Explained: Structured Settlement Cash Payout - Factoring vs Commuting Annuity Payments

Both are about a structured settlement cash payout, but there's a difference between paying cash in lieu of periodic settlement payments by factoring or by commuting.

Here's the difference:

Structured settlement factoring means that you are selling your future payments to a factoring company, i.e. a company that buys structured settlement payments.

Commuting, on the other hand, means that the insurance issuer itself that owns and pays out the structured settlement payments to the claimant is buying back, or rather terminating the periodic payments altogether in exchange of a one time single cash payout.

Structured settlement cash payout by means of factoring

To explain in more detail, when you factor structured settlement payments, you actually buy out the payments from the payee, but you do not cease the payments.

Key characteristics of factoring:

  • factoring is done by as structured settlement buyer or funder who is not a life insurance company or annuity issuer, but may be a private company active in buying out structured settlements from annuitants
  • the structured settlement annuities are not altered in the structured settlement cash payout and they continue to be paid out according to the original plan that can legally not be altered, deferred, accelerated, increased, or decreased
  • the payments are issued to the new payee, the buyer who purchased the payment rights from the original annuitant (the plaintiff) in exchange of a single up front lump sum payout

Cashing out by commuting payments

The idea of commuting is that the insurance company who owns the annuity and is paying out the periodic payments issues a one time cash payment to the recipient, discounting the future payments to present value, and thus "buying back" the annuity and stopping to pay out the structured settlement payments.

Key characteristics of commuting:

  • the annuity issuer himself (who took over liabilities from the defendant's casualty insurance company agreeing to pay out the compensation to the plaintiff in periodic payments funded by an annuity that is purchased from a life insurance company) issues the structured settlement cash payout
  • there are no more structured payments, not to the original payee nor to a new payee
  • no third party factoring company is involved

Factor or commute - what's the difference

In the eyes of a payee there would really be no difference in that whether he is receiving the one time payout from a factoring company issuing a one time structured settlement cash payout to buy out and take over the future payment rights, or receiving it from the annuity issuer himself, as in both instances he receives a one time lumpsum giving up his structured settlement payment rights.

However, from the perspective of the annuity owner, there's a big difference, as in the case of factoring the liabilities remain to pay out the structured payments, only the recipient changes, whereas in commuting the company terminates its liabilities and owns no more payments to anyone in the future.

Thoughts around structured settlement commutation vs factoring

Factoring, or buying out periodic payments for a single structured settlement cash payout, is a very common process. It needs a court approval and is frequently authorize by the courts in cases of qualified assignment structured settlement where personal injury plaintiffs transfer on their rights to the periodic payments to a different recipient in exchange for a lump sum when in immediate need of money.

In a factoring transaction, the qualified assignment structured settlement cash payout is usually exempt from taxes, as were the periodic payments (that include the original lump sum payout from the casualty insurance to the annuity issuer to buy an annuity to fund the payments, as well as the accumulating interest), and there's no excise tax imposed on the factoring company for buying out the payments.

The factoring company has no right, authority and control over the annuity itself, only the right tor receive payments, just as the annuitant had no ownership or power to change the annuities or payout structure.

What about the annuity issuer? Is it legally allowed for the annuity owner to buy back or commute the annuity payments? Is it a difference how soon the commutation is done after signing the original structured settlement annuity contract, whether in close proximity or at a later time? Is there a tax implication for commuting the payments?

If courts are approving factoring transactions in spite of "anti assignment provisions," while the structured payments themselves, on accordance with the structured settlement statutes, are not deferred or accelerated and the amounts and the structure of the payments remain unchanged - what about commutation of the payments that while not deferred, increased, or decreased, may be thought of as accelerated and are in fact ceased altogether?

Structured settlement commutation rider for beneficiaries

In period certain structured settlement annuities that are to be continued after the death of a recipient to the beneficiaries, a commutation rider may be offered in the original structured settlement agreement.

If a computation rider is offered to the heirs of the structured settlement recipient, a one time structured settlement cash payout may be offered to the named beneficiary discounted to present value instead of receiving future periodic payments. Further discussion of this topic, however, is beyond the scope of this article.

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