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About Secondary Market Annuities And Taxes

Many customers inquire about Secondary Market Annuities and taxes.  The original underlying Structured Settlement is a tax free award to the original annuitant.  Because of this, annuity carriers do not issue 1099′s to the recipients or to subsequent assignees.

Now before you jump for joy, read on….

Federal law and IRS guidelines per IRS 5891 outline how, in a properly structured transaction, a buyer becomes the assignee of an existing payment stream by means of qualified order.  The Buyer of a Secondary Market Annuity in a properly structured transaction as we do here at Annuity Straight Talk holds the contractual right to the payments.

So while under current IRS regulations buyers will not received a 1099 for the income they receive, this does not mean it’s tax-free.

Secondary Market Annuities Taxation:

Even though the original payee does not receive a 1099, subsequent investors do have a cost basis in the payments and a gain, and therefore are responsible for income taxes.

The taxation of income from Secondary Market Annuities held in non-qualified  accounts is up to the taxpayer and their tax adviser to declare.  Generally annuities are considered ordinary income and the ratio of income to principal is calculated using an exclusion ratio to determine (exclude) from income that amount of each payment that is return of principal.  Refer to the following IRS rules for guidance and consult your tax adviser for specific questions.

How To Calculate The Exclusion Ratio:

Obviously, investors have a basis in an SMA investment, and a gain on that investment.  The typical way to calculate the gain is to utilize an exclusion ratio for determining the principal and interest component of each payment.

Let’s look at an example of an exclusion ratio.  Assume the investor paid $100,000 and will receive $200,000 over 100 payments of $2000 each.  The exclusion ratio is 50%- Exactly 50% of each payment would be income, and 50% is return of principal.  Consult your adviser, but generally, this income is “ordinary income” for IRS purposes.

Alternative Methods:

There are other ways to reflect a payment stream where you use an amortization schedule, and one will be provided with your purchase on any Secondary Market Annuity.

This method however treats the SMA like a loan (and you are the lender) and recognizes interest income predominately in early years, and principal in latter years.   This may not be beneficial for you.

At this time, it’s our understanding you can use either the amortization method, or the  exclusion ratio method, to calculate your taxes. But be sure to consult your own tax adviser.

Secondary Market Annuities and Amortization Schedules:

The software we use in the SMA industry is called T-Val  and is used for calculating present value and discounted notes, as well as amortization tables for loans. With each SMA purchase, you will receive an amortization schedule produced by TVal that shows the principal and interest portion of each payment under the amortization method.

You can also refer our site for a discounted cash flow calculator.

The exclusion ratio is more intuitive than the amortization table.  Feel free to view this article for more information on the exclusion ratio, in plain English and not tax-speak!

Other Tax Considerations:

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 an applicable state and federal refund for the taxes withheld on that portion of your payment which is return of capital (basis).

Secondary Market Annuities & Taxes Summary:

So even though investors do not receive a 1099 for the payments from the carriers based on current tax law, what happens in the future to tax law is anyone’s guess.  Some may use an amortization schedule to calculate gains, and others use the exclusion ratio.

We at Annuity Straight Talk LLC do not offer tax advice, and this page is for general information only, so please be sure to consult your own tax adviser for more info.

Pop Up For Great Secondary Market Annuities Deals

PhilGround Hog day is here once again – this has to be the strangest quasi-holiday of of the year.  I really have no idea how the shadow of a rodent became a meteorological force…

But one thing that is popping up over and over again are our Secondary Market Annuities – Rates on all assets globally continue to contract, and we’re doing our best to keep delivering value to you even though we’re squeezed tight.

This week, take a special look at Deferred Income and Lump Sum cases- we have great quick- close, in stock deals and are offering a special, limited time incentive – call for details!

Check out the inventory here:

 

Here is a sample:

And remember, don’t drive angry Phil!

groundhog-day

Calculating Effective Rate in Secondary Market Annuities

Investors often have confusion about the rate of return used in annuities in general and in Secondary Market Annuities in particular.  So to clarify a few terms, we’ll walk through Nominal and Effective rate and the concept of Net Present Value and Discounted Cash Flow.

Please note, all our SMA cases are shown with an effective rate.  You should also refer to this page about Secondary Market Annuity Rates

Effective Rate:

Effective rate, Internal Rate of Return, and Annual Percentage Yield are three terms to describe the same thing for these cases. The effective rate is the yield of the series of cash flows, including the investment (negative) and payments (Positive).

You can calculate this using the XIRR function in MS excel or HP handheld calculators, and we use a program called T-Value.

Nominal Rate

Nominal interest rate is also defined as a stated interest rate. This interest works according to simple interest and does not take into account the compounding periods.  So for example, if you have a mortgage with a 4% rate, 4% is the nominal rate, but the actual Effective Rate (Yield) to the mortgage lender will be different, because of the compounding period of the loan.

Nominal Rate Vs Effective Rate

Effective interest rate, or APY, is a more accurate reflection of the yield of an investment as it includes the compounding periods during a payment plan. It more accurately can be used to compare two investments with different compounding periods like week, month, year etc.

Often times, the stated or nominal interest rate is less than the effective rate. However, the effective rate depicts the true picture of financial payments because it includes the compounding period.

Interest Rate and Time

As shown in the example below, interest rate is only meaningful in the context of time and the compounding period. Most often, when people say an interest rate it’s with the assumed context of “per year.”

An annual interest rate is also called the nominal interest rate, or Annual Percentage Rate (APR)

There are other compounding periods available however- common options are month, week, or day.

The yield of an investment with compounding other than annual will be different than the nominal rate. This is the Effective Interest Rate, or Annual Percentage Yield (APY).

