Secondary Market Annuities: An Overview of the Asset, the Risk, the Rate of Return, the Purchase Process, and the Under-Writing
What is a “Secondary Market Annuity”? Sometimes referred also to as a Pre-issued annuity, a Secondary Market Annuity is simply a “primary market” annuity that has been assigned/sold to a 3rd party investor (generally through a Court Approval Process); where the 3rd party investor becomes the “new” beneficiary of a pre-existing payment stream originally due to be paid to an underlying annuitant.
In its simplest form, the purchase of a secondary market or pre-issued annuity involves the assignment of an existing or future cash flow from one individual to another in exchange for a single “lump sum payment”. The most common forms of secondary market annuities arise out of the sale of structured settlement payments and lottery winnings where an original annuitant wishes to assign their future payments to a 3rd party in exchange for a single lump sum cash payment.
Unlike the purchase of “primary market” annuity, however, where the purchase of the annuity is completed between a consumer/investor and an “annuity issuer”; the purchase of a secondary market annuity generally requires that a Court Order Assignment Procedure be completed first. The purpose of the Court Order Procedure is to create a direct “new” legal obligation between the underlying Insurance Carrier(s) that originally issued and/or owned the annuity, and the 3rd party investor that is purchasing the payment streams under the “pre-issued” annuity.
The most important benefit received by the investor through the Court Assignment Process is that the 3rd party investor will also receive the same protections and guarantees that were afforded the original annuitant by each of the individual underlying insurance carriers that were involved in the issuance of the original annuity. Whereas the benefit received by the original annuitant is the ability to obtain immediate “liquidity” for future payments.
The investment is also very attractive to an investor because the rates of return on all secondary market annuities far exceed the rates of return possible on primary market annuities with an extremely low level of risk. Although secondary market annuities are not FDIC insured; the Court Order Procedure is governed by a strict State and Federal statutory scheme allowing the 3rd party investor to “step into the shoes” of the original annuitant. In addition, the investor/purchase of a secondary market annuity will also receive a separate “acknowledgement” from either one or two rated insurance carriers directly obligating the Insurance Carrier(s) to recognize the 3rd party investor as the “new” annuitant of the purchased payment stream.
For example, a 10 year income stream obtained through the purchase of a “Court Ordered” structured settlement annuity assignment will generally allow the investor to obtain a yield anywhere between 4.5% and 6% depending on the size, length, and timing of the payment stream purchased. By comparison, if that same investor were to have purchased a 10 year “primary market “immediate period certain annuity directly from an annuity issuer, the yield to the investor would probably average around 2.50%-3.00% depending on the timing, size, and duration of the payment stream. Equally important is the low level of risk that a properly purchased” court ordered annuity carries which has generally been equated to being similar to that of a Bank CD, or a U.S. Treasury Obligation; which on average produce yields at far less than 2.00%.
At the same time, any investor that is serious about seeking to explore the possibility of secondary market annuities as a form of wealth management strategy, must also engage in proper due diligence to insure full compliance and proper underwriting throughout the entire assignment process. Since proper due diligence also requires that a specific set of guidelines be followed, an investor is well advised to retain the services of a qualified structured settlement attorney/expert, consultant, and/or advisor well experienced in the purchase, procurement, underwriting, court approval, and placement of secondary market annuities.
A qualified structured settlement attorney will be able not only to facilitate the: (1) early procurement; (2) proper initial underwriting, (3) proper monitoring of the Court Approval Process; (4) proper final underwriting; but also significantly reduce all “post court approval” risks to a minimum. And an experienced structured settlement attorney should also be able to provide an investor with a “qualified opinion letter” (much like a certified financial statement) that assesses the “final risk” level involved to the investor, as well as assure that the necessary specific acknowledgement(s) from each of the underlying Insurance Carrier(s) obligated to make the future payments are drafted according to the investor’s explicit instructions.
Should a conservator investor seeking a higher yield, lower risk rate of return, explore the possibility of purchasing secondary market annuities; absolutely! Should such an investor seek to purchase secondary market annuities without engaging in proper due diligence and/or obtaining independent professional advice; absolutely not!