Risks of Factoring

Discover the financial risks of selling all, or a portion, of structured settlement payments. 

What is factoring?
Factoring is the selling of all or a portion of the annuitant’s future annuity payments to a third party company — let’s call it, a Factoring Company.  

How does factoring work?
As part of the sale, the Factoring Company offers a relatively small cash payment to the annuitant which gives it the rights to receive the future payments that would have been paid to the annuitant from the insurance company. The Factoring Company then sells your future annuity payments to investors or investment banks for more money to turn a larger profit.

Long-term impacts of factoring

Factoring introduces the potential for several unfavorable outcomes.

Impact 1: Loss of Guaranteed Long-Term Income1
Structured settlements are designed to provide injured claimants with guaranteed lifelong income with annuity payments guaranteed by MetLife. Once your future annuity payments have been sold to a factoring company, these guarantees transfer to that company. Factoring your future annuity payments means that you will not receive your full settlement amount.  The payout of a structured settlement is always higher than the money you purchased the annuity with (i.e. if you purchase a $100,000 annuity, you are guaranteed to receive more than that by the end of your guaranteed payments). If you factor your payments, you will be losing that extra money and the factoring company will give you less than your payments are worth1.

Impact 2: Loss of Tax-free Advantage
As an injured claimant, the annuity payments you receive from us are completely tax-free. Once you sell your annuity payments to a factoring company, you forfeit that tax-free right on those periodic payments.

Here’s an example: You and the defendant settle on a plan where you structure $385,000 which will provide you with a total expected benefit of $480,000. Starting in the middle of next year, you will begin to receive $2,000 a month in annuity payments for 20 years. Before your payments begin, you decide to sell 10 years of your future annuity payments in exchange for $50,000 to a factoring company. This leaves you with only $240,000 in total annuity payments over the course of 10 years. Your total expected benefit is now $290,000 instead of $480,000. You lose money, but the factoring company benefits from the growth of the annuity payments over the years and by giving you a discounted rate for your benefits.

Impact 3: Public Assistance Implications
Structured Settlements help individuals who are injured and in need of assistance. Often the benefits provided can help keep homes safe, families together, and medical needs met, which affords families the stability they need so they don’t have to turn to government supplemented programs. 

Deciding to factor

Should you encounter a hardship and need to sell all, or a portion, of your structured settlement, be sure to keep this advice in mind.

  • Be wary of advertising. Research the firm by checking the Better Business Bureau and the Consumer Financial Protection Bureau. You can also use a search engine like Google to check the firm's name and complaints against the firm.
  • Never sign any document without having a professional in tax, law, or both review it with you. If you must sign a document to receive a quote, be wary of any rights you may be giving up, including privacy rights, or even power of attorney.
  • Transaction costs can be high and may be hidden inside the discount rate. If a firm tells you there are no fees, be wary. Ask the firm how they pay the court filing fees, how they pay the attorney, and how they pay themselves.
  • Just like any other purchase, you should shop around.
  • Is this your second or third time factoring? Is it because the firm did not correctly diagnose your needs? With each transaction, there are fixed costs such as attorney fees, court fees, and background check fees, which will decrease your annuity's value.
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1. All guarantees are subject to the financial strength and claims paying ability of the issuing MetLife company.

Any discussion of taxes is for general informational purposes only and does not purport to be complete or cover every situation. MetLife, its agents and representatives may not give legal, tax or accounting advice and this document should not be construed as such. You should confer with your qualified legal, tax and accounting advisors as appropriate.