Secondary Market Annuities At A Glance

  • Secondary Market Annuities FAQ

    Review the panels to the left for answers to the most commonly asked questions on Secondary Market Annuities and Structured Settlement Annuities.

    We work with investors nationwide seeking their unique combination of Safety, Profitability, Flexibility, and Longevity. Like any financial product, Secondary Market Annuities have their pros and cons and we hope this section will help guide your selection process.

  • What is a Structured Settlement Annuity or Secondary Market Annuity?



    We use the term “Secondary Market Annuities” to encompass both a Structured Settlement Annuity and a secondary market lottery payment stream. For our purposes we primarily deal with Structured Settlements.

     A structured settlement is a court ordered payment stream paying an injured party and income stream for a defined period.  We call it a Secondary Market Annuity because it is an income stream – an annuity – that is purchased on the secondary market.  That means that as a buyer, you are not the original injured party, however you do become the assignee of the payments  under the original awarded settlement.  You become the assignee of an existing structured settlement case.

    Secondary Market Annuities are not to be confused with regular annuities such as variable annuities or index annuities that are being sold on a secondary market basis.  In the case of variable annuities with a death benefit that are sold by the original owner/beneficiary, these transactions have recently come under pressure from insurance companies.  We personally believe it is right to question these transactions, and have detailed our thoughts Here. 

  • Yield of Secondary Market Annuities



    Secondary Market Annuities  are future cash flow streams available for  purchase at a yield higher than comparable safe investments because of the following summarized reasons:

    1. The seller is selling at a discount
    2. The transaction needs to go to court process, sometimes takes 30 to 60 days
    3. There is a risk that the transactions are not approved in court (about one in 10)
    4. These transactions are generally long-term, locked up, and not liquid
    5. Supply is limited and cash flows are often quite “lumpy” and therefore are not suitable for all investors

    The yield available to investors is much higher than comparable fixed annuities, CD’s, Treasuries, and even tax-free Muni bonds.

  • Are Secondary Market Annuities Too Good To Be True?



    There are several reasons these contracts are available at a yield that is higher than currently available in the open market.

    Discounted Purchase Price:

    The first reason is that these cash flows are being purchased from individuals at a discount. The individual selling the annuity is willing to accept a discount rate in order to get cash today. You are able to purchase that future cash flow and the rate of return is higher than traditional annuities because of the discount that the seller is willing to take.

    These cash flows originate in a settlement – generally a workplace injury or legal dispute. The paying party (usually an insurance company ) fully funds the obligation when the settlement is made. At a later date, the original recipient may decide they need cash now instead of future payments.

    That’s where this secondary market transaction starts, when the original payee approaches a factoring company to purchase the future cash flow streams. It is that transaction where the original payee accepts a discount rate that is offered by the factoring company.

    Court Approval

    Once a buyer is committed to buying the cash flows that a seller wishes to sell, the transaction needs to go to court for approval. Because the original claim originated in a court proceeding, this is technically a change in the outcome of a previous court case. The court process that each of these cash flows must go through to approve the transaction insures that the transaction is fair and that the selling party won’t end up destitute or on public support.

    Il-Liquid:

    Once a transaction is approved in court, you as the buyer are not able to resell or accelerate or liquidate the cash flows. It is ill liquid and a fixed term.

    For all the reasons above,  Structured Settlement Annuities  can be somewhat more time consuming to purchase.  The yield is higher as a result.  It’s not too good to be true- you simply need to understand WHY it’s good and be willing to go through the process with us to achieve your goals.

  • Legal Review of Secondary Market Annuities



    Legal review of a structured settlement annuity transaction is a thorough thorough and time-consuming process.  For each case, outside counsel is retained at our expense and for your benefit.  They review the following documents to insure that your payment stream is absolute, guaranteed, and legally documented and binding.