Time Value of Money Example

Discounted cash flows involve the concept of Time Value of Money- a dollar tomorrow is worth less than a dollar today. How much less? That requires the ‘Discount Rate’ to calculate, and discount rate and effective rate are synonymous for these investments.

$100 in 1 year at a 10% discount rate will cost $90.91 today. A $90.91 investment today at a 10% Effective rate with annual compounding will yield $100 in 1 year. The annual compounding is critical- the nominal and effective rate are both 10% in this example, with annual compounding.

But if monthly compounding is used, the investment is the same $90.91, the Effective (APY) is the same 10%, but the Nominal rate, or APR, is 9.56%

The Effective Interest rate is also equivalent to the Internal Rate of Return, or IRR. To calculate in MS Excel, use the formula XIRR=((payments),(dates),0). This formula calculates the discount rate, or effective rate, or a given series of payments on definite dates. XNPV may also be used to solve for the purchase price of a series of payments on definite dates at a known discount rate.

Please note, all our SMA cases are shown with an effective rate.  You should also refer to this page about Secondary Market Annuity Rates where you can download example illustrations in Excel an see a video of how these payments are calculated.

What’s With The Secondary Market Annuity Rates?

I’ve fielded several emails and calls recently from investors confused about the rates shown on our inventory of Secondary Market Annuities.  Secondary Market Annuity rates all too often leave investors and advisors alike confused because unlike most other types of annuities, SMA rates are actually quite simple.  Chances are good you are over-thinking the problem!

What Is The “Best Annuity Rate’?

There is no one ‘best’ rate because that is an opinionated term, but in many other types of annuities you have a wide range of rates to contend with and you should calculate mortgage payment to prevent trouble in the future.  Index annuities have a ‘rollup’ rate and a “crediting rate”, and immediate annuities aoften show a ‘payout rate.

But Secondary Market Annuity rates are simple- an SMA simply has an effective rate.  Effective rate is the true measure of investment performance, and it is equivalent to an Internal Rate of Return or Annual Percentage Yield (APY).  This is a true, mathematical calculation.

Now, on certain immediate income cases we also display a ‘payout rate’ which is designed to simply give a comparison to immediate annuities.  Payout rate is nothing more than the annual income over the investment amount- eg, invest $100,000 and receive $1000/ mo, and you have $12,000 per year or a 12% payout rate.  As I said, this is only shown on immediate income cases as a comparison to immediate annuities, which are quoted in payout rates.

So now lets dispel some of the confusion with a walk-through of effective rate.

About Effective Rate In The Secondary Market Annuity:

Effective rate, Internal Rate of Return, and Annual Percentage Yield (APY) are three terms to describe the same thing for these cases. The effective rate is the yield of the series of cash flows, including the investment (negative) and payments (Positive).

You can calculate this using the XIRR function in MS excel or HP handheld calculators, and we use a program called T-Value.  You can read on or, pause a few minutes and watch a video of me using Tval to calculate price.

(To go full screen, click the square in the bottom right corner of the video)

Effective Rate in Secondary Market Annuities

Effective rate also takes into consideration the return of principal with each payment. For example, with Secondary Market Annuities, if you have 100 equal monthly payments, a portion of each payment is principal and a portion is interest. When you receive principal back with payment #1, the next compounding period has less of a base of principal to work with, therefore payment #2 has slightly less interest and slightly more principal. This is how an amortizing mortgage works also.

Nominal Rate:

Nominal interest rate is also defined as a stated interest rate, Annual Percentage Rate, and APR. This rate does not reflect the true yield on the investment or loan because it does not take into account the compounding periods.

For example, your mortgage might have a 4% nominal Annual Percentage Rate. However as you pay down the principal, more money is returned to the lender, thus their Annual Percentage Yield or Effective Rate, is higher than the 4% Nominal Rate.

Nominal Rate Vs Effective Rate

Most likely you have seen APR and APY disclosures on mortgage loans and credit card offers. Often times, the APR, or nominal interest rate is less than the effective rate. However, the Effective Rate depicts the true picture of financial payments because it includes the compounding period and any return of principal.

Effective Rate is the true measure of the yield of an investment.

Here’s a further explanation of Calculating Effective Rate in Secondary Market Annuities

Interest Rate and Time

As shown in the example below, interest rate is only meaningful in the context of time and the compounding period. Most often, when people say an interest rate it’s with the assumed context of “per year.”

But there are other compounding periods available – common options are month, week, or day.

It’s important to note that the Effective Yield to you as an investor in Secondary Market Annuities in a case with compounding other than annual will be different than the nominal rate.

Time Value of Money Example

Discounted cash flows involve the concept of Time Value of Money- a dollar tomorrow is worth less than a dollar today. How much less? That requires the ‘Discount Rate’ to calculate, and discount rate and effective rate are synonymous for these investments.

Here’s a simple example:

$100 in 1 year at a 10% discount rate will cost $90.91 today.

A $90.91 investment today at a 10% Effective rate with annual compounding will yield $100 in 1 year. The annual compounding is critical- the nominal and effective rate are both 10% in this example.

But if monthly compounding is used, the same investment of $90.91 results in $100 in 1 year, and the same Effective Rate (APY) of 10%, but a Nominal Rate (APR) of 9.56%. The payments are the same, but the rates are different because of the compounding period.

Now lets look at a slightly different example:

You borrow $98,770.17 with a 10 year amortizing mortgage with a 4% nominal interest rate and monthly compounding. You make 120 monthly payments of exactly $1000/ month. Your total payments are $120,000.

The nominal rate on the mortgage is 4%, but the lender’s Effective Rate or APY 4.074%.

This type of payment stream is just like an SMA, but you are the one receiving the payments. Your Effective Rate is 4.074%, your investment is $98,770.17, and you have 120 monthly payments of $1000.

