The history of structured settlements
Posted on septembre 13, 2013 by Frank
In the past, structured settlements were thought by many as a very risky business. Insurers would rather pay a large sum of money to a claimant, who would then have to manage it for the rest of his life. This model presented a very big problem: what ensured that the newly-invalid person had enough financial knowledge to survive on the amount for the rest of his life? Something needed to be done on that part.
The creation of structured settlements
It was in the beginning of the 70’s that companies, led by The Sullivan Group, started to put structured settlements into place. The concept was pretty simple: insurers, through periodic payments, would allow a better financial security to families by sending them a check every month for life. Everything was not perfect in the beginning, though! Tax implications, both for insurers and claimants, were not exactly clear: would claimants have to pay taxes on the annuities? The federal tax code had to be modified in order to make everything easier to understand and abuse-proof.
The development of the industry
It was 30 years ago that structured settlements started to take off, thanks to the dire work of Senator Mark Baucus. The man, who announced that he would leave the Senate in 2014, greatly contributed to create the tax code that was adopted in 1982 and is still into place today. The Periodic Payment Settlement Tax Act greatly served to clarify what was once a huge mess, making sure, for example, that the whole payments would be tax-free for the claimants.
The structured settlements quickly proved to provide advantages both for the claimants AND the insurers. How is that possible? Well, since the insurance companies are generally able to get way better interest rates than a small investor, they are able to make the money fructify a lot more than if it was given in one payment to the injured person. This method is profitable for the insurer and it also offers the stability we were talking about earlier.
Many countries have recognized structured settlements as a great way to solve a tort claim. Common law countries such as Australia, United States, England and Canada have included this procedure in the statutory tort law.
Structured settlements’ marketplaces are put into place
As FSD Law Group explains, in some particular situations, people wanted to sell their structured settlements in order to receive a definite sum of money – the exact opposite procedure that what we have been advocating since the beginning of this article. Why would they do so? Well, selling their annuities can help some people to finance a home or pay heavy medical bills. These sellers were however forced to sell this financial product at a much lower price than what it was really worth because the buyers, which were not very numerous, were not willing to take more risks.
In the last few years, we have seen startups develop products to allow buyers to compete to buy annuities from previous claimants. These websites operate like a marketplace: you are able to negotiate, sell a specific amount of annuities or years of payment, decline offers… in summary, it gives a stronger power of negotiation!