Buyers Guide to Structured Settlement Annuities

  • Guide to Structured Settlement Annuities

    Use the tabs to the left to understand what you need to know about Structured Settlement Annuities.
    Structured Settlement Annuities represent an ideal way to achieve high yield with safe money. Yields in the Secondary market are simply higher because of the circumstances surrounding each case
    These transactions are not too good to be true--- they're just too good to last. Get yours today!

  • What Are Structured Settlements

    A Structured Settlement comes into existence through a court case or legal settlement whereby the prevailing party agrees to a monetary award in compensation for damages and takes that award over time.  These might be workplace, injury, medical malpractice, or other types of settlements.  To qualify as tax-free Structured Settlements, it must be a:

    1. suit or agreement for the periodic payment of damages excludable from the gross income of the recipient under section 104(a)(2), or

    2. agreement for the periodic payment of compensation under any workers’ compensation law excludable from the gross income of the recipient under section 104(a)(1), and

    3. under which the periodic payments are of the character described in subparagraphs (A) and (B) of section 130(c)(2), and payable by a person who is a party to the suit or agreement or to the workers’ compensation claim or by a person who has assumed the liability for such periodic payments under a qualified assignment in accordance with section 130. (IRC section 5891(c)(1)).

    A Structured Settlement Annuity or Secondary Market Annuity comes into existence when a payee decides they wish to have a lump sum instead of their pre-arranged settlement payments.  What we call ‘Secondary Market Annuities’ or “Structured Settlement Annuities” are simply factored structured settlement payment streams sold by an individual, through a court administered process compliant with the applicable IRS codes above, wherein a new buyer becomes the new assignee of the payment stream.

  • Where Structured Settlement Annuities Originate

    Origination of Secondary Transactions:

    People’s lives change and they may wish to take a lump sum instead of their future payments.  In a ‘Factored Structured Settlement’ transaction, a seller and an intermediary known as a  factoring company come together to sell payments.  We are the buyer of these payments from the factoring company, and in turn sell them to you after a thorough investigation of the credit of the seller, any alimony, bankruptcy, or other liens.

    When a case is proofed up, the payments are transferred to our Business Trust by means of a series of purchase and sale contracts.  Additionally, a court of competent jurisdiction must rule if the sale is in the seller’s best interests. 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.

     

  • Structured Settlement Annuities Purchase Process

    A structured settlement is a payment stream payable to the winning party in a court case or other settlement.  People’s circumstances change, however, and some wish to sell their future payments for a lump sum.

    Reservation:

    As a case is researched and proofed, it is marketed.  Our Business Trust buys these cases and commits its own capital to the purchase.  We market cases that are in process on a ‘pre-order’ basis and we market cases we already own as quick close, ‘in stock’ inventory available for immediate sale.

    Court:

    The principal delay for ‘pre order’ cases is waiting for a court hearing where the seller is approved to sell.  Meanwhile, much additional research is done on the payments themselves, such as other claims, seller’s credit history, etc.  The court itself does nothing to verify if the seller has full rights to sell the payments- they merely rule if it is in their best interest.  The contractual documents and research are what create a ‘clear title.”

    Legal Review:

    Once a case is approved in court, and all the documents relating to the transfer of payment rights to you are compiled, the documents are sent to our counsel for review.  Our counsel reviews all documents to ensure everything is in order, and only after doing so we send you a closing book for review.

    Closing and Funding:

    After receipt of the complete closing book documenting the transfer of payments to you, your purchase funds are required in 48 hours.  We perform fully before you are asked to put up any money.

  • Secondary Market Annuities Yield

    Secondary Market Annuities  are future cash flow streams available for  purchase at a yield higher than comparable safe investments because of the following summarized reasons:

    1. The seller is selling at a discount 
    2. The transaction needs to go to court process, sometimes takes 30 to 60 days
    3. There is a risk that the transactions are not approved in court (about one in 10)
    4. These transactions are generally long-term, locked up, and not liquid
    5. Supply is limited and cash flows are often quite “lumpy” and therefore are not suitable for all investors

    The yield available to investors is much higher than comparable fixed annuities, CD’s, Treasuries, and even tax-free Muni bonds.

  • Are SMA's Too Good To Be True?

    There are several reasons why these are NOT too good to be true- These contracts are simply available to you, at a yield that is higher than currently available in the open market.

    Discounted Purchase Price:

    The first reason is that these cash flows are being purchased from individuals at a discount. The individual selling the annuity is willing to accept a discount rate in order to get cash today. You are able to purchase that future cash flow and the rate of return is higher than traditional annuities because of the discount that the seller is willing to take.

    These cash flows originate in a settlement – generally a workplace injury or legal dispute. The paying party (usually an insurance company ) fully funds the obligation when the settlement is made. At a later date, the original recipient may decide they need cash now instead of future payments.

    That’s where this secondary market transaction starts, when the original payee approaches a factoring company to purchase the future cash flow streams. It is that transaction where the original payee accepts a discount rate that is offered by the factoring company.