Calculating Effective Rate For Yourself

The Effective Interest rate is also equivalent to the Internal Rate of Return, or IRR. To calculate in MS Excel, use the formula XIRR=((payments),(dates),0). This formula calculates the discount rate, or effective rate, for a given series of payments on definite dates. XNPV may also be used to solve for the purchase price of a series of payments on definite dates at a known discount rate.

Click Here for an Excel sheet of the example above. Now, because of slight variations in the timing of amortization credits, TVal and Excel end up with slightly different values and XIRR may vary by a few thousandth’s of a point. The SMA industry and the lending industry all use TVal in their calculations.

Finally, we have (at great expense) a web based discounted cash flow calculator on this site you can use to verify any payment shown on the inventory page.  Just Click Here to use the web based Discounted Cash Flow calculator.

Are Secondary Market Annuities Safe?

Many prospective investors ask, “Are Secondary Market Annuities Safe”

In fact, the annuities that back the payment streams an investor purchases when buying Secondary Market Annuities are among the safest assets available anywhere.

It’s useful to remember where Secondary Market Annuities come from. Secondary Market Annuities originally come from Structured Settlements. These are payment streams issued to injured parties 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.

But in addition, it’s helpful to know that it’s mostly big institutions in the space, and not as much an individual investor’s game. You’re in luck and have an opportunity to get at an asset class few know about!

Institutional buyers of Structured Settlement Annuities:

For decades, payment streams backed by Structured Settlement Annuities have been aggregated and securitized and sold to institutional investors. JG Wentworth, the largest player in the industry, sells nearly $600,000,000 ($600M) worth of asset backed notes each year. The assets are, of course, diverse pools of Structured Settlement Annuity backed payment streams.

These asset backed securities routinely trade at yields just over the 30 year Treasury – they are A rated payments and are snapped up by long term institutional investors.

When reading the securities offering documentation and credit reports of JG Wentworth’s notes (contact us if you want a copy), the analysts identify risk in two main areas:

  • Transfer Risk
  • Carrier Risk

For #2, first, Carrier risk is largely mitigated by the sheer size and quality of the carriers that operate in the Structured Settlement annuity space. We’re dealing with the best of the best- Met Life, NY Life, Prudential… we’re generally not dealing with smaller insurance companies.

And as to #1, Transfer risk refers to the legal procedure transferring a payment stream from seller to you as buyer. Luckily for you, we follow a rigid and state mandated procedure that ensure transfers are complete, legally reviewed, and court approved, each time.

Here are a few more key points.

Structured Settlement Transfer Process:

The transfer process making you a new payee under an existing payment stream is also very safe.  There is a relatively uniform process adopted in 49 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 use  through our firm DCF Exchange 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 is a party to the court ordered transfer process. The payment remains in force throughout the transfer process regardless of who receives the checks.  Just because the payee changes as a result of a court- ordered transfer does not change the underlying payment stream or give the carrier any right to stop making payments.

Safety Factor #2:

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. Acknowledgement 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. Absolute Assignment of the cash flows assigning the payments to you forevermore.

Safety Factor #3:

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 extremely safe investments.  Sign up to the right to view our live inventory and get started today!

Generating Returns With Secondary Market Annuities – Video 6

In a recent appearance with nationally syndicated online columnist Steve Savant, AST’s Bryan Anderson talked about why Secondary Market Annuities yields are so good.  What a refreshing alternative to CD’s and other options!

 

With interest rates low, consumers are seeking safe returns that beat certificate of deposits and traditional annuity rates. Some are finding increased returns in the secondary annuity market. This alternative insurance product could be an additional supplement to retirement income. Annuity Market expert Bryan Anderson is interviewed by Steve Savant, syndicated financial columnist and talk show host of Steve Savant’s Money, the Name of the Game.

 

Other videos in the series:

Video 1- Steve Savant and Bryan Anderson On Secondary Market Annuities

Video 2- Why Secondary Market Annuities Are A Great Income Alternative

Video 3- Using Deferred Income Secondary Market Annuities

Video 4- Lump Sums and Secondary Market Annuities

Video 5- Using Secondary Market Annuities In Planning Scenarios

Video 6- Steve Savant’s ‘The Name Of The Game” On Secondary Market Annuities

 

Using Secondary Market Annuities in Client Planning Scenarios- Video 5

In this final installment of the Steve Savant show “Lets Get Down To Business” our own Bryan Anderson discusses how we use Secondary Market Annuities in various planning scenarios.

Enjoy!

 

Secondary market annuities are generally issued by highly rated life insurance companies. Factoring companies make a market for structured settlements with wholesale brokers and purchase these annuities for consumers seeking better returns. Annuity Straight Talk is a leading distributor for secondary market annuities. Product expert Bryan Anderson of AnnuityStraightTalk.com is interviewed by Steve Savant, syndicated financial columnist and talk show host featuring Secondary Market Annuities on Let’s Get Down to Business.

 

Other videos in the series:

Video 1- Steve Savant and Bryan Anderson On Secondary Market Annuities

Video 2- Why Secondary Market Annuities Are A Great Income Alternative

Video 3- Using Deferred Income Secondary Market Annuities

Video 4- Lump Sums and Secondary Market Annuities

Video 5- Using Secondary Market Annuities In Planning Scenarios

Video 6- Steve Savant’s ‘The Name Of The Game” On Secondary Market Annuities

 

Lump Sums and Secondary Market Annuities- Video 4

In this fourth installment, Bryan Anderson and Steve Savant discuss mortality credits and the higher yield that Secondary Market Annuities offer to investors.  Feel free to give us a call if this video generates any questions,

 

Mortality credits applied to annuities can increase returns beyond a carrier’s portfolio yield. These credits are based on the annuitant’s age and the length of the policy. The practical application of structured settlements is based on matching an investor’s need to the available inventory of structured settlements. Product expert Bryan Anderson of AnnuityStraightTalk.com is interviewed by Steve Savant, syndicated financial columnist and talk show host featuring Secondary Market Annuities on Let’s Get Down to Business.

