The term “Secondary Market Annuity” can mean a structured settlement, lottery payment, or an existing in-force annuity that is offered for sale at a discount by one party to another, and handled by intermediary companies including us.
What each of these transactions have in common is that an individual who owns future payments wants cash today, and we have a market because investors with cash today seek to secure a future payment stream.
Because the seller is willing to sell at a discount, advisors and investors can secure a significantly higher yield compared to other period certain, fixed products. We explore this on the “Compare SMA’s” page.
In this page we’ll focus on payments that originate as structured settlements, and how the payments come into being.
Structured Settlement Annuities:
Here’s an Example:
John hits Jane in a car accident, and the case goes to court.
John loses the case in court, and compensation is offered to Jane, either a lump sum, or a structured settlement making payments over her lifetime. Jane elects a structured settlement.
Jane’s court ordered settlement ties closure of the case to a settlement such that “Jane Doe shall receive $1000 per month for life, with 20 years guaranteed.”
To put closure on the case, John’s auto insurance carrier- let’s assume it’s 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. While Jane does not own the asset (the annuity contract) she 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.
Progressive can close the book on the matter except in the unlikely event that 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. As this is highly unlikely, it well illustrates the safety of these contracts.
Now back to our story…. John and Jane put this accident in the past. Progressive shifted the primary liability Met Life together with a significant premium payment, and while Progressive still owns the annuity, they have no rights to the cash flow. Jane, while she does not own the asset, does receive all the cash flow benefits in compensation for her injury.
End of Story? Not yet….
Now five years goes by, and Jane needs money. She therefore decides to sell some of her future payment stream for a current day lump sum.
Met Life can not buy Jane’s contract out because it would be a conflict of interest. Also, she is not the owner… Progressive is. Instead she decides to enter into a contract with a factoring company, like JG Wentworth, to get cash now for the future payments she is entitled to.
When Jane accepts the factoring company’s offer to buy her future payments, she has just created a secondary market annuity contract available for you to purchase…
Click on to “Understanding the Transfer Process” to see how Jane has the legal right to sell her payments to a new investor.