Sell Structured Settlement Financial Considerations 2 — Questions and Answers
Question 1: Which factor does NOT typically affect the lump-sum amount a payee receives for their structured settlement?
- The remaining term of the payments
- The original defendant's name (Correct answer)
- The dollar amount and frequency of payments
- Current market interest rates
Correct answer: The original defendant's name
The defendant's identity has no bearing on the valuation — the lump-sum offer is driven by payment size, timing, duration, and the prevailing discount rate.
Question 2: How does the remaining term of payments affect the lump-sum offer from a factoring company?
- Longer remaining terms always result in higher offers
- Longer remaining terms result in greater discounting because payments further in the future are worth less today (Correct answer)
- Remaining term has no effect on the offer
- Shorter remaining terms always result in lower offers
Correct answer: Longer remaining terms result in greater discounting because payments further in the future are worth less today
Payments that are further in the future are discounted more heavily because of compounding time value calculations, reducing the total present value.
Question 3: What is 'structured settlement funding' sometimes used for by investors?
- Funding class-action lawsuits
- Purchasing pools of structured settlement payment rights as an asset class (Correct answer)
- Issuing new annuity products
- Paying court filing fees on behalf of payees
Correct answer: Purchasing pools of structured settlement payment rights as an asset class
Institutional investors and hedge funds purchase pools of structured settlement payment rights as fixed-income investments, attracted by their predictable, tax-advantaged cash flows.
Question 4: Why might a payee with life-contingent payments receive a lower offer than one with guaranteed payments?
- Life-contingent payments are worth more to investors
- Life-contingent payments carry mortality risk — they end if the payee dies, making them less certain for the buyer (Correct answer)
- Guaranteed payments are taxable, reducing their value
- There is no difference in valuation between the two types
Correct answer: Life-contingent payments carry mortality risk — they end if the payee dies, making them less certain for the buyer
Life-contingent payments stop at the payee's death, creating uncertainty about the total amount the buyer will receive, which increases risk and reduces the offer price.
Question 5: What is a 'structured settlement annuity secondary market'?
- The original market where annuities are first sold to defendants
- The market in which factoring companies and investors trade previously issued structured settlement payment rights (Correct answer)
- A stock exchange for annuity products
- A government marketplace for structured settlement transfers
Correct answer: The market in which factoring companies and investors trade previously issued structured settlement payment rights
The secondary market consists of factoring companies and institutional buyers that purchase existing structured settlement payment rights from original payees, providing liquidity.
Question 6: If market interest rates rise significantly, how does this generally affect lump-sum offers for structured settlement payments?
- Offers increase because future payments become more valuable
- Offers decrease because higher discount rates lower the present value calculations (Correct answer)
- Offers are unaffected by market interest rates
- Offers increase to attract more sellers
Correct answer: Offers decrease because higher discount rates lower the present value calculations
Rising market interest rates lead buyers to apply higher discount rates, reducing the calculated present value and therefore the lump-sum offer to the payee.
Sell Structured Settlement Financial Considerations 2
Which factor does NOT typically affect the lump-sum amount a payee receives for their structured settlement?