Structured Settlements

Structured Settlements

Chances are your clients are dissatisfied with low-rate fixed annuities and dislike the fees and equity risk of variable annuities.

It’s possible, however, to earn yields upwards of 6 percent on “secondary market” annuities issued by top-rated carriers such as Allstate, MassMutual, Prudential, AIG, John Hancock, MetLife, Berkshire Hathaway and New York Life. These annuities, also called “structured settlements,” are often promoted online and through print advertisements with call-outs like “It’s your money!” and “Don’t wait to be paid!”

These annuities usually originate as a guaranteed stream of income from a personal injury or medical malpractice lawsuit, or lottery winnings. Recipients that need cash up front sell the guaranteed income to a factoring company—often through a court-ordered process. Yields may be 1 to 4 percent higher than annuities in the primary market due to the deep discount the buyer pays.

The price your client pays for the income from a structured settlement is net fees for expenses like due diligence reports. But also consider that the cut and commissions taken by secondary market sellers can run into the double digits.

Currently, one can buy a MetLife annuity with a 25-year term for a $232,000 investment that yields 6 percent. The return on the contract over 25 years is $1 million, according to SMASource.com, a secondary-market annuity website.

Over a shorter term, a client could earn 4.5 percent from a 10-year Berkshire Hathaway annuity for a $33,000 investment with a return of $50,000.

Nathaniel Pulsifer, a Whitefish, Mont. insurance agent and director of marketing for Annuity Straight Talk LLC, a secondary market annuity wholesaler, says that recipients of structured settlements often can’t cash out an annuity directly through the insurance company, so they must sell it through a factoring company. J.G. Wentworth is the big kahuna in the secondary insurance market. Others include Somerset Wealth Strategies, Altium Group, Pacific Structured Assets, and Peachtree Financial.

Buying or selling an annuity on the secondary market is not easy. Stan Haithcock, an annuity consultant, says there may be about $1 billion worth of annuities for sale on the secondary market, but hedge funds, private equity and institutional investors swoop in and buy 80 percent of them.

“It is a first-come-first-serve market,” he says. “So if you see something you like, you better move on it.” Individual investors, he warns, get a haircut on the price.

Haithcock says that financial advisors need to refer clients to brokers who specialize in secondary market annuities. CPAs and lawyers need to review the tax and legal ramifications of the transactions.

“It’s kind of messy,” he says, noting the market is largely unregulated. “Most (insurance) agents are not qualified to sell them. Selling your annuity is not like selling your car.”

You need to receive a judge’s approval to change the payment rights of the policy. “The issuing insurance company needs to acknowledge and approve the change—a process that can take a while,” he says.

If handled incorrectly, he warns, an advisor involved in the transaction could face a lawsuit.

Kristine McKinley, a financial advisor, says she would not normally recommend any type of annuity to risk-averse clients. She would review all suitable options, based on safety, liquidity and yield.

“With interest rates most likely to increase, it doesn’t make sense to lock into anything, especially for 15 years,” she says.

Another caveat: The buyer is depending on the validity of the court order approving the sale of the annuity. The court approving the transaction must have jurisdiction over the assignment of the annuity and the parties involved in the transaction, including the insurance company or the state lottery commission, according to a report by Pacific Structured Assets.

“Only a handful of companies truly compete in this space, so the inventory of secondary market annuities is limited,” Haithcock says. “With billions of annuities sold every year and trillions already on the books, secondary market annuity offerings will grow. But the market for these investments is for sophisticated investors.”

TAGS: Insurance
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