    Court Approval

    Once a buyer is committed to buying the cash flows that a seller wishes to sell, the transaction needs to go to court for approval. Because the original claim originated in a court proceeding, this is technically a change in the outcome of a previous court case. The court process that each of these cash flows must go through to approve the transaction insures that the transaction is fair and that the selling party won’t end up destitute or on public support.

    Il-Liquid:

    Once a transaction is approved in court, the payments are generally il-liquid.  While we can re-sell payments, there are not contractual guarantees on liquidity as with some other annuities.

    For all the reasons above, Structured Settlement Annuities can be somewhat more time consuming to purchase. The yield is higher as a result. It’s not too good to be true- you simply need to understand WHY it’s good and be willing to go through the process with us to achieve your goals.

  • Secondary Market Annuities and IRA's

    Structured Settlement Annuities can be purchased using qualified funds, such as an IRA or a 401(k). To purchase a structured settlement with qualified funds, you would open a ‘Self Directed IRA’

    A self-directed IRA allows you to purchase nearly any kind of investment you want. You simply direct the IRA custodian to send payment for the purchase to the attorney trust account prior to closing. Upon closing, the funds are released to the seller, and the income stream will be paid to your self-directed IRA account.

    Income earned by your self-directed IRA continues to be tax-deferred until you withdraw funds from that account. At that point, it is subject to taxation. You may also be subject to required minimum distribution (RMD) regulations, so it’s important to plan your purchase of secondary annuities to coincide with the required minimum distributions.

    Using a self-directed IRA, you can direct the IRA custodian to purchase any type of investment you want, subject to certain limitations. These limitations include the purchase of life insurance, and certain collectibles. Therefore, because life contingent structured settlements include life insurance as a component of the investment, life contingent structured settlements can not be purchased with qualified funds. Please give us a call to discuss your situation.

  • Legal Review of Secondary Market Annuities

    Legal review of a structured settlement annuity transaction is a thorough thorough and time-consuming process. For each case, outside counsel is retained at our expense and for your benefit. They review the following documents to insure that your payment stream is absolute, guaranteed, and legally documented and binding:

    1. Transaction Summary & Information Page
    2. Client’s Purchase Order
    3. Payment Servicing agreement
    4. Underwriting Certificate & Guidelines
    5. RPSA & T-Value
    6. Settlement Agreement, Qualified Assignment, and/or Annuity or Benefits Letter
    7. Assignments to Transfer Agreement and Testamentary Agreement
    8. Insurance acknowledgment or Stipulation
    9. Notice of Assignment Package – with Proofs of Service
    10. Court Order (and any prior Court Orders)
    11. Disclosures Statement and Transfer Agreement
    12. Searches
    13. Credit Documents
    14. Appendix

  • Safety of Secondary Market Annuities

    There are a variety of reasons that Structured Settlement Annuities are extremely safe. These are detailed on this site  and summarized below

    Safety Factor #1

    An insurance company paying a structured settlement would be held in contempt of court for failing to make payments according to the terms of a structure settlement.

    Safety Factor #2

    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.

    By using the secondary market, you are in business in different states, 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:

    Thus the three key items that ensure legal safety are:

    1. Benefits letter from the issuer to the payee, which establishes that the Payee has the payments to sell,
    2. Court order changing the payee to an entity that benefits you,
    3. Acknowledgement letter or stipulation agreement after the court hearing from the Issuer naming the entity that benefits you as the new payee of the specific payment stream you purchased.

    Safety Factor #4:

    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. You will spread your risk among many carriers, all generally highly rated, and achieve high yield diversification.

  • Structured Settlement Taxation

    The original payee in a structured settlement case receives a ‘structured settlement payment’ as defined by the IRS.  For the original payee,  this payment  is – by IRS rules and Federal statute – tax free.  Here are two documents relating to this taxation- 2001 HR2884 and IRS Code Chpt 55, Sec 5891

    Taxation for you as a new assignee of a Structured Settlement Annuity is  up to the taxpayer.  Federal law and IRS rules guide the factoring and transfer process for structured settlement transactions, and when done properly, as we do at AnnuityAce, a court order shows you as the new assignee  by means of  qualified order.  This is the process we follow and extensively review on each case.

    You as the new assignee of a factored structured settlement case will not received a 1099 for the income you receive, but this does not mean it’s tax free.  Referring to the following IRS rules, you and your account and can determine how you treat this structured settlement payment.

Now that you understand the basics of Structured Settlement Annuities  from the guide above, lets discuss a few more details.

Types of Structured Settlement Annuities

There are two types of Structured Settlement Annuities.  The first is a structured settlement, and the second is a lottery payment.

About Structured Settlements:

Very often, winners of legal cases- such as a workplace injury, a slip and fall claim, a car accident-  elect to take their settlement over time, to have income instead of a large lump sum.  this makes a lot of sense for people who have suffered injury and may not be able to work.   The IRS favors these structured settlements because they want injured parties to have a reliable source of income, and consequently the IRS treats these qualified settlements as tax-free awards.

Life happens, however, and the circumstances may change for the individual who won the award.  In future years after they receive their settlement, they may wish to sell their future payments for cash today.  At that time, the seller engages the services of a factoring company who makes an offer to purchase the future income.

