Buying Secondary Market Annuities- Understanding The Transfer Process
In the Secondary Market Annuities world there are two methods of transfer currently in use in the industry. One is used on a professional and institutional level, which we now utilize exclusively. I’ll explain that in a moment. But first…
The Old Way Of Transferring Secondary Market Annuities
First, I wanted to explain a more inflexible method that we previously followed. Following this “Old” method, cases are marketed on a ‘best efforts’ basis by many agents. There’s a bit of a scramble around fresh inventory and cases may be marketed by multiple agencies.
If an investor is lucky enough to secure a case quickly and not have it taken out from under by another buyer, the investor’s name is directly entered into the court order and assignment documentation. After court approval, this investor’s name is now a matter of public record, which is a level of exposure many people do not appreciate.
Because the brokers offering cases in this manner do not control the inventory – they are just ‘flipping’ it- they frequently are pressured by their sources to fund cases before all the documentation is complete. Specifically, it became a common practice to fund the sellers of payments with investor money before the underlying insurance carrier issued an acknowledgement of the court order transferring those payments to the new investor.
Sometimes this acknowledgement letter takes 3 to 6 weeks to get issued, and when investor funds are used to buy a case before this is complete, there is exposure to the investor during this time period. Now, in a properly reviewed case this risk is greatly mitigated with buyback agreements, review of the file, and review of the notices made to the carrier. In short, it’s not really a risk as the acknowledgement is a foregone conclusion that simply takes a little time to complete, but still, it’s an uncomfortable time period.
Finally, once acknowledged and truly closed, a ‘direct to court order’ assignment to an investor becomes a rigidly inflexible arrangement. Investors can transfer the payments to heirs via their will, or if they purchased in the name of a trust at the beginning, but that may involve probate (state dependent) and generally can not transfer to a subsequent buyer. Hence, using this transfer process, these Secondary Market Annuities are il-liquid.
Summary Of The Old Way Of Transferring Secondary Market Annuities
This older method of transfer works, however the limitations are described above. The limitations are:
- Public Disclosure
- Il Liquidity
- Potential heirs/ assigns complications
- Lack of Control by Client And Agent
- Potential exposure of investor funds prior to complete acknowledgement
The New Way Of Transferring Secondary Market Annuities
The more professional and institutional method of transferring payments utilizes a Trust to be the named buyer in a Court order. I’ll detail some of the benefits of a Trust in just a moment, but one of the key elements is that a payment servicing company receives the payments and makes them payable to the Trust if it is still the owner of the payment, or to whomever the Trust subsequently assigns its rights to. Once a Trust re-assigns its rights to the payment, it has no ownership of those payments.
This is the process we now follow as it addresses each of the concerns outlined above.
- Exclusive control over inventory, so our clients do not have the cases taken out from under them.
- The trust is the named buyer, thus insulating the end investor from public disclosure
- Our buyers can easily re-assign to both heirs or to other owners by working with the payment servicer, thus making the payments much more liquid.
- Finally, by processing cases in a timely manner and extending capital to buy the cases, investor exposure to funding cases prior to the file being full and complete with carrier acknowledgement is eliminated.
- As an added benefit, our supplier can also offer a guarantee of its work by going back to carriers to re-acknowledge the transfer after a period of time. This is especially important, and is something brokers using the ‘old’ method can not do.
Summary of The New Secondary Market Annuity Transfer Process
Utilizing these best in class transfer procedures, Secondary Market Annuities are now more liquid, more secure, and more flexible for our clients. Please sign up to this site and download our Secondary Market Annuities buyers guide for more details, or give us a call with any questions.