Frequently Asked Questions About Secondary Market Annuities

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Frequently Asked Questions About Secondary Market Annuities

Secondary Market Annuities come from structured settlements, which  originate as a result of  a court case whereby an individual wins an award and elects to take their payments over time.  These payment streams typically include guaranteed monthly payments and/or guaranteed lump sums designed to accommodate the payee’s life circumstances in the future.

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Why People Sell Structured Settlement Annuities

Quite simply, people’s circumstances change.  When individuals with Structured Settlement Annuities seek to sell their future payment streams for cash today, they approach a financing company who applies a discount to the future payment streams and offers a lump sum to the payee. When individuals sell their right to receive payments under a structured settlement, a Secondary Market Annuity is created. They represent one of the best ways to capture higher yields in a safe money investment.

When a seller and the financing company have an agreement, the company commences its underwriting of a specific case.  They investigate the credit of the seller, any alimony, bankruptcy, or other liens, and a file with the court that originally awarded the payee the settlement to amend the court order.  This is to comply with the provisions of Federal laws contained in the 2001 bill HR2884 and  IRS Code Chapter 55, section 5891, relating to a transfer subject to a Qualified Order.

As a case is researched and proofed, it is marketed to select firms.  We are unique as we work with, a wholesale vendor who buys these payments directly into a business trust when they become available.  Other vendors of SMA’s market on a “Best Efforts” basis and have no control over the process, quality, or even the existence, of the payments.

With the DCF Exchange inventory, a business trust is the named buyer, and this trust name is entered into the various documentation and court order relating to the transfer.  Some of these documents are public record, so using the trust acts as an important confidentiality buffer and represents a key element of why our process is superior to other transfer methods.

Once a case is approved in court, and all the documents relating to the transfer of payment rights are compiled, the documents are sent to counsel for review.  As we market cases in both a pre-order and in stock manner, capital may be extended by the wholesaler to purchase a case if it is not reserved prior to this point.

The legal counsel reviews all documents to ensure everything is in order. Once reviewed, we provide a full and complete  closing book and only after doing so are your purchase funds required within 48 hours.

Prior to closing, the closing book consisting of your payment stream, the transfer and assignment agreements, the court order and an acknowledgment from the annuity issuer all documenting the transfer, is compiled and sent to you.  You’ll have 48 hours to complete the transaction by wiring funds to close the case.

Secondary Market Annuities and Taxes

The taxation of  income from factored Structured Settlements is  up to the taxpayer and their tax advisor, and depends if the Settlement is held in a qualified IRA or not.  Federal law and IRS guidelines outline how,  in a properly structured transaction, a court order shows a buyer as the assignee  of the payments by means of  qualified order.  This is the court process we follow at AST.

While under current IRS regulations you as the new assignee of a factored structured settlement case will not received a 1099 for the income you receive, this does not mean it’s tax-free.  Please refer  to the following IRS rules for guidance and consult your tax advisor for specific questions.

In the case of lottery payments, state and federal taxes are withheld from the payments from the state lottery commission, and you will file annual tax returns that would include a  request for refund for the taxes withheld on the portion of your payment stream that was return of principal.

We’ll outline a few common Q&A questions below.

What Is A Secondary Market Income Annuity?

A Secondary Market Income Annuity (SMIA) is the resale of an existing annuity income stream, either from an Immediate Annuity, a Factored Structured Settlement, or a Lottery Prize Payout contract. The pre-defined income stream and specific terms of the offering is sold for a lump sum payment and thereby transferred from the current recipient of the income to the Buyer.

Is This Investment Right For Me?

If you are looking for an investment that can provide above average returns for the fixed income portion of a balanced portfolio and are in a financial position to hold an illiquid investment with a specific income/return structure, you should consider Secondary Market Annuities.

What Are The Benefits Of Secondary Market Annuities?

SMIAs guarantee you a payment stream over a specific period of time, at a fixed rate of return.  This investment is generally considered to be a good vehicle for “safe money” savings.  Annuity Straight Talk only offers SMIAs from those insurance companies that are highly rated by Standard & Poor’s for claims paying ability, making the Secondary Market Income Annuities we offer one of the safest forms of fixed term purchases available today.

