Four Types of Cases

In the realm of Secondary Market Annuities we have four types of cases.

Each of these payments are described in detail below.

  • Guaranteed Payments

    Guaranteed Payment, Pays To You Or Your Heirs

  • Existing, Self Owned Annuities

    Period Certain, self owned or inherited annuities.

  • Lottery Payments

    Lottery payments are often annual payments.

  • Life Contingent Payments

    Payments Are Contingent On The Seller’s Life.

Secondary Market Annuities From Structured Settlements

Structured settlements are used extensively to settle cases.  In many situations, recipients chose not to receive a large lump sum, and opt instead for a structured settlement that provides a series of payments over time.

These payment streams often include a series of guaranteed payments, a lifetime income stream, and lump sums to accommodate milestones foreseen in the future for the injured party, such as a house purchase, college tuition for children, etc.

Pursuant to state specific procedures that were adopted after the Federal Government adopted IRS Regulations 5891, annuitants can sell their structured settlement payment rights for cash and face no tax penalties for doing so.  Ensuring that the proper procedure is followed and that each payment stream is irrevocably assigned to a new investor is what we do.

The vast majority of our cases are from structured settlements and are predominately Guaranteed payment streams, but Life Contingent cases come from these payments also.

It’s important to note, Life Contingent cases are NOT viatical transactions like life settlements of re-sold variable annuities with death benefits..

A typical structured settlement benefits letter outlining the payee’s award may read something like this:

“Starting 1/1/10, $4000 per month for life, increasing 3 Percent  per year, with 30 years guaranteed, together with $100,000 on 1/1/15, $150,000 on 1/1/20, $200,000 on 1/1/25, and $300,000 on 1/1/25”

This benefit statement gives rise to our first to types of payment streams, below.

Guaranteed Payments

When this payee decides to sell, they may choose to sell some of their payments or all of them.  They may choose to carve out the last lump sum only, or carve out half their income stream for 20 years, or any number of combinations.

In the guaranteed payment period, because each payment amount and date is known, we can use discounted cash flow math to calculate a fixed purchase price on any given day using the net present value of the defined payment stream.

The case will pay exactly as and when specified, to the investor or its heirs.

For example, 180 monthly payments of $2000/ month, from 1/1/14 to 12/1/23, has a present value of $261,339.37 at the current prevailing discount rate for similar SMA’s.

This would be the investor’s purchase price.

Life Contingent Payments

Life Contingent Payments refer to the portion of a payment stream payable to an annuitant AFTER the guaranteed portion.

Like a callable bond, the term is not guaranteed, but the yield IS guaranteed.  A life insurance policy on the seller’s life with the investor holding a collateral assignment ensures the investors yield.

Life Contingent Secondary Market Annuities offer a higher yield than guaranteed payments because there is slightly more complexity to the transaction.

However, even though the term is not certain, many investors find the potential for early liquidity to be a good thing, not a detriment.

Because of complexity of life insurance collateral assignments and other issues related to mortality tracking and premium payment, we chose not to offer life contingent payments to individual investors at this time.

The other types of payments we occasionally have to offer are described below.

Lottery Payments

Lottery payment streams are less common than structured settlement payment rights, but offer unique benefits.  Lotteries are generally annual payments.

It’s important to note that lottery payments come from nongovernmental organizations set up to administer lottery funds.  They are NOT general obligations of the state where the lottery is issued.

Most lottery commissions utilize Zero Coupon Treasuries to back the annual lottery payment obligations they owe . From a security and credit standpoint, most lottery payments are they are like discounted TBills and thus very high credit quality.

There are tax implications to lottery payments however.  A lottery winner has no taxable basis in the award, and thus lottery commissions withhold state and federal taxes on payments.  Purchasers however do have a basis in the payments, and thus withholdings exceed tax liability.

Purchasers would then need to file a return in the state where the lottery was issued to get a refund, and this delay impairs yield.

Because of time delays and tax complications, we rarely offer lottery payments to retail customers.

Self Owned, Existing Annuities

Existing period certain annuities, sometimes known as ‘self owned annuities’ form a small part of the Secondary Market Annuities inventory.  They are less common than Structured Settlement Annuities.

These are generally annuities directly owned by a seller, such as an immediate annuity with a period certain guarantee term.  Often, it’s the heirs of an annuitant who seek to sell the future payments for cash.

In this type of case, the transfer process can sometimes be quite simple and painless.  A simple issuing company form can irrevocably change the beneficiary or ownership of an existing annuity. The discount rate and resulting yield to the investor is generally similar to our guaranteed structured settlement SMA payments.

Self owned annuities are a small portion of our available cash flows but are an excellent source of safe income.