The future income stream is generally a fixed, definite payment contract.  It may include  lump sums,  annual increases, deferral periods, or it may be contingent on the lifespan of the seller.  But bottom line, it is a fixed series of cash flows that are being sold by the individual. The factoring company puts a discount rate on those future income payments, and makes those future income payments available through brokers such as Annuity Ace for individuals to purchase.

The Purchase Process;

The purchase process can take as little as 24 hours or as much as 60 days, depending on the type of case you reserve.  The principals of this site are owners of the nations leading wholesale distributor of Secondary Market Annuities to agents and agencies,and take a principal role in each transaction.  They extend their own capital to buy cases and market them both on a ‘pre-order’  and and ‘in stock’ basis.

We buy each case and employ specialized legal counsel to review all the transfer contract documentation.  Each case also needs to be seen in a court of competent jurisdiction to rule if the sale is in the seller’s best interests.  It’s important to note that the court procedure rules solely if it’s in the seller’s interests- the court itself does nothing to validate the existence of the payments or the validity of the transfer.  There are a host of other steps to the transfer that we follow.

That said, it is very important that the court process be followed when transferring payments from one party to another, because an improperly handled structured settlement transfer may be subject to a penalty tax by the IRS.  The structured settlements that we sell at Annuity Ace all follow rigid legal guidelines to ensure that the payments are transferred as part of a ‘qualified order’ under IRS guidelines that are adopted by nearly all states.

About Lottery Payments

The second type of secondary market annuity commonly found are lottery payments.  Individuals who win lottery payments and elect to receive their payments over many years as opposed to in one lump sum often change their minds in the future.  Just as with a structured settlement, they approach a  factoring company to purchase those future payments.The transfer of those payments to you as a buyer also requires a court process to unequivocably assign the payments to you.  This is an investor security measure that is very important.

An important distinction between structured settlements and lottery payments is that lottery payments are fully taxable to the original buyer.  State lottery commissions withhold state and federal taxes from lottery payments, so as a new owner of a  lottery payment stream, you will need to file a tax return in the state that the lottery originated in in order to reclaim some portion of that withholding based on your tax rate.

Security of Structured Settlement Annuities

Structured Settlement Annuities  offer unparalleled safety for investors money because the issuing companies who make the payments to the original party are generally very high credit.  These are companies such as Met Life, New York Life, Transamerica, etc- the top tier of insurance companies with A to AAA credit ratings. In addition, the court process and legal review we do on your behalf as the buyer during the purchase ensures that the payment stream is unequivocably yours.

The sellers credit history, any claims to income such as alimony, child support, or garnishment, are thoroughly investigated and cleared prior to court.  You received clear and complete title to the payment stream together a court order benefiting an entity controlled by you entitling you to the payment stream, and an acknowledgment from the insurance company showing the payments have been transferred.  The transfer process is absolute and thorough.

Benefits of Secondary Market Annuities and Structured Settlement Annuities

In addition to the credit quality of the underlying insurance carrier, secondary market annuities offer higher rates of return than primary annuities due to the discounted purchase price.

  • Secondary market annuities also offer a fixed rate of return over a fixed period of time.  In many situations, this is preferable to the unknowns of an indexed annuity, and when compared with a fixed annuity, the yield from a secondary market annuity is much higher.
  • For investors seeking an above market, safe money rate of return for a known duration, there is no other investment currently available with comparable rates of return and safety.
  • Secondary market annuities can also be purchased with IRA dollars in a self-directed IRA.
  • In contrast to variable annuities and fixed indexed annuities, secondary market annuities have no fees or ongoing costs.  The purchase price for a secondary market annuity includes all legal review, closing costs, and transaction costs.  There is no annual cost, with the sole exception of costs to administer your IRA if that is applicable.

Drawbacks to Secondary Market Structured Settlement Annuities

No annuity is without drawbacks, and secondary market annuities are no exception.  First and foremost, secondary market annuities are not generally liquid investments.  While we can facilitate the resale of contracts, there is no guarantee of the rate at the time of sale nor are there contractual sale rights or liquidity options.

Additionally, secondary market annuities take some time to place.  Often an investor may need to buy multiple contracts in order to achieve the income stream they desire. Also, when buying secondary market annuities in the ‘pre-order’ stage, there are occasionally contracts that are not approved the court.  This happens for a variety of reasons usually relating to the seller.

Consequently, investors considering secondary market annuities need to be flexible and willing to replace contracts that do not come together with new offers.  Typically, they can take 1 to 2 months to find just the right set of offers to fill an investor’s order.

Secondary Market Structured Settlement Annuities  Summary

Secondary market annuities represent a fantastic way for investors to earn an above market rate of return with an excellent credit quality.  For investors considering fixed indexed annuities with lifetime income rider’s, a secondary market annuity for a fixed period of time together with an immediate annuity in the future will often yield a higher level of income to the investor. To find out more about secondary market annuities, be sure to sign up for e-mail notifications from the site.

“For all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”