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Employers and workers’ compensation claim adjusters sometimes shy away from structured settlements because they don’t understand the vocabulary of the structured settlement brokers. The terms and phrases related to structured settlements are often cloaked in legalese which intimidates both the employer’s work comp manager and the adjuster. As structured settlements will save your company money on the larger workers’ compensation claim settlements, we have put together a glossary of some of the more common terms you will hear and what they mean.
Annuitant: A person who receives the benefits of an annuity.
Annuity: A specified income payable at stated intervals for a fixed or a contingent period, often for the injured employee’s life.
Beneficiary: The injured employee who receives the payments from the structured settlement.
Benefits Stream: The amount of income and when the claimant will receive the income from the structured settlement. Same as Payment Stream.
Deferred Lump-sum Payments: These are payments to the injured employee, which are larger than the regular periodic payments, and are given at pre-determined dates in the future to cover the cost of a college education, car replacement, home remodeling, etc.
Flexible Settlement Plan: A structured settlement that takes into consideration the needs of the injured employee, both financially and medically, while also addressing the cost of the structured settlement. A flexible settlement plan includes the planning necessary to achieve the goals of the injured employee while maintaining control of the cost of the structured settlement for the employer/insurer.
Impaired Risk Ratings: Prior to selling an injured employee an annuity that the life insurance company will have to make payments on for the rest of the employee’s life, the life insurance company needs to establish how long the injured employee will live. In addition to the medical information on the injury, the life insurance underwriter wants to know all the other medical issues of the injury employee including diabetes, hypertension, obesity, etc., so they can properly estimate how long the injured employee will live.
Joint and Survivor Annuity: When an injured employee is concerned about a spouse or other dependent outliving the employee, the annuity can be structured based on the life expectancy of both people to guarantee payments for as long as either the employee or the second person lives.
Life Annuity: A guaranteed of periodic payments that lasts for the lifetime of the injured employee.
Life Care Plan: An analysis of the future medical needs of the claimant to provide the claimant with adequate compensation to cover future medical costs related to the work injury.
Medicare Set-aside Agreement: The estimated amount of money that will be needed to cover future medical cost. This is often a second annuity that is purchased for the seriously injured employee as a part of the structured settlement.
Non-qualified Assignment: A non-qualified assignment is the transfer from the party at fault to the life insurance company, the obligation to pay the future periodic payments of a structured settlement. The obligation to pay does not qualify for favorable income tax treatment as no physical injury is involved.
Payment Stream: The amount of income and when the claimant will receive the income from the structured settlement. Same as Benefits Stream.
Period Certain Annuity: When the injured employee knows that in the future there will be additional income from Social Security, a pension, IRAs, 401Ks, etc., the injured employee may elect to get larger payments from the structured settlement annuity by shortening the time period the annuity will be paid to age 65 or some other cut-off point.
Periodic Payments: Settlement payments that the injured employee receives based on an agreed payment schedule, whether it bi-weekly payments, or monthly payments, or quarterly payments or annual payments.
Qualified Assignment: A qualified assignment is the transfer from the workers’ compensation insurer to the life insurance company, the obligation to pay the future periodic payments of a structured settlement. The obligation to pay qualifies for favorable income tax treatment as the obligation arises out of an injury.
Rated Age: Everyone has a normal life expectancy. When an employee’s injury are such that the life insurance company’s underwriter does not expect the employee to live to the normal life expectancy age, a ‘rated age’ is the underwriter’s adjustment of the estimated life expectancy based on the medical information available about the injured employee.
Settlement Planning: The structured settlement broker meets with the injured employee and the employee’s attorney if there is one, and reviews what the injured employee needs to accomplish with the structured settlement. The settlement planning establishes what the structured settlement intends to accomplish, including some money up front, the length of time periodic payments will be needed, how future medical bills will be paid, future lump-sum needs for transportation, college education for child(ren) etc.
Step Annuity: A structured settlement that has built-in increases in the amount of the periodic payments the injured employee will receive.
Structured Settlement: A payment plan where the injured employees receives periodic payment from a life insurance annuity over an agreed upon period of time in exchange for releasing the workers’ compensation insurer from further responsibility for the workers’ compensation claim.
Tax Deferred: The delay of income to a later date delaying when the income tax will be owed. The attorneys for injured employees often arrange for their legal fees to be paid through a structured settlement to delay payment of their income tax until the money is actually received.
Tax Free: The injured employee does not pay federal income taxes on the periodic payments received from a properly designed structured settlement agreement.
Time Value of Money: The life insurer is able to invest the amount of money it receives for the annuity and over time the investment grows in value, allowing the injured person to receive a much greater amount of money over time than the injured person would receive if a lump sum of money is paid to settle the workers’ compensation claim.
Trust: A legal arrangement in which an injured employee (the trustor) gives fiduciary control of his claim settlement to the life insurance company (the trustee) for the benefit of beneficiary (the injured employee).
Variable Income Payment Annuity: Instead of having fixed payments of income, the injured employee elects to participate in the equity markets by tying the amount of the periodic payments to the success, or lack thereof, the life insurer’s participation in the equity markets. If the life insurer portfolio rises, the employee’s periodic payments rise. If the insurer’s portfolio drops, the employee’s periodic payments drop.