Yields on Secondary Market Annuities are higher simple because the seller of the payment stream is willing to sell at a discount for cash today.  You benefit from that discount and get a higher yield on the cash flow as when compared to comparable annuity products available in the open markets.

 What Is The Yield On A Secondary Market Annuity?

Yields on Secondary Market Annuities vary and are generally related to the length of deferral.  For example, an offer with a 10 year deferral period would have a higher interest rate than an immediate income offer.  A long term lump sum offer will have a higher long term, compounding yield.

Secondary Market Annuities simply costs less to purchase the same income stream.

Can I Transfer Or Sell These Payments Later On?

We can facilitate the re-sale of payments you own due to the  unique procedures we follow, but the transfer rate at the time you sell will be market based.  There is no early surrender option or liquidity option, so it’s best to consider Secondary Market Annuities as generally not liquid or marketable.

Who Makes The Payments to Me?

SMIA payments are made to the payment servicing partner, ASG, who makes the payment to you.  We utilize a payment servicer to facilitate liquidity and to provide you with quick close, in stock inventory.  The Asset Servicing Group is a nationally recognized payment servicer providing millions of dollars of monthly policy service on thousands of policies.  ASG at no time has any ownership or control of your funds, they merely act as a recipient lockbox and forward you payment as you direct, to you, you heirs, or a new owner if you re-sell the payments.  Payment servicing carries a nominal cost that varies with each case and is shown in our SMA Buyers Guide.

Why Work With Annuity Straight Talk?

Each transaction we handle is subject to a rigorous review by an attorney.  The due diligence and unique procedure followed protects each individual buyer to the fullest.  Attention to each case sets us apart from everyone else in the industry in protecting you, the customer. The transaction process has been designed to protect the Buyer.

In addition, all costs of the transaction are built into the price- other than the account servicing costs above, there are NO hidden fees, monitoring costs, account fees, or ancillary charges.  In the case of Life Contingent annuities, the purchase price INCLUDES life insurance coverage for the entire payment cycle, AND Gap insurance covering the first two years of the contract.  This is all factored into the purchase price and handled prior to closing by our team, and designed to protect your interests.

What Is A Typical Term And Purchase Amount?

The present value of a Secondary Market Income Annuity is generally between $50,000 and $500,000 but can be higher or lower. Terms can range from 1 to 35 years but typically are 5 to 20 years.

Why Are SMA Rates Higher?

The rate of return on a SMIA is typically higher than the rate available on annuities newly purchased directly from insurance companies today because an SMIA has been previously owned and has attributes, such as payment term and payment amounts, that cannot be changed.

Additionally, an SMIA is transferred for the present value of future income payments. The present value is determined by what the Annuitant, or the Seller, will accept and what a Buyer will pay.

Can I Purchase Secondary Market Annuities With My IRA?

Yes, most Secondary Market Annuities can be purchase with IRA money.  A self directed IRA is required and we can assist you setting up a self directed IRA with a custodian familiar with the Secondary Market Annuity marketplace.

It’s important to note that Self Directed IRA’s do have nominal fees- we have three preferred IRA custodians, please contact us for more details.

Are All SMA Payments Serviced?

Yes, all payments we deal with are serviced, through ASG, ( Asg is a market leading payment servicer servicing thousands of policies in the life settlement and SMA space. All our cases are serviced by ASG for 3 good reasons

  • ASG is a top quality servicer- in about 30% of cases from other companies and brokers you will have payment servicing thrust on you at the 11th hour without warning, from lower quality companies, which is far worse.
  • As the IRS requirements of code sec 5891 (which deals with the transfer of structured settlements) are rigid, insurance carriers will only adhere to the assignee named in the court order, and will not accommodate subsequent re-transfer. As the Business Trust is the named buyer and all cases are purchased prior to an end investor being identified- we must use a servicer to facilitate reassignment and liquidity
  • Our ability to sell the payment to you means you have the ability to sell it to someone else- that is the primary benefit of servicing. Assignment to an heir, a third party, or to a trust or a child, is easy with a servicer and impossible with a direct assignment from a carrier.

In short, servicing costs are nominal and largely borne by our company with the account setup, so it’s generally not material on the yield. As to risk, we took all measures possible to align with the best in class.  In sum, the benefits of servicing far outweigh the nominal cost and slight hassle of an extra step in the process.

Written By

Bryan Anderson

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