 

Other videos in the series:

Video 1- Steve Savant and Bryan Anderson On Secondary Market Annuities

Video 2- Why Secondary Market Annuities Are A Great Income Alternative

Video 3- Using Deferred Income Secondary Market Annuities

Video 4- Lump sums and Secondary Market Annuities

Video 5- Using Secondary Market Annuities In Planning Scenarios

Video 6- Steve Savant’s ‘The Name Of The Game” On Secondary Market Annuities

 

Why Deferred Secondary Market Annuities Are The Most Efficient Use Of Funds- Video 3

In this third installment of the Steve Savant special week on Secondary Market Annuities, Bryan gets on a roll discussing how deferred income Secondary Market Annuities can offer the most powerful guaranteed income out there.  For customers who don’t need the bells and whistles of other types of annuities with riders and benefits, Secondary Market Annuities are the way to go.

 

Some structured settlements offer payments similar to deferred income annuities, where payments are delayed for a period of time before installments begin. But some structured settlements can defer for a period of time and distribute lump sums instead of a stream of income. Product expert Bryan Anderson of AnnuityStraightTalk.com is interviewed by Steve Savant, syndicated financial columnist and talk show host featuring Secondary Market Annuities on Let’s Get Down to Business.

 

Other videos in the series:

Video 1- Steve Savant and Bryan Anderson On Secondary Market Annuities

Video 2- Why Secondary Market Annuities Are A Great Income Alternative

Video 3- Using Deferred Income Secondary Market Annuities

Video 4- Lump Sums and Secondary Market Annuities

Video 5- Using Secondary Market Annuities In Planning Scenarios

Video 6- Steve Savant’s ‘The Name Of The Game” On Secondary Market Annuities

 

Why Secondary Market Annuities Are A Great Income Alternative- Video 2

Here is video 2 of Annuity Straight Talk’s Bryan Anderson on Steve Savant’s nationally syndicated ‘Lets Get Down To Business” discussing Secondary Market Annuities.

This show is designed for advisors, so there are certain acronyms and industry shorthand is discussed.  If you have any  questions, don’t hesitate to give us a call to discover if Secondary Market Annuities might be right for your situation.

 

Structured settlements have two important characteristics that make them appealing to an investor: above market yields and/or discounted present value lump sum purchase. At the same time there are two possible drawbacks to structured settlements as well: il-liquidity and no lifetime payouts.

Product expert Bryan Anderson of AnnuityStraightTalk.com is interviewed by Steve Savant, syndicated financial columnist and talk show host featuring Secondary Market Annuities on Let’s Get Down to Business.

Other videos in the series:

Video 1- Steve Savant and Bryan Anderson On Secondary Market Annuities

Video 2- Why Secondary Market Annuities Are A Great Income Alternative

Video 3- Using Deferred Income Secondary Market Annuities

Video 4- Lump Sums and Secondary Market Annuities

Video 5- Using Secondary Market Annuities In Planning Scenarios

Video 6- Steve Savant’s ‘The Name Of The Game” On Secondary Market Annuities

 

Secondary Market Annuities- AST on the Steve Savant show with Secondary Market Annuities

We hope you enjoy this first of several videos from the nationally syndicated online financial  commentator, Steve Savant, who recently hosted Bryan Anderson of Annuity Straight Talk on his show for a week of episodes featuring Secondary Market Annuities.  The show is geared to advisors and financial professionals but everyone will learn something.

Here’s the first video:

 

Product expert Bryan Anderson of AnnuityStraightTalk.com is interviewed by Steve Savant, syndicated financial columnist and talk show host featuring Secondary Market Annuities on Let’s Get Down to Business.

 

Other videos in the series:

Video 1- Steve Savant and Bryan Anderson On Secondary Market Annuities

Video 2- Why Secondary Market Annuities Are A Great Income Alternative

Video 3- Using Deferred Income Secondary Market Annuities

Video 4- Lump Sums and Secondary Market Annuities

Video 5- Using Secondary Market Annuities In Planning Scenarios

Video 6- Steve Savant’s ‘The Name Of The Game” On Secondary Market Annuities

 

Case Study- Quick Close Secondary Market Annuities

We had a lovely experience over the weekend.  A client called Friday afternoon, late, wanting an in-stock SMA for his mother.  He’d been watching our list for a few weeks and made the mistake of reserving several cases from another vendor.

After 3 of his 6 cases from ‘the other guy’ fell apart, he called us back and reserved a 2 year short lump sum as a perfect CD replacement for her matured CD.

He was able to review the closing book over the weekend, and arranged her wire on Monday.  The case closed today, and the only delay was due to the slowness of the banks in processing the wire transfer.

If you are ready for the “In Stock” SMA experience, give us a call!

To check out our inventory available now- CLICK HERE

Secondary Market Annuity Case Study 2- Immediate Income

We’ve had a lot of comments from readers of the SMA case study #1, so decided to write up another recent transaction to further illustrate how a secondary market annuity can be used to beat the low rates and generate retirement income.

“Mike”, who has been a member of the site for over a year, had plans to retire at the end of April, 2011 and was looking for the best income options for retirement.

While wanting to continue meaningful growth for future planning opportunities, he was also concerned about too much risk with his hard-earned nest egg.  We needed to find a way to enhance his level of retirement income so additional assets could be placed in reserve for a later date.

I knew how much money he had to invest so I kept an eye on the market and was able to grab the perfect investment for him.

What did Mike get?

