pros and cons of secondary market annuities

As with any investment, there are pros and cons to Secondary Market Annuities.  Take a moment to read through these pros and cons, and scroll down to see the most frequently asked questions we get from customers.

Remember, SMAs are used in three distinct ‘safe money’ scenarios- Income Now, Income Later, and Safe Growth.  The the ‘pros’ for one scenario or investor may be a ‘con’ in another investor.  The only important answer is, is it right for YOU?

Fixed Term Investment

Guaranteed Payment, Pays to Buyer or Heirs

Pros and Cons of Secondary Market Annuities: Pros

A guaranteed yield for a fixed period of time, paying to you or heirs.

Pros and Cons of Secondary Market Annuities: Cons

Payment stream has an end date.

Analysis:

With a Secondary Market Annuity, you are making an investment that stops paying when the principal and interest is paid back.  This is just like when you borrow money- the loan is closed and the payments cease when you as the borrower pay in full… but in the case of Secondary Market Annuities, you are the one receiving the payments from the insurance carrier.

If you know you need to secure an income for retirement that you and your spouse can never outlive, you should consider a Lifetime Income Guarantee (AKA LIG) policy, with Secondary Market Annuities filling in the years prior to the LIG starts.

Alternatively, consider an Immediate Annuity or a Hybrid Annuity with a lifetime income rider.  LIG and Immediate Annuities are tied to lifetime(s), and you can not outlive the income. That payout, however, may be lower than a Secondary Market Annuity unless you live a very long time.

Frequency and Duration of Payments

Absolute Payment

Pros and Cons of Secondary Market Annuities: Pros

Payments accrue to the payee/ buyer you specify on your purchase reservation. That may be you, your spouse as joint Tenants, your heirs, your Trust, or your estate. What You See Is What You Get.

Pros and Cons of Secondary Market Annuities: Cons

In some states, this may create probate issues.

Analysis:

Create a Trust to be the receiving entity, to skip probate. Plus, nearly all our payment streams use a servicing company to receive the payments, for ease of reassignment or change of payee. Consult your own tax and estate planners regarding Trusts.

Liquidity

Secondary Market Annuities Do Not Offer Partial Surrender Liquidity

Pros and Cons of Secondary Market Annuities: Pros

Secondary Market Annuities pay out exactly as scheduled, to you or your heirs.

Pros and Cons of Secondary Market Annuities: Cons

You can liquidate (re-sell) a Secondary Market Annuity, but the amount you receive depends on the interest rate environment at the time you decide to sell.

Analysis:

Devote only that portion of your assets that you can safely set aside in a fixed and long term investment. Deal with liquidity with other assets. Know that it is easy to re-sell all the payments, but no easy to get partial liquidity.

Profitability

Secondary Market Annuities Are More Profitable Than Other Fixed Investments

Pros and Cons of Secondary Market Annuities: Pros

Attain a higher yield with your fixed income allocation, when compared to other comparable options such as bonds, CD’s or Fixed Annuities.

Pros and Cons of Secondary Market Annuities: Cons

What’s not to like about higher yield payments?

Analysis:

This is self explanatory.  Higher yield fixed income means lower cost to secure your financial future, leaving more left over.

Volatility

Secondary Market Annuities Have No Volatility

Pros and Cons of Secondary Market Annuities: Pros

Self evident. Secondary Market Annuities are priced based on current market discount rates. If rates fall, you may have contracts that can be sold at a profit.

Pros and Cons of Secondary Market Annuities: Cons

SMA’s are priced based on current market discount rates. If rates rise, you may face a discount to face value if you are forced to sell, in addition to the legal costs and discount required to re-market a case.

Analysis:

Consider a Secondary Market Annuity as a “Yield To Maturity” investment. Devote only that portion of your assets that you can safely set aside in a fixed and long-term investment. Deal with liquidity with other assets. If you feel you may have a need to sell and can do so at a profit, having serviced payments may facilitate this sale and reassignment.

Frequently Asked Questions

What Our Customers Ask Before Buying Secondary Market Annuities

Secondary Market Annuities form an important part of the financial landscape by providing liquidity to structured settlement sellers, and by providing a higher yield, high credit payment stream to buyers.

Properly structured and legally reviewed by our affiliate wholesale firm, DCF Exchange, these instruments offer a great guaranteed income alternative to today’s yield starved investors. Advisers and individuals alike should take a close look at these high-yield, high credit quality safe-money alternative investments.

Here are a few frequently asked questions that our buyers typically ask:

Secondary Market Annuities are an excellent, high-yield alternative to other fixed income investments. In addition, they can also form a high-yield, guaranteed income source for risk-averse investors, or to fund future obligations.

