These frequently asked questions cover many of the aspects of Secondary Market Annuities- click the links above the section below, such as Financial Planning, or IRA, to sort the FAQ to the area of interest to you.
How Do Secondary Market Annuities Fit Into A Financial Plan?
Secondary Market Annuities are an attractive alternative to other fixed income investments. They also can form the floor of guaranteed fixed income for a risk-averse investor, or be used to fund future obligations.
SMA’s have a variety of uses. Here are a few ideas:
- A couple has a wide disparity between their ages (70 year old man, 50 year old wife) where joint life payout options have too low a payout rate.
- An income SMA can be used to produce income for the couple’s life and a lump sum contract ensures the surviving spouse has the ability to re-position in the future.
- Investors seeking high yield alternatives to CD’s
- Investors seeking specific future payment streams or lump sums, to fund education, gift, or other goals.
- Investors seeking alternatives to the complicated contractual terms of variable and index annuities with income riders
Why Are Yields Higher Than Other Fixed Products And Other Annuities?
Yields with Secondary Market Annuities are higher because the seller is selling at a discount. Quite simply, these are fully funded, existing payment obligations. A buyer becomes the assignee of an existing payment stream. It’s like a note receivable bought at a discount.
The carrier making the payment is not offering these higher yields- rather, the seller, because of the discount, makes the higher yield happen for the buyer.
Why Is The Carrier Issuing Such High Yield Contracts?
Insurance companies are not issuing contracts at the yields we offer with Secondary Market Annuities. Rather, sellers are willing to sell their existing annuities at a discount that allows you to achieve a higher yield yield.
This is the nature of a discount rate. The existing payment stream is fixed, and the purchase price is determined by the discount rate, which is the buyer’s effective yield.
To use a loan analogy, a 30 year loan with a rate of 6% has 360 monthly principal and interest payments of $599.55 each. If a lender sells that loan for $90,000, those same 360 monthly payments of $599.55 each equates to a yield of 7.01% for the buyer of that loan if they buy at $90,000.
SMA’s work the same way.
Why Are Structured Settlement Annuities Safe?
Structured Settlement Annuities are considered to be senior obligations of the insurance companies issuing the annuity. Because structured settlements originate in settlement of a claim and are usually a part of a court proceeding, payments to settle the suit are made pursuant to a court order. Failure to make those payments would be contempt of court, and therefore are considered to be senior obligations of the issuing company and further, are contingent liabilities of the annuity owner.
How Is The SMA Transfer Process Safe?
In typical Secondary Market Annuity transactions, we facilitate your clients becoming the new payee under an existing payment stream.
In a well structured and properly documented SMA transaction, there are four key elements of an that ensure safety:
- Benefits letter from the issuer to the payee, which establishes that the Payee has the payments to sell,
- Due Diligence documents ensuring that no other claims to the payments exist, and that all applicable state statutes and procedures were followed,
- A valid Court Order and several other contractual agreements documenting the change of payee from seller to buyer,
- Acknowledgement letter or stipulation agreement after the court hearing from the Issuer confirming the new payee of the specific payment stream.
When you or your clients work with a good broker or intermediary, costs for the review to ensure this is done right are included in the purchase price. This review cross checks all the documents, court order, and disclosures to ensure that the client’s payment stream is solid.
Of course, this is exactly what we do.
Why Not Buy Direct?
Transactions undertaken directly with originators, or through low-value add introducing parties or sloppy brokers, are strongly discouraged. You won’t find better rates and will run many more risks of improper structure and performance. Doing it right is cheap insurance for buyer and adviser alike!
A simple analogy is this: People buy and sell homes all the time. But whether it’s with a real estate agent or direct from a seller (FSBO), everyone should use a title company to insure title and perform escrow services.
Buying a home without a title insurance policy is a HUGE and foolish risk. Buying an SMA without legal review, direct from an originator, and using their one-sided documentation, is like buying a home direct from a seller, not using an attorney to review the deal, and skipping the title policy. In short, it’s crazy.
What About Qualified Funds?
SMA purchases can be arranged through a self directed IRA custodian who is familiar with the asset class. There are special calculations to be done to account for required minimum distributions or RMD’s so it’s best to work with a custodian already familiar with the market.