We found a Secondary Market Income Annuity issued by New York Life with a purchase price of $309,000 that carried excellent benefits.  Here’s how it breaks down…

$309,000 initial investment.
6.25% guaranteed effective yield over 20 years.  Income starts immediately at…

  • $1600 monthly continuing for nine years, then…
  • $2150 monthly for eleven months with a lump sum of $100,000 in month twelve, then…
  • $2150 for seven years and nine months, then…
  • $2450 for two years and two months.

Aggregate income over the 20 year period will be more than $558,000!

Compare This Secondary Market Annuity Income Stream To An Immediate Annuity:

What is astounding is that investing his initial $309,000 in a period certain, 20 year immediate annuity today would have paid him only $1400 monthly based on his and his wife’s age.   This is an aggregate total of $336,000.

Buying the secondary market income annuity gave him more than $220,000 in additional income over the immediate annuity.  This is an unbeatable investment in today’s market!

Mike was able to purchase a significant income stream from a superior rated insurance company, and also receive a big lump sum payment in the middle of the term.  With this lump sum payment he has plenty of options for covering the income gap at the end of the term.

Again, this may not represent your situation but the enhanced rates in the secondary market lend a great deal of power to the idea of conservative asset management in retirement.

Wouldn’t you like to know what this market can do for you?

Contact us now to talk about a secondary market annuity strategy for your unique situation!

To Get Access to Secondary Market Annuities, Call 800.438.5121

Or, Please Click Here To View Current Secondary Market Annuity Availability

Secondary Market Annuities- Case Study

Be sure to read our SMA Case Study #2 also.

Case Study- 47 year old single male. When Dave came to me he clearly indicated he was extremely risk-averse.  Having been on the losing side of the S&L crisis in his early saving years and two major market corrections more recently, he was pretty fed up with the investment business.

Even so, he was able to accumulate a solid level of assets in cash and an IRA.  After taking time to understand his needs and current position, we began talking about annuities, as safety is what most appealed to him. Together we looked objectively at various annuity contracts he had been shown by other agents, including GLWB and deferred index annuities.

For one reason or another nothing was completely appropriate for him given his relatively young age and the fact that he really didn’t need to make any sudden moves.  We decided to wait for the right deal to come along.  Many investors and members of this site I speak with daily have the same cautious approach in this volatile market.

Along came secondary market annuities, and the potential for substantially higher interest rates on a guaranteed basis.  We began talking about the possibility before I had access to the products so he was well informed and able to act quickly.

Being prepared beforehand was extremely important to this process and enabled him to take action when the right deal came up.  I can’t stress enough, that pre-education a critical foundation for every individual considering these products.

Here’s what we were able to accomplish with several Secondary Market Annuities…

Over the course of two weeks, Dave purchased four separate secondary market annuities for a total investment of $294,910.  Rates on these contracts range from 6.25% to 7.25% over a time period of ten to 25 years.  To keep it simple I’ll use the aggregate figure and show distributions as a whole.

The individual payments listed represent the guaranteed payments as part or all of each specific deal.  As it all came together we were able to write it down on a timeline to see how it works in his unique situation. Here’s how it comes out based on his future ages at the time of each distribution.

INITIAL INVESTMENT OF $294.910 AT AGE 47
Income:
1.) $60,000 at age 58
2.) $60,000 at age 60
3.) $30,000 at age 62
4.) $100,000 at age 63
5.) $265,000 at age 64
6.) $83,250 at age 67
7.) $100,000 at age 68
8.) $300,000 at age 73

Total Investment: $294,910.

Total Aggregate Cash Flow: $998,250

Blended Effective Yield: 6.874%.

This plan creates a staggered set of payments that will allow him to ladder various retirement income investments to counter longevity risk and inflation.
The best part is that he can do all this with no market volatility in any part of the equation.  These contractually guaranteed figures give Dave tremendous income potential in the future with the flexibility to adapt to changing market conditions throughout retirement.

With continued savings over the next ten years and conservative management I see no reason why he can’t start planning for an early retirement now.  Do you?

Now that’s my kind of plan!

It really shows what kind of output is possible with solid, consistent growth over time.  Now, to be honest, this clients name isn’t really Dave but he is so happy with the process and end result that he has made himself available to anyone of you that would like to talk to someone who has been on your side of the secondary market annuities process and chosen to take the leap.  Call or email me and I’ll share his real name and set up a time when you two can chat.

Click On for case study #2 to produce retirement income with a secondary market annuity.

Click Here To View Current Secondary Market Annuity Availability

Why SMA’s Are Hard To Beat

While we work with a variety of annuities, we frequently gravitate to Secondary Market Annuities.  For investors specifically seeking a lifetime income stream that can not be outlived, SMA’s are not appropriate.  But for many, a fixed period of time or a fixed lump sum is appropriate, and the yield on the SMA’s makes it very attractive to use these fixed term cases.

For period certain returns, SMAs are beating everything handily with nothing else coming close for the following reasons:

  • The returns are well above any other fixed income asset class of similar safety and credit quality (A to AAA)
  • The income on the SMAs is consistent, known and a blend of principal and interest, facilitating a known and orderly drawdown of assets without risk to principal from price fluctuations
  • By using SMAs you’ll be able to count on this portion of your portfolio to provide steady, consistent cash flows to supplement your monthly living expenses and thus allowing you to leave other investments alone, allowing them to return to the “Average Returns” and eliminate a “Sequence of Returns” risk.  See this excellent summary of the sequence of returns risk, a study by Moshe Milevsky
  • Diversification will be achieved by purchasing several different SMAs that add up to desired investment and will provide the desired income

To put a solid floor of income in place, determine your needs and goals.  Contact us and let us know what you are looking for.  Understand the process so that when we find the right deals for you, you can make an informed decision

It takes some patience but in the end it’s well worth it.