Here are a few planning scenarios that illustrate the uses of these tools:

Income Now:

A couple has a wide disparity between their ages (60 year old man, 50 year old wife).  Traditional joint life annuities will offer very low payouts for this couple.

However, Secondary Market Annuities can be used to produce income for any buyer, or buyers, and of any age.  In this scenario, the couple may use Immediate Income Secondary Market Annuities to produce Income Now for a period of years, then use other tools to protect their money and produce income later, thus earing a higher yield than any other safe money option.

Income Later:

In addition to the Income Now Immediate Income SMA, the couple may use Deferred Income Secondary Market Annuities to produce Income Later to guarantee income for the surviving spouse to re-position in the future.

Safe Growth Options

Investors seeking high yield alternatives to CD’s or a couple with an age discrepancy as we detailed above may use Lump Sum Secondary Market Annuities as a Safe Growth Option to ensure that principal is available for the future.  This may be used for income, or to fund education, gift, or other goals.   Investors seeking alternatives to the complicated contractual terms of variable and index annuities with income riders rejoice at the simplicity and high yield available in Secondary Market Annuities.

The yield on Secondary Market Annuities is higher simply because the seller is selling at a discount. These are existing, fully funded payment obligations. A buyer becomes the assignee of an existing payment stream- a note receivable bought at a discount.

See above- discounted cash flow is a hard concept for a lot of people, but it’s at the heart of this market. $100 in 10 years is worth $55 today at a 6% discount rate. There are 10 years of deferred, compounding accumulation, which means the purchase price today is just $55.

Using the same discount rate of 6%, a payment stream of $1000/ month for 120 months costs $90,724.32 today. Because the payments start immediately, each payment includes some portion of principal and some of interest. As principal is paid out, is no longer accruing at the discount rate, and thus the total amount of interest earned on a ten-year income stream is much lower than the total interest earned on a ten-year deferred lump sum contract.

Insurance companies are not issuing contracts that yields 6% in this marketplace. Rather, sellers are willing to sell their existing annuities at a discount that allows you to achieve a 6% yield.

In summary, Investors considering period certain Single Premium Immediate Annuities (SPIA’s) or using withdrawals from Fixed Annuities, Variable Annuities, or Indexed Annuities for cash flow, will find a Secondary Market Annuity a higher yield alternative.

Structured Settlement Annuities are considered to be senior obligations of the insurance companies issuing the annuity. Because structured settlements originate in lawsuits, payments that are made to settle the lawsuit are subject to a court order. Failure to make those payments would be contempt of court, and therefore are considered to be senior obligations.

In typical Secondary Market Annuity transactions, we facilitate you receiving the payments of an existing payment stream. In previous sections, we detailed how structured settlement annuities come into being and are funded, and why they are safe.

In a well structured and properly documented SMA transaction, there are five key items that document a case transfer and ensure legal safety of payments to you:

  1. Benefits letter from the issuer to the payee, which establishes that the Payee has the payments to sell.
  2. Court order changing the payee name to you or an entity that benefits you, such as our Business Trust.
  3. Acknowledgment letter or stipulation agreement after the court hearing from the Issuer naming you or an entity that benefits you as the new payee of the specific payment stream you purchased.
  4. Legal Review reviewing all documents, notices, filings, UCC statements and procedures in each case and every jurisdiction the case is subject to.
  5. Irrevocable Assignment of the cash flows from our entity that purchased the payments assigning the payments to you forevermore.

Of course, this is exactly what we do at SecondaryMarketAnnuity.Net. Counsel reviews each and every case.

Transactions undertaken directly with factoring companies, or through low-value add introducing parties, are discouraged. You won’t find better rates and will run many more risks of improper structure and performance. Doing it right is cheap insurance for buyer and adviser alike!

A simple analogy is this: People buy and sell homes all the time. But whether it’s with a real estate agent or direct from a seller (FSBO), everyone uses a title company to insure title and perform escrow services.

Buying a home without a title insurance policy is a HUGE and foolish risk. Buying an SMA without legal review, direct from a factoring company, is like buying a home direct from a seller, and skipping the title policy. In short, it’s crazy.

Unlike all other newly issued annuities, SMA’s have no holding or administrative costs other than a nominal payment servicing fee and, if applicable, costs to your IRA custodian. Remember that originally, a claim or suit was settled with a monetary payment that purchased an annuity, either in a qualified assignment or directly by the defendant, to pay out future benefits to the injured party. This award has no costs or fees to the recipient, and thus has no costs to you too.

Secondary Market Annuities are a refreshing, what you see is what you get transaction, without complicated fees, riders or other costs.

