Structured settlement annuity companies: who issues the annuity and why it matters

The company sending your structured settlement payments is a life insurance company, and in most cases the claimant had little or no say in choosing it. The defendant or its liability insurer selected the carrier, funded the annuity, and transferred the payment obligation away. Understanding that chain is worth the effort, because the identity and financial strength of that one insurer is what stands behind every future payment.

This article covers how the issuer gets into the arrangement, why the pool of carriers writing this business is small, what the tax code requires of the funding asset, and how to verify the company holding your money. It does not rank carriers or recommend one, and it deliberately avoids naming a "best" issuer — that is a judgment about a specific case, and the market changes.

Who is actually obliged to pay you

Three parties sit in the chain, and people routinely confuse them.

The original obligor. The defendant or its liability insurer, which agreed in the settlement to make future periodic payments.

The assignment company. A substituted obligor that takes over the payment obligation from the defendant under a qualified assignment, releasing the defendant from it. This is the entity legally obliged to pay you.

The issuing life insurer. The company that issues the annuity contract purchased to fund those payments. The assignment company owns that annuity; you are generally named as the payee, not the owner.

In practice the assignment company is usually an affiliate of the issuing life insurer — a subsidiary set up for exactly this purpose. There is nothing improper about that; it keeps the obligation and the funding asset inside one corporate group. But it means that when people say "my structured settlement company", they are compressing two entities into one, and when you assess financial strength you need to know which life insurer sits behind the arrangement.

The mechanics of the transfer itself are covered in qualified assignment structured settlements.

Why only a handful of insurers write this business

The market for structured settlement annuities is far narrower than the market for retail annuities, and that is not an accident.

The first reason is statutory. IRC §130(d) defines a "qualified funding asset" as an annuity contract issued by a company licensed to do business as an insurance company under the laws of any State, or an obligation of the United States. The funding asset must be purchased within 60 days before or after the date of the qualified assignment, and its payment periods must be reasonably related to the periodic payments being assumed. That closes the door on funding a qualified structure with anything other than a state-licensed insurer's annuity or Treasury obligations.

The second is the design of the product. IRC §130(c) requires that the periodic payments be fixed and determinable as to amount and time, and that they cannot be accelerated, deferred, increased or decreased by the recipient. An issuer therefore takes on an obligation it cannot renegotiate, on a schedule that may run for a claimant's lifetime, often set at settlement when the claimant is young. That is a long, illiquid, mortality-sensitive liability — a specialist book, not a mass-market one.

The third is underwriting. Many structures involve claimants with impaired life expectancy, priced using a rated age. Getting that pricing right requires medical underwriting capability that most annuity writers do not maintain. The mechanism is explained in structured settlement rated age.

The result is a concentrated market. A small number of large life insurers write the great majority of US structured settlement annuities, with a handful of specialist entrants alongside them. That concentration is why the identity of the issuer is a live question rather than a formality.

How the issuer gets chosen — and your limited say

In a typical case the defendant's structured settlement broker or consultant obtains quotes from several issuers for the payment schedule being negotiated. The defendant or its liability carrier funds the annuity, so it is generally paying the premium, and it has a legitimate interest in the cost.

That produces a tension. The lowest-cost quote for a given payment schedule comes from the carrier pricing most aggressively, which is not necessarily the carrier you would choose to depend on for forty years. Some defendants also maintain approved-carrier lists for their own reasons.

What a claimant can realistically do:

• Ask which carriers were quoted and at what cost. This is negotiable information, not a secret.
• Retain your own consultant. A claimant-side structured settlement broker works for you rather than the defendant, and the role and its conflicts are covered in what a structured settlement broker does.
• Ask to split the funding. Where a settlement is large, spreading it across two issuers converts one concentrated exposure into two smaller ones. Whether this is available depends on the case and the defendant's willingness.
• Object to a carrier. You can decline to accept a particular issuer, though that may reduce the payment schedule the same premium buys.

None of this is available after the settlement agreement is signed and the annuity is purchased. It is a pre-settlement conversation or it does not happen.