    1. Transaction Summary & Information Page
    2. Client’s customer reservation form
    3. Client’s customer Purchase Agreement and attached TValue table
    4. Underwriting Certificate & Guidelines
    5. RPSA & T-Value
    6. Settlement Agreement, Qualified Assignment, and/or Annuity or Benefits Letter
    7. Assignments to Transfer Agreement and Testamentary Agreement
    8. Insurance acknowledgment or Stipulation
    9. Notice of Assignment Package – with Proofs of Service
    10. Court Order (and any prior Court Orders)
    11. Disclosures Statement and Transfer Agreement
    12. Searches
    13. Credit Documents
    14. Appendix

     

  • Purchase Process of Secondary Market Annuities



    A structured settlement is a payment stream being paid to the winning party in a court case or settlement.  People’s circumstances change, however, and some wish to sell their future payments for a lump sum.

    Origination:

    A seller and an intermediary known as a  factoring company come together and the factoring company investigates the credit of the seller, any alimony, bankruptcy, or other liens.  When a case is proofed up, they file with the court that originally awarded the payee the settlement to amend the court order.  This is to comply with the provisions of Federal laws contained in the 2001 bill HR2884 and  IRS Code Chapter 55, section 5891, relating to a transfer subject to a Qualified Order.

    Reservation:

    As a case is researched and proofed, it is marketed to individual investors to purchase.  If you select a case, you will fill out a brief reservation form with your name as you want the payments to be made out and submit a $5000 deposit to our outside counsel’s Trust account to hold the case and ensure mutual commitment.  This deposit is fully refundable if the case does not go through.

    Court:

    As a buyer of a structured settlement payment, your name will be entered into the court order documenting the assignment.  In about one in 10 cases, courts do not approve the transfer of payment rights, for reasons relating to the seller.  The court has an obligation to protect the seller and the public.

    Funding:

    Before the  Court hearing, you will be required to put up the balance of the purchase price in the attorney trust account to ensure performance.  The purchase price is fully refunded together with the deposit if the case does not go through Court.

    Legal Review:

    Once a case is approved in court, and all the documents relating to the transfer of payment rights to you are compiled, the documents are sent to our outside counsel for review.  Our counsel reviews all documents to ensure everything is in order, and only after doing so are your purchase funds released from the attorney escrow account to the seller.  

    Closing:

    After closing, the closing book consisting of your payment stream, the court order showing you as the assignee, and an acknowledgment from the annuity issuer also showing you as the assignee, is compiled and sent to you.  You will receive payments that are stipulated in these documents.

  • Safety of Secondary Market Annuities



    There are a variety of reasons that Structured Settlement Annuities  are extremely safe.  These are detailed here and 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. 

    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.

    By using the secondary market, you are in business in  different states, which affords you the total protection of all states involved rather than simply the limits offered in your current state of residency.

    Safety Factor #3:

    Thus the three key items that ensure legal safety are:

    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 to you,
    3. Acknowledgement letter or stipulation agreement after the court hearing from the Issuer naming you as the new payee of the specific payment stream you purchased.

    Safety Factor #4:

    Because a typical case involves 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 And IRA's



    Structured Settlement Annuities  can be purchased using qualified funds, such as an IRA or a 401(k).to purchase a structured settlement with qualified funds, you would open a ‘Self directed IRA’

    A self-directed IRA allows you to purchase nearly any kind of investment you want.  You simply direct the IRA custodian to send payment for the purchase to the attorney trust account prior to closing.  Upon closing, the funds are released to the seller, and the income stream will be paid to your self-directed IRA account.  

    Income earned by your self-directed IRA continues to be tax-deferred until you withdraw funds from that account.  At that point, it is subject to taxation.  You may also be subject to required minimum distribution (RMD) regulations, so it’s important to plan your purchase of secondary annuities to coincide with the required minimum distributions.

    Using a self-directed IRA, you can direct the IRA custodian to purchase any type of investment you want, subject to certain limitations.  These limitations include the purchase of life insurance, and certain collectibles.  Therefore, because life contingent structured settlements include life insurance as a component of the investment, life contingent structured settlements can not be purchased with qualified funds.   Please give us a call to discuss your situation.

  • Secondary Market Annuities And Taxes



    The taxation of  income from factored Structured Settlements is  up to the taxpayer and their tax advisor, and depends if the Settlement is held in a qualified IRA or not .  Federal law and IRS guidelines outline how,  in a properly structured transaction, a court order shows a buyer as the assignee  of the payments by means of  qualified order.  This is the court process we follow at AST.  