There is only one IRA custodian that we recommend and work with. It’s important to note that while Secondary Market Annuities have no fees or costs other than the purchase price and a nominal payment servicing charge, IRA custodians do have some costs.
Why Use a Business Trust In the Buying Process?
This is the DCF Exchange Process:
The DCF Business Trust is the entity named in our transfer process. As the court order approving the transfer is a matter of public record, utilizing the trust provides an important layer of confidentiality for the purchaser.
When the “Absolute Assignment” is executed by the purchaser and DCF as trustee of the DCF Business Trust, the Trust no longer has any right or title to the payments. At that point, the cash flows are irrevocably assigned to the purchaser. The servicing agreement directs how the payments are made.
Possession Of The SMA For The Purchaser
The payment streams are only available to the purchaser after they have been meticulously reviewed and the insurance carrier has acknowledged the transfer. Buyer funds are not committed at any time prior.
Once the due diligence process is complete, DCF Business Trust executes an agreement to irrevocably assign the cash flow to the purchaser.
At that time, the purchaser takes ownership of the cash flows.
Third Party Legal Review
The DCF Business Trust is the named buyer of the cash flows and commits its capital to buy each case that DCF offers for sale. Therefore, it is not just prudent but imperative that DCF performs a rigorous review of each case prior to any purchase.
DCF’s third party legal department reviews all of the supporting documentation to ensure the cash flow is conveyed to the purchaser absolutely and irrevocably. The review includes a thorough examination of the court order and supporting court documents, verification that the cash flow is free of any liens and attachments, and review of the transfer and assignment documents.
Independent Legal Review
Though not required in the process, you are welcome to hire your own counsel to provide an independent review of the supporting materials. We can help familiarize your attorney with the asset class and answer any questions he or she might have.
Direct To Court Order Assignments
There are a number of disadvantages to being named directly in the court order. Court orders are public records and purchaser personal details and details of the purchase will be visible to all.
Also, the court order does not transfer title or guarantee payments to the purchaser. The court has a duty only to verify that the sale of the payments is in the best interest of the seller– they have no duty, and take no action, to verify if the payments are in fact valid or if there are any claims to the payments. This verification is done outside of court, and title is transferred by contract.
A distinction should be made between the court process and the contractual assignment in the secondary market for structured settlements. Federal and state law requires that a court approve any transfer of a structured settlement. But the court order alone is not sufficient to convey title. The end purchaser’s right to receive payments is actually conveyed by a contract between the seller and the end purchaser.
In some cases, the seller is the original annuitant. But in many cases, the seller is an entity acting as an intermediary.
In either case, it is the contractual agreement between the seller and buyer, not the court order alone, that conveys title to the payment stream.
When Are Funds Required?
Only after the payment stream is fully reviewed and transferred to the DCF Business Trust are purchaser funds required. At funding, a purchaser executes a single document that irrevocably assigns the payments from the Trust to the purchaser.
With In Stock cases, funding can move as quickly as 48 hours. With Coming Soon cases, the date of funding depends on the case; the anticipated close date is indicated on each case.
In either situation, funds must be transferred to the DCF Business Trust within two business days after you receive the closing book. The case can close immediately upon mutual execution of the irrevocable assignment of cash flows, transferring full title to the purchaser.
After DCF has completed its legal review of the case, a Closing Book will be prepared and sent by Docusign electronically. Funding is required within two days of receipt of this Closing Book. The amortization schedule showing the final purchase price will be enclosed along with wiring instructions.
The contents of the Closing Book show the complete chain of title to the purchaser and are as follows:
- Summary Cover Page
- Wiring Instructions, Final Purchase Price
- Absolute Assignment
- Between DCF Business Trust and Purchaser
- Amortization Schedule
- Specific Transferred Payment Stream
- Servicing Agreement
- How Cash Flows Are Handled
- Legal Review Certification
- Legal Review Letter & Specific Case Findings
- Acknowledgement Letter or Stipulation Agreement
- Carrier Confirms Transfer of Payments and Court Order
- Court Order
- Approves Seller’s Transfer to DCF Business Trust
- Current Benefits Letter
- Carrier Confirms Currently Available Payments
- Purchase & Assignment Agreement/SMA Purchase Agreement
- Between Factoring Company and DCF Business Trust
- Purchase Agreement/Absolute Assignment Agreement
- Between Original Seller and Factoring Company