How to check the carrier holding your money

Start with the documents. The settlement agreement, the qualified assignment agreement and the annuity policy or benefits letter between them will name the issuing insurance company, the assignment company, the policy number and the payment schedule. If you cannot locate them, the assignment company's servicing department will confirm the issuer.

Then work through the same due diligence you would apply to any long-dated insurance obligation:

1. Get the exact legal entity name. Not the group brand. Large insurance groups have multiple licensed subsidiaries with separate balance sheets and sometimes different ratings.
2. Check the financial strength ratings at source. AM Best, S&P, Moody's and Fitch each publish current ratings free. AM Best's Financial Strength Rating is an opinion on the insurer's ability to meet its ongoing insurance obligations — it is not a guarantee, and AM Best states it is not a recommendation to buy, hold or terminate anything. The scales differ between agencies, so an "A+" at one is not the same height as an "A+" at another. Annuity company ratings sets out the scales in detail.
3. Check the state insurance department. Confirm the insurer is licensed, and look at its complaint record and any regulatory actions.
4. Understand the backstop. Structured settlement annuities are not FDIC-insured and carry no federal guarantee. If an issuer fails, the state guaranty association system provides limited protection, with caps that vary by state. What happens if the insurance company fails covers this in full.
5. Note that the payer can change. Blocks of annuity business are sold, reinsured and transferred. Receiving a letter from a company you have never heard of is common and usually routine, but it is worth confirming and then re-running the checks above on the new entity.

What does not change when the carrier changes

Two points settle most of the anxiety that arises when a servicing letter arrives from an unfamiliar name.

First, the tax treatment attaches to the claim, not to the company. Where the underlying recovery was for personal physical injuries or physical sickness, the periodic payments are excludable under IRC §104(a)(2), and that treatment follows the payment stream through an administrative transfer. It is explained in are structured settlements taxable.

Second, the payment schedule itself is fixed. The same §130(c) condition that prevents you from accelerating or deferring payments also prevents the obligor from rewriting them. A new servicer inherits the schedule as written.

What can change is the credit standing behind that schedule, which is precisely why the checks above are worth repeating rather than doing once.

An illustrative way to size the exposure

Suppose a settlement funds $2,400 a month for thirty years, guaranteed. The nominal total is $864,000, though its present value at settlement is far lower. If your state's guaranty association limit for annuity benefits is expressed as a present-value cap well below that figure, then a meaningful part of the stream sits outside the backstop and rests on the issuer alone.

These figures are illustrative only and chosen to show the shape of the problem. Guaranty association limits vary by state and are periodically revised — verify the current limit for your state of residence before drawing conclusions.

That arithmetic is the practical argument for caring about the issuer at settlement, and for asking whether the funding can be split. It is also the reason how much a structured settlement is worth is a present-value question rather than a nominal one.

Frequently asked questions

Can I choose which company issues my structured settlement annuity?

Not unilaterally, because the defendant or its liability insurer generally pays the premium. But you can ask which carriers were quoted, retain your own consultant, object to a particular issuer, or ask to split the funding across two. All of it has to happen before the settlement agreement is signed.

What happens if my structured settlement annuity company fails?

The obligation does not disappear. The state insurance department places the insurer into rehabilitation or liquidation, and the state guaranty association system provides limited protection subject to caps that vary by state. Payments may be delayed during the process and amounts above the cap are at risk. See structured settlement insurance company fails.

Why did my payments start coming from a different company?

Usually because the block of business was sold, reinsured or transferred to another carrier, or because servicing was reassigned within a group. The payment schedule and its tax treatment are unaffected. Confirm the change with the assignment company, keep the notice with your settlement documents, and check the new entity's ratings.

Does the issuing company affect the tax treatment of my payments?

No. The exclusion under IRC §104(a)(2) depends on what the damages were paid for, not on which insurer funds them. What the issuer affects is the reliability of the payments, not their character. The wider tax picture is in are lawsuit settlements taxable.

This article is general education, not personal financial or legal advice. Ratings, guaranty association limits and carrier participation in this market all change; verify current details with the rating agencies, your state insurance department, the assignment company and your own advisers before acting.