Why Take 1.15% When You Can Get 4.5%?

NYLLogoNew York Life  announced earlier this year it’s short and mid term, guaranteed fixed annuity rate of 1.15%.  Citing a continued flat-line market, NYLife is offering rates little better than a CD as a guaranteed floor rate.

There is a market value adjustment, so the actual yield to maturity may be higher, however the floor may also be all that is earned

When considering fixed annuities or options similar to the NY Life above, take a moment first to call us and discuss Secondary Market Annuities.

Short and mid term lump sums routinely pay 4.5 to 5% effective rate of return.  Deferred…. compounding… and often, from NY Life itself!

To put it in perspective, a $100,000 investment today will pay back $102,311.89 in three years at 1.15%

The EXACT SAME INVESTMENT of $100,000 today will pay $109,197.02 at 4.5%

That’s nearly a 4X increase in real dollars – $2311 in Interest income vs $9197!!

Secondary Market Annuities are pure and simple, more income at a lower cost.  Give us a call to find out more.

 

 

 

Perfect IRA Deal- A Nice Deferred Lump Sum

Today I want to feature a deferred, lump sum investment that is just hard to beat.  We have two similar lump sums, from two different top rated carriers, AIG and Prudential.  Each have the same payment stream.

The AIG deal is this one:

What makes this so special?  Well, compare it to a CD or a fixed annuity.  For an investor with a bucket of cash and time to defer, there are few better ways to position assets today.

Take an IRA for example.  For a 50 year old, an IRA is a bucket of money that you can’t touch until you retire, age 59.5 at the earliest without IRS penalty.  What’s a 50 year old to do? You have to defer for 10 years at minimum…. and if you’re looking to retire at 65, this is a perfectly timed passive and safe investment.

Long term deferred lump sum investments make perfect sense in an IRA where you can’t do anything with the money anyway until you retire.  And concerns about a large amount of taxable income coming in one year are moot when you do this deal in an IRA.  It’s all tax deferred anyway.

Compare CD’s at a paltry 1.5 % rate, taxable annually… Fixed annuities at about 3%…. Muni bonds at 2% to 4% and susceptible to principal degradation if rates rise… and compare to Treasuries at 1%… ish.

These yields are you other ‘safe’ money options.  Why wouldn’t you seriously consider a fantastic  lump sum deferred deal like the one above that has a guaranteed price, and guaranteed payout, fixed and defined terms, and a great rate?

We’re waiting for your call- 2 of these are available today, one from AIG and one from Prudential.  800-438-5121.

Substantial Immediate Income & 5.5% Rate

Today I want to highlight two large immediate income deals.  It’s not often that we have substantial cases, because most settlements are smaller in nature.  However today we have a Genworth and a John Hancock case each nearly $2 million in size.  And each offers a long-term increasing income stream that is just perfect for retirement.

The most attractive case I have seen in years is this John Hancock case.  At a 5.5% effective interest rate, this is truly an outstanding deal.  With fixed annuities paying in the neighborhood of 3%, high quality bonds in the 3 to 4% range, and 20 year period certain immediate annuities in the 2 1/2% effective rate of return range, the 5.5% rate on the John Hancock case is an astounding value.

For an investment of just over $2 million, we can deliver a guaranteed 33 year income stream paying out $5,117,771.09.  Can your financial advisor guarantee you the same output?  I doubt it…

The beauty of secondary market annuities is that we can simply deliver more income, coupled with an outstanding guarantee, for a lower purchase price than other comparable investment options.    No other retirement income plan comes close to this level of return, guarantee, and safety

The downside of the John Hancock case is that it cannot be split among several investors, it cannot be purchased with IRA funds, nor can a trust be the purchasing entity.  But it is perfect for high net worth individual looking for a guaranteed income stream lasting 33 years, and we’re investigating the use of a simple LLC holding company to accommodate a couple of members to purchase the case.  Call for details

The case starts paying $4880 per month in January of next year, and that payment stream increases by 3% per year for five years.  Then in the middle of 2018, the income jumps from $5657 per month to $9478 per month.  That income stream also increases 3% per year, and lasts 27 years.  The final 12 months of payments are at $21,054 per month.

This is a substantial income from one of the top carriers in the business.  With uniform A to A+ ratings and a Comdex score of 93, John Hancock is simply at the top of the game.

As if the John Hancock case wasn’t enough, we also have a Genworth case nearly the same size that pays out over a shorter period of time. The Genworth case starts in just a few months with its income at $10,350 per month.  The income stream increases each year for 18 years, with a final 12 months at $17,620 per month.

Whereas the John Hancock case cannot be split, this Genworth case can be split among several investors, so if you are interested in a portion of this case, please let me know.

These two large immediate income cases show just some of the power of the secondary market for annuities.  If either one suits your fancy please don’t hesitate to call to learn more.

Is Your Home Equity Optimized?

Home equity has been unreliable  recent years.  Too many used home equity as an ATM, and the real estate downturn has left many realizing the folly of their ways with homes worth less than their mortgage.

However while  most of the visitors to this site have significant equity or paid off homes, most are only considering their homes as an asset to be utilized far in the future when they downsize.

I’d like to propose another way of using your home today, and capitalizing on the unbelievably low interest rates in the home mortgage market.

For many people with good credit, home loans can be obtained in the 3% to 4.5% range.  It doesn’t really take a rocket scientist to realize that investing money borrowed at 3.5% into a new investment yielding 5 to 6% is a good deal.

Consider these four current offers (as of 8/2/12): each one offers a solid cash flow, as well as lump sums.  Depending on how much money you borrow from your home, the income stream can be used to pay your mortgage, even pay it off.  This leaves you a lump sum that matures in the future as essentially free money.

