FAQ To Stay Ahead Of The Crowd:
Secondary Market Annuities and factored structured settlements form an important part of the financial landscape by providing liquidity to sellers. Properly packaged as Secondary Market Annuities, these instruments form a great guaranteed income alternative to today’s yield starved investors. Advisers and individuals alike should take a close look and be ready for a high-yield, safe alternative investment.
Here are a few frequently asked questions to round out your knowledge:
1- How Do SMA’s Fit Into My Financial Plan?
SMA’s 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.
SMA’s have a variety of uses. Here are a few planning scenarios where these are great tools:
- A couple has a wide disparity between their ages (70 year old man, 50 year old wife)
- Traditional joint life annuities will offer very low payouts, whereas an SMA can be used to produce income for the couple’s life and a future lump sum for the surviving spouse to re-position in the future.
- Investors seeking high yield alternatives to CD’s
- Investors seeking specific future payment streams or lump sums, to fund education, gift, or other goals.
- Investors seeking alternatives to the complicated contractual terms of variable and index annuities with income riders
2- Why Are Secondary Market Annuities Higher Yield Than Fixed Annuities?
The yield on SMA’s 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.
3- Why Would The Insurance Company Issue A Contract Yielding 6% In This Market?
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 the SMA a higher yield alternative.
4- How Do I Know Structured Settlement Annuities Are Safe?
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.
5- How Do I Know Secondary Market Annuities Are Safe?
In typical Secondary Market Annuity transactions, we facilitate you becoming the new payee under an existing court ordered 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 four key elements of an that ensure safety:
- Benefits letter from the issuer to the payee, which establishes that the Payee has the payments to sell,
- Due Diligence documents ensuring that no other claims to the payments exist,
- A valid Court order documenting the change of payee from seller to buyer,
- Acknowledgement letter or stipulation agreement after the court hearing from the Issuer naming buyer as the new payee of the specific payment stream.
When you or your clients work with a good broker or intermediary, costs for a third party legal review by a qualified attorney familiar with structured settlement assignment transactions should be included in the purchase price. This outside review cross checks all the documents, court order, and disclosures to ensure that the client’s payment stream is solid.
Of course, this is exactly what we do at SecondaryMarketAnnuity.Net. Outside counsel reviews each and every case.
6- Why Shouldn’t I Buy Deals Direct From Factoring Companies?
Transactions undertaken directly with factoring companies, or through low-value add introducing parties, are discouraged. You won’t find better rates and run many more risks of improper structure and performance. A legal review 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 an 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.
7- What Are The Costs And Fees Of An SMA Purchase?
Unlike all other newly issued annuities, SMA’s have no holding or administrative costs. 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 fees, riders or other costs.
8- What About SMA’s With Qualified Funds?
SMA purchases can be arranged through a few self directed IRA custodians. 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 is only one IRA custodian 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, IRA custodians do have nominal costs. We have a discounted rate available to our customers from the best Self Directed IRA custodian in the marketplace. See This Page for more info.
9- Who Is The Typical SMA Buyer?
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.
10- Who Are The Parties In A Structured Settlement Annuity Transaction?
In a typical structured settlement annuity transaction, here 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 assignee of the original payee. 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.