    While under current IRS regulations you as the new assignee of a factored structured settlement case will not received a 1099 for the income you receive, this does not mean it’s tax-free.  Please refer  to the following IRS rules for guidance and consult your tax advisor for specific questions.   In the case of factored lottery cases, taxes are withheld by the state lottery commission for state and federal taxes, and you will file for a refund for the taxes withheld on that portion of your payment which is return of capital (basis).

  • Secondary Market Annuities for Income



    Structured Settlement Annuities  are perfect for generating retirement income.  These are very safe income streams, paid by highly rated carriers, and are available to you at a yield higher than comparable safe investments.

    There are a wide range of payment streams available in the secondary marketplace.  These range from immediate income, to long-term deferred lump sum.  Selecting the right structured settlement income stream for your needs is a process easily accomplished by defining your goals up front.  Then, working with us, we select appropriate structured settlements as they become available, and reserve them in your name.

    Generally, it takes several structured settlements to compile then investors desired income stream.  Having multiple cases is actually a benefit, in that you spread your retirement income risk out among multiple carriers in multiple states.

Structured Settlement Secondary Market Annuities FAQ



What we call Secondary Market Annuities are both Structured Settlements and lottery payments primarily.  They represent one of the best ways to capture higher yields in a safe money investment.  Lottery payments are typically awarded as lump sums or annuities, and when people with annuity lottery winning wish to sell for lump sums, they become available to you.

Structured Settlements originate as a result of  a court case whereby an individual wins an award and elects to take their payments over time.  These payment streams typically include guaranteed monthly payments and/or guaranteed lump sums designed to accommodate the payee’s life circumstances in the future.  There may be lump sums originally earmarked for education, house purchase, or other needs.  

Sometimes, certain Structured Settlements also include life contingent payment streams.  This would be a situation where the payee is to receive a guaranteed payment of $xx per month for 20 years, and $xx per month as long as they live.’   If the payee is selling the ‘as long as they live’ portion, it’s what is known as life contingent, and we insure a new payee’s economic interest in that payment stream with life insurance on the selling payee’s life.

However,  people’s circumstances change.  Often, individuals seek to sell their future payment streams for cash today.  When they do so, they approach a factoring company who applies a discount to the future payment streams and offers a lump sum to the payee.

When a seller and the factoring company have an agreement, the factoring company commences its underwriting of a specific case.  They investigate the credit of the seller, any alimony, bankruptcy, or other liens, and a file with the court that originally awarded the payee the settlement to amend the court order.  This is to comply with the provisions of Federal laws contained in the 2001 bill HR2884 and  IRS Code Chapter 55, section 5891, relating to a transfer subject to a Qualified Order.

As a case is researched and proofed, it is marketed to individual investors to purchase.  As a buyer of a structured settlement payment rate, your name will be entered into the court order documenting the qualified assignment.  In about one in 10 cases, courts do not approve the transfer of payment rights, for reasons relating to the seller.  The court has an obligation to protect the seller and the public.

Once a case is approved in court, and all the documents relating to the transfer of payment rights to you are compiled, the documents are sent to our outside counsel for review.  Our counsel reviews all documents to ensure everything is in order, and only after doing so are your purchase funds released from the attorney escrow account to the seller.  After closing, the closing book consisting of your payment stream, the court order showing you as the new assignee, and an acknowledgment from the annuity issuer also showing you as the assignee, is compiled and sent to you.  You will receive payments that are stipulated in these documents.

The taxation of  income from factored Structured Settlements is  up to the taxpayer and their tax advisor, and depends if the Settlement is held in a qualified IRA or not.  Federal law and IRS guidelines outline how,  in a properly structured transaction, a court order shows a buyer as the assignee  of the payments by means of  qualified order.  This is the court process we follow at AST.  

While under current IRS regulations you as the new assignee of a factored structured settlement case will not received a 1099 for the income you receive, this does not mean it’s tax-free.  Please refer  to the following IRS rules for guidance and consult your tax advisor for specific questions. In the case of lottery payments, state and federal taxes are withheld from the payments from the state lottery commission, and you will file annual tax returns that would include a  request for refund for the taxes withheld on the portion of your payment stream that was return of principal.