What are Secondary Market Annuities?
Often, individuals are awarded annuities as a result of a lawsuit or winning a state lottery. Instead of a large one-time payment, they received a series of payments over time.
Sometimes these individuals do not want to wait (or cannot afford to wait) years for their entire payouts. They can elect to sell their future payments to someone else in exchange for a lump sum payment today. The “resale” of these annuities are secondary market annuities.
Higher Yields Through Discount Purchases
You can purchase a secondary market annuity from the original owner at a discount, and have the stream of income or lump sum payment(s) assigned to you. These plans will typically offer a rate of return well above standard fixed annuities, immediate annuities, CDs, or bonds of a similar credit quality.
This increased yield is created through the original owner selling these payments at a discount, not the insurance company paying the higher specified rates.
The insurance company is obligated to make these payments regardless if it is to the original owner or the new investor. When these income streams were originally issued they were issued at current market rates. Again, the yield enhancement is created purely through the mechanics of the factoring process and the existing owner’s willingness to sell their payment stream at a discount.
Are Secondary Market Annuities Safe?
The payment of these annuities are safe and dependable — personal annuity receivables are direct obligations of top-rated insurance companies such as MetLife, John Hancock, Pacific Life, Allstate, Prudential, The Hartford, Aegon, and other A and AA rated carriers. Annuities from lottery winnings are all the direct obligations of state lotteries, and pre-defeased with U.S. Treasury instruments maintained in segregated trust funds.
However, there are risks to be aware of when purchasing structured settlements. Proper due diligence is vital to ensure safety.
What is Factoring?
Factoring is used by businesses and individuals to sell accounts receivable (invoices) to third parties (called factors) at a discount – in exchange for an immediate lump sum payment with which to finance continued business. It is not a loan, it is the purchase of a financial asset (the receivable). Factoring involves three parties:
- The seller
- The debtors
- The factor
The sale of receivables transfers ownership of the receivables to the factor, which means the factor obtains all the rights and risks associated with them. Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount. The factor’s profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment.
What are the types of Secondary Market Annuities?
A Secondary Market Annuity is any annual payment sold at a discount on the open (secondary) market. The 5 most common types of secondary market investments include:
- Factored Structured Settlements (FSS)
- Lottery Winnings
- Annuity Income Streams
- Life Settlements
- Viatical Settlements
Factored structured settlements (FSS) are existing structured settlement payments. They were awarded by settlement or jury to the injured party and funded through any number of insurance companies. The awardee, or “Original Payee,” may have been the person hurt, or it may have been a member of his or her family. The payee (seller) desires, for any number of reasons, to sell a portion or all of their payments in exchange for a lump sum of cash.
Lottery Winnings are the payments available for sale from someone who actually won a state lottery prize. Regardless of whether you are looking to sell your payments or buy someone else’s prize, the process is very similar to that of the factored structured settlements (FSS). They must also go through a court approval process, which will delay any transfer from seller to buyer, although not quite as long as an FSS dealing. The lottery transfer process usually takes 30 to 45 days. Lottery prizes are all the direct obligations of state lotteries.
Annuity Income Streams are existing immediate annuities whereby the original purchaser has decided to sell his/her existing payment stream in exchange for a lump sum of cash. This asset is typically not liquid and has no commutable value whereby the investor can “put” it back to the insurance company, so the seller looks to the secondary markets to supply the liquidity in exchange for the remaining payments. Unlike FSS, SMA, and Lottery Winnings, transferring from seller to buyer does not require any type of court approval.
Life Settlements are sales of an unnecessary life insurance policy to a third party for more than its cash value and less than its face value. This is an excellent option for policy owners worried about lapsing policies. A life settlement is an alternative to a surrender or lapse of a policy, or when the owner of a life insurance policy no longer needs or wants the policy, the policy is under-performing or can no longer afford to pay the premiums.
Viatical Settlements are sales of a life insurance policy by the policy owner before the policy matures. Such policies are sold at a price discounted from the face amount of the policy but usually more than the premiums paid or current cash surrender value.