How Safe is the Secondary Market for Annuities?
The question of safety of the Secondary Market is one we receive frequently, especially after sending out a list of currently available offers that pique reader interest.
Quite simply, we like structured settlement secondary annuities because they offer the highest yield and highest level of safety available to consumers for retirement income purposes. They are not the simplest transactions for buyer or agents to complete, and they are not appropriate for all situations. For example, for older investors, other types of annuities may have more benefits in flexibility or longevity protection. However as planning tools with excellent yield and safety, they simply can’t be beat.
Be sure to reference our post on the difference between Structured Settlement Annuities and viatical (life insurance) transactions.
So now that you know why we like them in general, the question remains, is this market for real and how safe is it?
Secondary market annuities can more specifically be called structured settlements in technical terms. A structured settlement originates when an individual wins a settlement- this can be a car accident, medical malpractice, or any other sort of award.
The settlement essentially takes the same form as an annuity contract that is available to anyone who invests retirement assets with an insurance company- it’s a promise by a highly rated carrier to make a series of future payments to the individual.
In this case, rather than an individual buying those future promised with a premium (AKA an annuity), in a settlement, the losing party in the case settles their obligation by transferring a sum of money to satisfy those future payments. The sum is transferred to an insurance company who then shoulders the future market risk and court-ordered obligation to make specific payments. The winning party- usually an individual- enjoys this income stream tax-free per IRS regulations.
However, circumstances change for people, and sometimes they wish to sell their future payments for a lump sum. This is where our ”Secondary Market Annuities” originate.
Because of this slight difference in origination of funds in the settlement, there is one critical difference that separates primary market from secondary market annuities. In addition I’ll add two other reasons that will show clearly why the secondary market is a much SAFER investment.
Safety Factor #1
An insurance company becomes party to a structured settlement as part of a final court order in a lawsuit. In the unlikely event that this specific insurance company fails in the future, an existing court order compelling the company to make payments would place that liability among the company’s most senior debt obligations. And that means it gets paid out ahead of all other company liabilities. The insolvent insurance company would be held in contempt of court for failing to make payments according to the terms of a structure settlement. The stream of income provided to you via the secondary market annuity would not be affected nor have to wait for further bankruptcy or liquidation proceedings.
Safety Factor #2
And now for the somewhat less critical but also quite relevant…
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. Let’s assume your state guaranty fund covers $100,000 for annuities but you need to invest quite a bit more money to cover your retirement income needs. Within the primary market, no matter what you decide to invest, you may only be covered to the maximum limit of $100,000.
By using the secondary market, you are subject to the guaranty limits of the state where the contract was initially issued, not necessarily your state of residence. Structuring an income portfolio in the secondary market typically requires multiple deals to complete. It is quite probable that each contract will have originated in a different state, 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:
The risks in an SMA are generally transactional in nature- meaning, it has a risk of not closing due to the seller changing their mind or the court not approving the transfer. In both of these cases, there is no financial consequence to you if the case fails, and your deposit is fully refunded. This happens in about 1 in 10 cases where generally a court disallows the seller from selling due to the seller’s personal situation.
Other risks in an improperly handled SMA transaction are that a payment stream could be already committed or not transferable. Our process eliminates that risk as our outside counsel reviews and will not release purchase funds until a thorough checklist is complete.
Thus the three key items that ensure legal safety are:
- Benefits letter from the issuer to the payee, which establishes that the Payee has the payments to sell,
- Court order changing the payee to you,
- 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.
Not surprisingly, these three key pieces are what must be in place before your funds are released to a factoring company and seller, and are what constitute our closing book after a transaction is complete.
Safety Factor #4:
And finally we’re going to talk about a safeguard that is inherent to any sound retirement income plan. Any advisor worth their salt will advise you to spread your assets between several different insurance companies. While this is a great recommendation, it rarely happens because most salesmen are lazy and benefits can vary greatly between carriers to the point where it puts you at a financial disadvantage.
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.
A retirement income portfolio based on secondary market annuities thus offers unparalleled safety of 1) credit quality, 2) seniority status among the issuing company obligations, 3) rock solid legal review, and 4) diversity of carriers.
If you’d like to explore this profitable yet extremely safe opportunity for your retirement income plans, we’re ready for your call.
Annuity Straight Talk