Home Equity Secondary Market Annuities

The Genworth case is a perfect example.  It pays $4800/ month for 306 months, then pays $550,000 lump sum.  At 4% interest, you could borrow $1,005,413 on a 30 year home mortgage with payments of $4800/ month.   Theoretically, you could borrow the entire purchase price of $922,969, pay the mortgage off with the income stream, and be left with $550,000 at the end of the term.

Now, jumbo mortgage rates, your risk tolerance, and other factors may make this specific amount of borrowing not advisable.  But let’s say you have $550,000 to invest, and a paid off home worth $1M.  You could easily borrow $400,000, and rates on 15 year mortgages are as low as 3.5%.  The payment on this is 15 year mortgage is just $2860 per month.

Then, combine your mortgage proceeds and your available cash to purchase the $922,969 Genworth case yielding 5.5% over 28 years.  Utilize $2800 of the monthly income from Genworth for your mortgage payment, you are still left with $2000 month of income for the first 15 years.  Your house is paid off after 15 years, and your income from Genworth jumps to $4800 a month for another 10.5 years.  As a super bonus, you also have a $550,000 lump sum windfall- your entire invested principal is returned in full, and meanwhile your enjoyed 15 years of $2000/ mo and 10.5 years of $4800/mo.  That is a superb investment.

Utilizing home-equity in this way is very safe, as your mortgage payment is directly offset by your new income source, and the investment that you make yields a higher rate of return than your debt costs you.  There are home mortgage interest tax deductions to take into consideration as well that may make this even better.  For retirement investors looking to safely utilize home-equity, a strategy like the one described above is hard to beat.

It just so happens that we currently have four similar cases to the Genworth case that all would suit this strategy.  Each includes significant income streams and a lump sums.  For investors with home-equity, you owe it to yourself to make lemonade out of this lemon of a low rate environment.

Don’t let these low rates go to waste.  Grab some cheap mortgage money, and give us a call to secure one of these fantastic income with lump sum Secondary Market Annuities. In most cases, we can make arrangements to hold cases while your refinance is processing.

Excellent Deferred SMA’s

Summer  is heating up, and the deferred Secondary Market Annuities we have available this week are hot too.  For so many, just a few short years of SAFE, deferred growth can make a huge difference in planning stable income streams.  Locking in a future income stream now with a strong carrier can be a great move.

Below are selected deferred income contracts we have available.  Click the image to  see the whole list.

As you may  know, these move quickly so if there’s a deal you like, don’t hesitate to give us a call to reserve it.  They might not be available for long

Deferred Secondary Market Annuities

Also, these income + Lump Sum contracts have some attractive features.  The Prudential case #06460 is a solid long term income stream, with a decent lump sum not far out.

Deferred Income Secondary Market Annuities

If you have any questions about our Secondary Market Annuities do not hesitate to call or email.

Most of the questions we receive regularly are also addressed here: SMA FAQ

How Life Contingent Secondary Market Annuities Work

After several conversations this week with prospective buyers about life contingent secondary market annuities, I felt it was important to broadcast some information about these exciting high-yield opportunities to everyone.  The two deals that I am highlighting today are new on our list.   They might be gone soon, so if they look good, let’s chat soon! I will  quickly highlight a life contingent deal, and then explain how life contingent deals work.

The first deal is a large Prudential deal.  This deal will absolutely drench you in income for 30 years.  The final years worth of monthly payments is an astounding $17,875.56 per month- this contract pays out a total over $4 million over 30 years, on an investment of just $1.4 million today.  This astounding 6% yield simply cannot be matched anywhere.  The seller in this case is younger- in his 20s- and life insurance is already approved. 

Life Contingent Secondary Market Annuities

Life Contingent Secondary Market Annuities as of 6/27/12

The full payment stream is as follows:

4 life contingent monthly payments of $1,860.25 beginning on 09-01-2012 through and including 12-01-2012; 360 life contingent monthly payments of $1,916.06 beginning on 01-01-2013 with a 3% annual increase through and including 12-01-2042;

264 life contingent monthly payments of $7,181.79 beginning on 01-01-2021 with a 3% annual increase through and including 12-01-2042;

Plus Lump Sums:

01/01/26 = $100,000

01/01/31 = $200,000

 This is just an incredible, long-term, increasing income stream.

So how does a life contingent payment stream work?

 I am going to start out by saying that life contingent deals are not for everyone. If you don’t understand the Secondary Market for annuities, or feel unsure about handling investments, they might not be for you. They add a little bit more complexity to the secondary market annuity transaction, and honestly sometimes they do not close.  Where about one in 10 SMA transactions fail to get approved in court, we have an even lower success rate with life contingent deals.

 So with that disclaimer out of the way why am I telling you about these deals?  Because they come with a higher yield. 

 A life contingent secondary market annuity simply means that the payments due to the seller – and thereby due to you as a new buyer – depend on the seller’s life.  If the seller dies after you buy the payments, the payments will cease to be made by the insurance company. 

 Therefore, in order to make this an attractive and safe investment for you, life insurance is purchased on the life of the seller that will pay you any amount due to you under the remaining terms of your contract.

 Let’s use an example of a current deal on our list that is new today.

Life Contingent Secondary Market Annuities

Life Contingent Secondary Market Annuities

Looking at the CIGNA deal, the payments start in December of 2019.  On this deal, the first 36 payments are guaranteed.  The remaining 126 payments are contingent on the seller’s life.  In this case, the seller is a 40-year-old male. 

 The benefits statement is:

36 guaranteed monthly payments of $1,590 beginning on 12-11-2019 through and including 11-11-2022;

116 life contingent monthly payments of $1,590 beginning on 12-11-2022 through and including 07-11-2032.

