Introduction
For decades, annuities have served as the principal funding vehicle for structured settlement obligations. In both qualified and non-qualified assignment transactions, life insurance company structured settlement annuities became the industry’s default mechanism for securing future periodic payments.
More recently, funding agreements have emerged as an alternative funding vehicle within the non-qualified assignment (NQA) marketplace. Although funding agreements have existed for many years in the insurance industry, their use in connection with structured settlement-related non-qualified assignments represents a significant development in the evolution of settlement funding.
The emergence of funding agreements provides settlement professionals with an additional tool for funding future payment obligations and expands the range of transactions that can benefit from assignment structures.
What Is a Funding Agreement?
A funding agreement is a contractual obligation issued by a life insurance company under which the insurer agrees to make specified payments according to agreed terms.
Like an annuity, a funding agreement is typically supported by the insurer’s general account. Unlike an annuity, however, a funding agreement is not an annuity contract and does not depend upon the life of an annuitant.
When used with a non-qualified assignment, the funding agreement serves as the asset supporting the assignment company’s obligation to make future payments to the payment recipient.
The Traditional NQA Funding Model
Before the introduction of funding agreements into the NQA marketplace, annuities were generally the preferred funding mechanism.
The typical structure consisted of:
- An underlying settlement or compensation obligation.
- Transfer of that obligation to a non-qualified assignment company.
- Purchase of an annuity by the assignment company.
- Future payments funded by the annuity.
This structure remains widely used and continues to provide an effective solution for many transactions.
However, not every non-qualified obligation fits comfortably within a traditional annuity framework.
Why Funding Agreements Emerged
The growth of the non-qualified assignment market created demand for additional funding alternatives.
Employment settlements, executive compensation arrangements, deferred compensation programs, commercial disputes, and other business-related obligations often involve payment streams that differ from traditional personal injury structured settlements.
Funding agreements provide insurers and assignment companies with additional flexibility in addressing these obligations.
They have proven particularly attractive in transactions involving:
- Shorter payment durations for plaintiffs or attorneys.
- Large premium cases.
- Customized payment schedules.
- Corporate and executive benefit arrangements.
- Other non-qualified obligations where traditional annuity economics may be less efficient.
As a result, funding agreements have expanded the range of transactions that can be accommodated through non-qualified assignment structures.
IRC Section 72(u)
One factor contributing to interest in funding agreements is Internal Revenue Code Section 72(u).
Section 72(u) generally addresses annuity contracts owned by non-natural persons. Because funding agreements are not annuity contracts, they may provide an alternative funding mechanism in situations where Section 72(u) considerations complicate the use of annuities.
For settlement professionals operating in the NQA marketplace, this distinction can be significant.
Funding Agreements Are Not Replacements for Annuities
The introduction of funding agreements should not be viewed as a replacement for traditional annuity funding.
Annuities remain the dominant funding vehicle for structured settlement obligations and continue to offer important advantages, particularly in long-term cases involving personal injury claimants.
Instead, funding agreements should be viewed as an additional option.
The availability of multiple funding vehicles enables assignment companies and insurers to select the structure most appropriate for a particular transaction.
Recent Market Developments
The use of funding agreements in the non-qualified assignment market is a relatively recent development.
New products introduced during the 2020s have increased awareness of funding agreements among settlement professionals and expanded the range of available funding alternatives.
Whether funding agreements ultimately become a major segment of the NQA marketplace remains uncertain. What is already clear, however, is that they have become an important addition to the settlement funding toolkit.
Conclusion
Funding agreements represent one of the most notable innovations in the non-qualified assignment marketplace in recent years. By providing an alternative to traditional annuity funding, they offer greater flexibility for certain types of payment obligations, particularly those involving shorter durations, larger case sizes, customized payment structures, and situations affected by IRC Section 72(u).
As the NQA market continues to evolve, funding agreements are likely to play an increasingly important role in helping insurers, assignment companies, and settlement professionals design efficient funding solutions for complex periodic payment obligations.
Related Reading
Funding Agreements for B2B and for Non Qualified Assignments (4structures.com)
Non-Qualified-Assignments and Structured Settlements (4structures.com)
What is a Funding Agreement? – Structured Settlements 4Real®Blog June 28, 2023
NQA-Flex: Flexibility in Non-Qualified Assignments – Structured Settlements 4Real®Blog April 1, 2026
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