Once the parties to a lawsuit or claim (plaintiff and defendant) have agreed to settle the claim through the use of a structured settlement and payment amounts are agreed upon, the defendant or it's insurer (or Qualified Settlement Fund) funds its obligation by issuing two checks rather than one lump sum. The first check typically represents up front cash (including attorney fees) and the second check is to purchase a settlement annuity - a policy guaranteed by a life insurance company. The life insurance company that issues the annuity then makes the payments directly to the party who is to receive them via mail or direct deposit, if desired.
In the typical case, defendants transfer their obligations to a third party through a qualified assignment agreement. The third party (assignee) has the sole obligation to make the payments to the plaintiff and will buy and own the annuity. This assignment is an advantage because assignees have extensive experience in handling the administration of structured annuity payments and are backed by a guarantee by their parent company. The assignee is responsive to all future questions and servicing needs for the annuity.
Procedurally, it is important to remember that the injured individual cannot purchase the annuity themselves and still enjoy the tax-exempt benefits afforded under the Internal Revenue Code. The annuity must be purchased on their behalf by the defendant, insurer, or their assignee (or Qualified Settlement Fund, if applicable.)