 On 12-11-2022, the date of the 37th payment, your accrued principal and interest balance is $140,674.  Life insurance in excess of this amount has already been purchased by the seller, with you as the buyer of these payments to be named as a beneficiary under a collateral assignment. 

 If the seller is to pass away at any time during the life of this 14 year contract, the amount due to you under the amortization schedule of this deal will be paid to you.  If there are more life insurance proceeds than what remains owed to you, the remainder amount pays to the heirs of the seller.

Pros and cons of Life Contingent Secondary Market Annuities

Because life contingent deals are not absolute payment streams, they’re not for everyone.  Some investors do not want the uncertainty of receiving a lump sum in the future. 

However the flipside is also a possibility – receiving a lump sum might be an unexpected windfall.  It might allow you to reinvest in a different rate environment, or it may be flexibility that is a pleasant surprise.  There can be some complications purchasing life contingent deals with IRA money, so be sure to give us a call.

The important thing to look at right now is that life contingent deals have a higher rate of interest.  This reflects the added complexity, and sellers are willing to accept a higher discount rate to sell life contingent payments.

If you are seeking a higher yield, then a life contingent deal might be for you.  We do not publish all the life contingent deals available to us, so be sure to give us a call.  We can discuss your needs, and find the right deal for you.

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IRA’s and Secondary Market Annuities

Self Directed IRAs and Secondary Market Annuities

Self directed IRA’s are needed when making investments in Secondary Market Annuities with qualified funds.


Secondary Market Annuities can easily be purchased with qualified retirement funds utilizing a Self Directed IRA account.

Qualified funds may be in a Roth, a 401K, 403b, a Simple IRA, or other qualified vehicle.  To buy an SMA using qualified funds we need to utilize a self directed IRA.  Many self directed IRA custodian options exist but we work with one almost exclusively who has experience in the asset class and offers great service at a low cost.

Rolling funds over from one custodian to a new one is a very simple process, but it can take a week or two.  For clients who are planning to use qualified funds, it often is best to open the self directed account first, even before you reserve a deal.

Using Self Directed IRA’s With Secondary Market Annuities

GSTC Full Logo smallWe have worked with several self directed IRA custodians in the past, including Provident Trust Company and IRA Services, however Gold Star Trust is head and shoulders above the other two in terms of speed, service, and low cost. They are doing a great job for us and we recommend all customers use them. Their paperwork will be shown in the video demo.

Download “SDIRA Questionnaire” Shown In This Video


Download “Gold Star Trust Traditional IRA Documents” Shown In This Video


Download “Gold Start Trust Roth IRA Documents” Shown In This Video

There are four steps in an SMA/IRA transaction:

  • Open the Gold Star IRA Account– pages 1-4 AND page 8 of the IRA Application kit
    • Gold star will open an account with $0 transferred in. There are nominal account establishment fees ($65 annual/$25 opening) that can be paid by credit card.
    • Typically there is no need to open the IRA until an SMA is court approved.
    • Page 8= wholesale rep form. This authorizes us to communicate with, but not direct, Gold Star regarding your SMA purchase.
  • Fund the Gold Star IRA- pages 5+6, IRA Transfer/ Rollover documentation
    • This moves money from the current custodian to Gold Star.
    • Depending on the current custodian and the investments held, this might take 2 days or 4 weeks. It might require additional documentation such as notarized or medallion stamped signatures, and it may require time for currently held investments to sell and for trades to settle out. Also, some custodians may not wire, and may only send a check.
    • All these factors determine when you need to initiate the rollover/ transfer. Ideally, you wait until your SMA is court approved, then initiate transfer of funds to Gold Star, however there may be situations depending on your current custodian where you need to start money moving earlier.
  • Buy the SMA- Direction of Investment form, page 7
    • There is a space on the form for the case ode (Example 2A010216A-1), and for the exact purchase price
    • The best practice for people who know they are buying an SMA but don’t know which SMA yet, is to send in a signed DOI form right at account opening, leaving the case code and $$ blank- Gold Star will fill this in once you identify an SMA
    • Alternatively, if you know which SMA you are buying and it’s been court approved, fill in the code but leave the price blank, as that is not known until right before closing, and Gold Star can fill that in.
  • Closing book
    • In SMA transactions with IRA funding, we supply you with the closing book for your review prior to funding
    • Once you review and approve, by email or call to us or to Gold Star, Gold Star signs the Absolute Assignment and the Servicing Agreement on your behalf as custodian, and wires money from your account to purchase the SMA
    • Closed/Funded/Complete

About Self Directed IRA’s

Self directed IRA’s are simply IRA’s held by a custodian that permits you to direct your own investments- you can chose to buy SMA’s, real estate, or any other sort of investment.  A self directed IRA custodian will not offer you investment advice- they just ensure the account is in compliance with the IRS.

By contrast, many IRA’s held by brokerages like Schwab or Fidelity let you pick from only a few Fidelity or Schwab mutual funds- they are restricted and captive, and may  offer traditional stock picking advice.  Read about self directed IRA’s here.

Best Cases For Qualified Funds

IRA’s are designed to offer tax deferral for investors saving for retirement…. and they are designed to be SPENT in retirement as well.  Most investors can’t touch the money in their IRA’s for a long time, and too often, people shoot for income contracts in an IRA and produce income (and return of principal) that they can’t take out.  Instead, take advantage of these deferred interest rates and consider deferred lump sum cases.

RMD Details

Holding SMA’s in a qualified vehicle requires the custodian to calculate the Required Minimum Distribution (RMD) each year.  Be aware that long term deferred SMA contracts in qualified vehicles for investors over 70.5 years of age may be subject to RMD’s yet not produce cash flow.  Advisors should be sure there is sufficient money for RMD’s when using deferred contracts in IRA’s