Structured settlements may contain life contingent payments, and these payments can be sold. Dallas attorney Matt Bracy explains life contingent payments and how they can be sold in this report.
When a structured settlement is set up to settle a personal injury claim, it will probably have two components. One part is the guaranteed payments that will be made to the person or the person’s estate, regardless of that person’s survival. The other component, Bracy explains, is life contingent payments. These payments are only made if the person receiving the settlement is alive. A typical structured settlement annuity might have be set up like this: twenty years of payments at $1,000 per month, plus monthly payments after that for the beneficiary’s life.
Bracy says that, at the beginning of the factoring era in structured settlements, most factors would only buy the guaranteed payments portion of the settlement. Bracy points out that the life contingent payments are riskier and have built-in problems. In more recent times, factoring companies have begun to purchase the life contingent payments. The sale process for payments like these is much like that for the sale of guaranteed payments. The seller has to go to court, get a judge to make a best interest finding, and comply with all the other requirements of the structured settlement law.
One key difference in the sale of life contingent payments is that there will be an investor who makes the purchase rather than a factoring company. A factor could buy and hold on to the life contingent payments, but that is not what usually happens. Bracy says that there is usually and investor looking for one of two things: either a hedged or an unhedged asset. In a hedged situation, the investor will buy a life insurance policy on the original beneficiary so as to be sure of getting paid should the beneficiary die. An unhedged transaction does not involve the purchase of an insurance policy to safeguard the future payments and is obviously a more risky situation.
Because of the difference between guaranteed and contingent payments, it is no surprise to learn that the discount rate is higher in transactions involving life contingent payments. What this means is that the beneficiary selling the contingent payments will receive less money than he or she would for guaranteed payments.
The court process is largely the same for both kinds of sales. However, Bracy says, there is one significant difference, and that is that there has to be in place a reasonable procedure in place for verification of the beneficiary’s life. What “reasonable” means in this situation that the judge must be satisfied with the procedure, not just one party or the other to the transaction. For example, if the insurance company suggests a procedure with which the factoring company disagrees, the recourse is to get the court to make the decision.
Matt Bracy is a partner in Scheef & Stone, L.L.P., Dallas, Texas, representing businesses and business owners in the areas of general business law, contract negotiations and drafting, business formation, transactions, collections, commercial litigation and government relations. Over his career he has represented diverse businesses and individuals in private practice, and in-house as General Counsel and Director of Government Relations for multi-million dollar companies. The Legal Broadcast Network is a featured network of the Sequence Media Group.