Structured Settlements Secondary Market and Factoring

Question 1

What is the 'discount rate' in a structured settlement factoring transaction?

Accepted Answer

The annual interest rate used by the factoring company to calculate the present value it will pay for future payment rights

Answer

The Federal Reserve's benchmark interest rate

Answer

The life insurer's internal rate of return on the annuity

Answer

The IRS-mandated rate for valuing structured settlements

Question 2

What is 'present value' as used by factoring companies when pricing a purchase of structured settlement payments?

Accepted Answer

The lump sum a factoring company will pay today, which equals the future payments discounted back at the factoring company's required rate of return

Answer

The total of all future payments being purchased

Answer

The original cost of the annuity to the defendant

Answer

The IRS-approved value of the payment stream

Question 3

Under IRC §5891, to avoid the 40% excise tax, a factoring company must obtain what?

Accepted Answer

A qualified order — a court order approving the transfer that meets all applicable state SSPA requirements

Answer

IRS pre-approval of the discount rate used

Answer

Approval from the original defendant's insurer

Answer

A waiver from the annuity issuer

Question 4

What is 'double-dipping' in the context of structured settlement factoring?

Accepted Answer

A claimant selling the same payments to two different factoring companies

Answer

A practice where a factoring company applies the discount to the gross rather than net payments, inflating the effective rate

Answer

Applying for court approval in two states simultaneously

Answer

A claimant receiving both a lump sum and continued periodic payments

Question 5

What information must a factoring company typically disclose to a structured settlement payee before the payee signs a transfer agreement?

Accepted Answer

The gross advance amount, the present value of payments sold (at a standard rate), the net amount payable, and the effective annual discount rate

Answer

Only the lump sum being offered

Answer

Only the annuity issuer's name

Answer

Only the court in which approval will be sought

Question 6

What is a 'best interest' finding in the context of structured settlement factoring?

Accepted Answer

A court's finding that the transfer of payment rights is in the best interest of the payee, considering financial needs and dependent welfare

Answer

The factoring company's determination that the transaction is profitable

Answer

The IRS's determination that the transaction is tax-compliant

Answer

The annuity issuer's consent to the transfer