Structured Settlement Annuities- How Secondary Market Annuities Are Made
This is part 1 of a 3 part story on how Secondary Market Annuities come to be.
The term Secondary market annuity can mean a structured settlement, lottery payment, or an existing annuity. What these transactions all have in common is that an individual who owns future payments wants cash today, and you want to use your cash today to secure a future payment stream.
Because the seller is willing to sell at a discount, you can get a great deal.
The most common transaction is a guaranteed structured settlement, which we will explore here in a little example story. In the next e-mails, I will talk about the other types of deals, but for now let’s stick with a guaranteed structured settlement
Structured settlements are found primarily in the legal system when an individual wins an award, and elects to take their monetary compensation over time instead of as a lump sum.
Let’s use the story of a typical car accident as an example….
John Smith hits Jane Doe in a car accident, and the case goes to court.
John Smith loses in court, and Jane wins. Money is offered to Jane, either a lump sum, or a structured settlement making payments over her lifetime. Instead of taking the lump sum, Jane, who can’t go to work because of her injuries, elects a structured settlement.
Jane’s court ordered settlement reads “Jane Doe shall receive $1000 per month for life, with 20 years guaranteed.”
Now Jane doesn’t want John or Progressive, his auto insurance company, to be paying her, and the court doesn’t want this either. Progressive just wants to close the case and raise John’s premiums.
To put closure on the case, Progressive purchases an annuity from a major life insurance carrier to pay Jane $1000 per month for life, with 20 years guaranteed. Let’s assume they purchase the annuity from MetLife.
Progressive Insurance is the owner, MetLife is the issuer, and Jane is the payee of this annuity contract. Jane can call up MetLife any time and they will tell her that she is entitled to $1000 a month for life, with 20 years guaranteed starting on the date the case was closed.
If MetLife goes out of business, and also the State Guarantee funds that guarantee Met and the other carriers operating in that state go out of business too, (Ummm Not very likely!) Jane can go back on Progressive and demand that they make good on the money owed to her under the court settlement.
Now back to our story…. John and Jane can finally put this accident behind them. Progressive has a continuing liability to Jane, but they have shifted that onto Met Life, albeit for a pound of flesh. Met Life sticks it to Progressive and gets a big chunk of premium to invest, and adds Jane to their long list of happy customers.
End of Story? Not yet….
Now five years goes by, and Jane needs money for a new car. She can’t get a loan as she doesn’t work, so she decides to sell some of her payments for a lump sum.
Met Life can not buy Jane’s contract out because it would be a conflict of interest. So instead, she enters into a contract with a factoring company- and you may have heard ads for companies like JG Wentworth on TV that specialize in this business- and sells $500 a month for 15 years.
Jane accepts the factoring company’s offer at an 8% discount rate, and looks forward to receiving a little over $53,000 once the case is settled. She has her eye on a new Lexus.
Jane has just created a secondary market annuity contract available for you to purchase…
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