Structured settlement payments are a form of financial compensation award whereby the payment is made as a series of periodic payments rather than as a single payment upon receipt of the award. This can take the form of significant payments when a beneficiary reaches a certain age, such as a 21st birthday, or it could form smaller monthly payments over many years or even decades. The payments are typically in made in lieu of a successful personal injury or workplace compensation award. They are often made when the beneficiary is a minor or otherwise considered vulnerable, and may not be considered best able to manage receipt of a large lump sum of money at a given time.
The terms of structured settlements are negotiated between the parties at commencement, and in some instances the financial priority or needs of the beneficiary will change over time. In the event the beneficiary wants more or all of the funds in the payment plan earlier than scheduled, they have the option of selling part or all of their future payments in return for an immediate lump sum payment. A characteristic of selling the periodic payments in return for a lump sum is that the seller will not receive the full notional amount of the total payments. For instance, if the award provided for a sum of $ 400,000 to be paid in equal annual instalments over 10 years, if the beneficiary sold the right to receive the payments soon after the award they may for instance only receive a payment of $ 300,000.
When sold on the investment markets, the right to receive the payments are known as structured settlement investments. Essentially the investor is the party on the other side of the trade from the seller. Inside the investment markets they are considered to be Secondary Market Annuities, or SMA's. SMA's are considered to offer comparatively high yields and low risk compared to other annuity products. It should be appreciated that each SMA is unique and the payments receivable are specific to the individual structured settlement being purchased.
The higher yield payable from these investments is not reflective of a greater risk, but is rather reflective of lower liquidity. The terms of the payments were tailored to the requirements of the beneficiary at the time of the award, and often will not provide for equal periodic payments over long periods of time as is typical with a conventional annuity. Participants in these markets should also be aware that before they can be sold Court approval is required, and the remit of the judge is to ensure the beneficiary of the award is fully aware of the implications of the transaction and that the terms of the sale are equitable to all concerned.