When discussing Secondary Market Annuities, we’re not talking about viaticals or life settlements- rather, a Secondary Market Annuity (SMA) is a payment stream that stems generally from the settlement of a legal dispute that results in the wining party receiving a structured settlement paying compensation over a period of time. And while at times we may refer to transferred lottery payments and self-owned annuities, the balance of this page will stick to structured settlements.
In a case that settles using a structured settlement, the liability for the future payments may be retained by the losing party, or it may be shifted to a third party. However in both situations, an annuity is purchased from a top-tier carrier to fund the future payment obligations that the winning party negotiated and is entitled to.
The annuity may be owned by the losing party, or by the third party, however the payment stream is payable to the winning party as a payee. The payee does not own the asset, rather it owns the right to receive the payment stream.
Selling Structured Settlement Annuities
Now we all know that times change, and often, payees decide they may need a lump sum now rather than the long payout they agreed to in the original settlement. A bustling and competitive business exists to purchase structured settlement payments for cash now. These payment originators, or ‘factoring companies’, compete to get sellers to sell their payments. As theirs is a capital intensive business of buying payments, they require constant inflows of funding to stay in business.
This is where secondary market annuities originate. Firms like DCF Exchange buy Secondary Market Annuities from originating companies and distribute them through advisors and to institutions and individual investors. These existing payment streams are available at yields that far exceed comparable period certain fixed annuity products available in the market today
Transferring A Secondary Market Annuity Payment Stream
In a traditional annuity purchase, the asset is a contract with the insurance company. The investor is usually owner AND payee/beneficiary of that contract.
In a structured settlement, the Owner is generally a Qualified Settlement Fund or the defendant in the original settlement. The initial payee is the winner of the settlement. They do not own the asset, but rather have the rights to receive the payments.
A “Secondary Market Annuity” is created when a new investor seeks to buy an existing payment stream. For a new investor to become the payee of an existing payment stream, the terms of the original settlement are changed to re-assign the rights to receive the payments to the new party. Ownership remains the same, but the right to receive some or all of the payments may be assigned to a new party.
In order to change the payee of an in-force structured settlement payment stream, a Court of competent jurisdiction must be involved.
The Role Of The Court In Structured Settlement Annuity Transfers
Let’s be clear- the Court’s role is NOT to judge the validity of the transfer or in any way guarantee the transfer- the Court simply is in a position to rule if the transfer is in the payees best interest. The Court Order is just one of several key pieces.
Lets look at an example. A plaintiff lost their ability to work in a car accident, and received a lifetime monthly payout in compensation, and has a gambling problem. Years later, if the payee seeks to sell their payments, the Court may rule to not allow the sale, on the grounds that the original payee may blow the lump sum of cash and end up on public support systems. It’s not in the Public’s interest for the payee to have the lump sum and not the income.
It’s a widely held misconception in the industry that a Court order is an absolute line in the sand evidencing an assignment. This is simply not true. To be truly complete, quite a few additional steps are needed- the payment stream must be verified, the carrier must be involved, any parties to the payment stream must be notified, all liens must be cleared, and a state specific procedure must be followed.
Legal review is a must to ensure that the proper procedures are followed and the contractual ‘chain of title’ irrevocably assigns the payments to the investor. The Court Order is but one of these many steps.
Now even if the case above was approved, the Court offers no judgment or guarantees if the payee has other claims to the payment, and the court does not check if they actually have the payment in the first place! The payee may have sold it privately to pay gambling debts years ago, and the Court would not know.
Knowing that the Court is just one of many steps, a proper assignment requires these other summarized items to be complete:
Summarized Steps In A Transfer
Any one thing done improperly can interfere with a new payee receiving the payments, so it is critical for competent counsel to review all the documents.
Remembering that an originator is in business for themselves to get a deal done, it’s key here to recognize the value a highly experienced reviewer or intermediary party with skin in the game provides. Indeed, it is critical to protect an end investor.
The Old Way of Transferring Payments:
Over the last several years, transfers were arranged by intermediary brokers and when an investor committed to buy, the broker produced some sort of purchase agreement between broker and investor. Usually the broker supplied the investor’s titling information to the originator factoring company and put an investor’s name directly in the court proceedings.
The investor rarely had any contract with the actual seller of payments or the originator, and thus there existed no real contractual relationship or performance obligation between these parties.
The investor’s relationship and contract with the broker was built on trust as the broker had no firm control of the asset, yet often exercised some level of control over the investor’s cash and the legal review of the transfer.
Whether third party legal review or in house, the Investor had few opportunities to review documents and often was not involved in the steps of the process. Likewise, the Broker had little control of the documentation until near the end of the transaction, and gradually there developed a distressing precedent of funding transactions before all documentation was complete, specifically post- court acknowledgement letters.
Issues With The Old Way Of Transferring
While this old process works, it requires quite a few leaps of faith and is fraught with potential issues.
Questions of the legal reviewer’s fiduciary duty come up, as do questions of funds control. This process also exposes the investor to a long time delay waiting for court, which may or may not be approved, and further it effectively commits the investor to signing documents that may come up- such as stipulations, affidavits, and originator’s purchase and sale agreements, and undisclosed servicing arrangements- without the Investor ever knowing about or seeing such documents beforehand.
Issues of confidentiality also arise- many investors would prefer anonymity over their personal name and address directly in a court order and openly viewable as a public record.
Finally, as the broker had no ‘chain of title’ connection to the asset, what was the buyers ‘purchase contract’ with the broker really stating?
At heart, an agreement from an investor to buy a payment stream needs to state that if the payment stream with the series of steps and documents summarized below is completed and reviewed properly and made available to the Investor, then the Investor will exchange money for the payments. Rarely could a broker control the proceedings sufficiently to ensure all of these elements and thus ensure the investor’s safety.
Absent the items in the “Steps of a Transfer” as shown above, an investor should never be committed as the cash flow is not perfected or properly assigned.
Yet in most broker-arranged transactions where the broker is not a principal to the transaction, the brokers routinely used client funds to purchase payments prior to the final and critical step, carrier acknowledgement. While this rarely (but not never!) resulted in issues with the transfer, it is a distressing practice that we do not engage in.
In short, committing to buy a case directly via court ordered re-assignment through a broker who does not properly control a transaction is fraught with investor exposure. And buying a case directly from an originator is likewise fraught with potential issues.
A better way of doing business…
Now with Secondary Market Annuities from DCF Exchange, available from this site, investors enter into a purchase agreement with a counter-party who actually controls the payment stream. DCF has actual cash on the line, and only sells cases once it has completed all the steps in the transfer. We’re able to sell existing in force payment streams from in-stock inventory and close in a matter of days or hours.
We work to ensure all the steps are complete in an orderly manner and with professional, experienced counsel, and acquire each cash flow into our inventory, prior to making it available to you.