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Structured Settlements Part ll

Posted on Apr 12, 2013 in Insurance Advisor Ascension Business Journal

Last month’s column provided brief information about the annuities that are used for structured settlement arrangements. It explained that recent changes in the Internal Revenue Code and state legislation now make it possible, under certain circumstances, to modify the payment stream provided by the structured settlement annuity (annuity) by entering into a structured settlement factoring transaction (factoring transaction).

With a factoring transaction the annuity beneficiary sells or assigns the right to receive all or a portion of identified future annuity payments to a third party (the factoring organization) in exchange for a lump sum payment.

Many factoring transactions transfer the right to only some and not all of the future payments from the annuity and may provide for the transfer of all or less than 100%, of each of identified future payment(s).

There are many items that need to be considered when contemplating a factoring transaction. Three of them are:

– The Interest Rate: Provided by the factoring organization in the disclosure materials can be thought of as “the tax free investment return rate or interest rate that is given up as result of the factoring transaction”. A recent case highlights this, it was indicated that proceeds from the transaction would be used to set up a savings account. While a passbook savings account was paying about 1% to 2% per annum, he/she gave up a tax free investment rate of close to 15% per annum, i.e. the interest rate. Is there a different and cheaper alternative available?

– Factoring a Portion of Selected Annuity Payments: Often the factoring organization will offer to purchase a fraction, and not all, of identified annuity payments. When such is the case the annuity beneficiary should be aware that if need arises in the future he/she may only be able to pursue a factoring transaction with the same factoring organization which would prevent seeking competitive offers.

In addition, a payment servicing agreement may be necessary to provide that payments from the insurance company will go to the factoring organization which in turn would remit to the beneficiary their portion. There are a number of items that need to be considered when this is the case. A good understanding of the operation and potential implications and risks of such agreements is advised.

– Negotiation: Before settling on an offer to enter into a structured settlement factoring transaction, the annuity beneficiary should seek to obtain more than one offer based on transferring the same annuity payments so that the terms offered can be readily compared.

Finally, when contemplating a structured settlement factoring transaction seeking the advice from a qualified professional is recommended.

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