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Guaranteed vs. Life Contingent

Structured Settlements and Contingent Payments

If you have a structured settlement, you may have heard the term “contingent payments”. Contingent payments are an installment sale that has left the payment period or the price of the asset unfixed. Structured settlements can have two kinds of payments, guaranteed payments and contingent payments.

Some of these payments are guaranteed to be paid regardless of whether or not the original beneficiary is still living while other payments are dependent upon the life of the original beneficiary. Therefore, a portion of the settlement is guaranteed while the remainder depends upon how long the beneficiary lives. Understanding the differences is important to anyone with a structured settlement or who is interested in selling one.

What are the Differences?

Guaranteed payments are payments that are made out to you from the insurance company. Regardless of whether or not the recipient is living at the time the payment is due to be made, a guaranteed payment is made regardless. If the recipient has died before payment has been issued, the designated heirs will receive payment.

Contingent payments are also referred to as non-guaranteed payments. In these instances the insurance will only make payments to the payee as long as he or she is living. Any payments coming due after his or her death will not be distributed to the estate.

Selling Life Contingent Payments

You can sell life contingent payments just as you can sell guaranteed payments. You probably wonder why someone would be willing to buy payments that they may not receive. Buying contingent payments do have more risks than buying guaranteed payments. The buyer of the life contingent payment views them as an investment, so they purchase a life insurance policy on the original beneficiary totaling the amount of the payments. That way, if the original payee dies before the purchased payments have been paid, they have themselves covered.

While selling guaranteed payments and contingent payments both require the court’s approval, selling contingent payments requires a reasonable procedure that involves the verification process of the life of the beneficiary. In a hedged transaction, the buyer will purchase a life insurance policy on the original beneficiary. If it is an unhedged transaction, no life insurance is purchased to protect the value.

You may receive higher payments for guaranteed payments than you will for contingent payments. If you are selling a structured settlement on the secondary market, the buyer knows they will receive the guaranteed payments, so they are willing to pay you more for them. The amount paid for life contingent payments has a lot to do with whether they are hedged or unhedged.

Reasonable Procedure to Verify Life

As mentioned earlier, there has to be a reasonable procedure in place to verify the life of the beneficiary. “Reasonable” may vary considerably from person to person. It is a court approved process. A judge will need to approve your transfer of a life contingent structured settlement transfer. If life insurance is denied on your policy due to various factors then that will affect your lump sum payout.