SMA purchases can be arranged through a self-directed IRA custodian who is familiar with the asset class. There are special calculations to be done to account for required minimum distributions or RMD’s so it’s best to work with a custodian already familiar with the market.

There are a couple of IRA custodians that we recommend and will work with. Furthermore, we have discounted rates for self-directed IRAs available to our members and clients.

It’s important to note that while Secondary Market Annuities have no fees or costs other than the purchase price and a nominal payment servicing charge, IRA custodians do have some costs. We have a discounted rate available to our customers from the best Self Directed IRA custodians in the marketplace. See This Page for more info.

The typical SMA buyer is a safe-money investor seeking an above average yield, with very low risk and no volatility. Payment streams can be immediate income, short-term lump sum, long-term lump sum, or a mixture.

In a typical structured settlement annuity transaction, there will be an annuity issuer or obligor, an annuity owner, and a payee. The payee is the person to whom the payments are being made. This is the person who is injured in the suit or settlement, who is receiving the money.

In a lawsuit, typically the losing party will settle the claim against them by either purchasing an annuity to fund the future claims, or by assigning their obligations to pay the future payments through what is known as a qualified assignment. In a qualified assignment, the assignment company will then purchase an annuity to fund the future claims.

In both an assigned case and an unassigned case, you have the same parties, namely, the payee, the annuity issuer, and the annuity owner.

As a buyer of structured settlement payment rights, you become the new assignee of the original payments. Your payment rights are guaranteed by the annuity issuer, and in the secondary manner guaranteed by the annuity owner, who may either be an assignment company or the original losing party in the lawsuit.

Are Secondary Market Annuities Safe?

Structured Settlement Annuities are issued to the original payees in compensation for injuries or other claims. These awards are negotiated by the parties, usually in a court case or out of court settlement.

The winners of these settlements have legal counsel who have a duty to look out for their client’s interests, and consequently, when they opt for a Structured Settlement they are opting for the safety and well being of the clients over a long period of time.

The annuity companies that offer Structured Settlement Annuities are the strongest in the industry- Met Life, New York Life, John Hancock, Genworth, Allstate, Symetra, Berkshire Hathaway… these are generally AAA rated carriers and in the business of conservatively managing risk and paying claims safely and on time.

Almost by definition, with Structured Settlement Annuities you are dealing with the best of the best right from the start.

STRUCTURED SETTLEMENT TRANSFER PROCESS:

The transfer process making you a new payee under an existing payment stream is also very safe. There is a uniform process adopted by all but two states that requires notifications, disclosures, and procedures to be followed. While the majority of the documentation is contractual, there is one step in the process where a court with jurisdiction over the original settlement also needs to rule that the transfer is in the seller’s interest.

While the Court Order is one key piece among several that properly document a transfer of payment rights, it actually does nothing to verify the payments. An investor’s name in the court order simply exposes the investor in a public manner. The process we adhere to with our source of inventory protects investor confidentiality.

There are a variety of additional reasons that Structured Settlement Annuities are extremely safe. These are summarized below.

SAFETY FACTOR #1

An insurance company paying a structured settlement would be held in contempt of court for failing to make payments according to the terms of a structure settlement. The payment remain in force throughout the transfer process regardless of who receives the checks. Just because you become the new payee under an existing Court ordered settlement does not change the nature of this protection.

SAFETY FACTOR #2

Each state has an insurance guaranty fund that covers the guarantees of insurance policies and annuities for insolvent insurance companies who can’t make payments.

When you buy multiple secondary market annuity cases, you are in business in different states, which affords you the total protection of all states involved. If you buy one or more primary market annuities, you are only afforded the protections offered in your current state of residency on all your annuities.

SAFETY FACTOR #3

There are five key items that document a case transfer and ensure legal safety of payments to you:

  1. Benefits letter from the issuer to the payee, which establishes that the Payee has the payments to sell,
  2. Court order changing the payee name to you or an entity that benefits you, such as our Business Trust
  3. Acknowledgment letter or stipulation agreement after the court hearing from the Issuer naming you or an entity that benefits you as the new payee of the specific payment stream you purchased.
  4. Legal Review reviewing all documents, notices, filings, UCC statements and procedures in each case and every jurisdiction the case is subject to.
  5. Irrevocable Assignment of the cash flows from our entity that purchased the payments assigning the payments to you forevermore.

SAFETY FACTOR #4

Because a typical client of ours purchases multiple Secondary Market Annuities, purchasing contracts in the secondary market virtually assures that you will place assets in several companies with no sacrifice to average yield or overall performance. You will spread your risk among many carriers, all generally highly rated, and achieve high yield diversification.

Secondary Market Annuities are  safe, guaranteed yield investments. View our live inventory and get started today!