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What Are “Discounted Annuities”?

Ken OlsheinWritten By: Ken Olshein in Houston, TX

Investors looking for a higher return than that of a Traditional Annuity, an Immediate Annuity, a Bond, a Certificate of Deposit (CD) or Money Market fund with similar risk should consider Discounted Annuities….also known as Secondary Market Annuities. These are structured settlements consisting of payment streams (or a lump sum payment) that are sold by Factoring Companies who purchase them from claimants looking to get cash in exchange for their future payments. The discount comes in because the owner of the annuity (stream of payments) is willing to sell it at a discount to its appraised value. This can be a very lucrative investment opportunity for individual investors and investment companies who are seeking rates of return on their investments of 4% to 6% (as of Nov 2013). They are guaranteed by the issuing insurance company and considered very safe. By working with “A” rated and above insurance companies such as: The Hartford, Prudential, Liberty Mutual, Cigna, MetLife, and New York Life that guarantee the Structured Settlement / Discounted Annuities offers safety, ease of access and high yields normally around 4% to 6%.

What are Structured Settlements / Discounted Annuities?

A structured settlement is an arrangement for periodic payments, usually a specific number, to be paid on a regular basis, normally monthly, quarterly or annually, over a period of years in order to satisfy a financial obligation. The term usually applies to restitution for damages that result from personal injury lawsuits. In most cases, this is a personal injury caused by negligence, such as a motor vehicle accident, medical malpractice, wrongful death, or injury caused due to the negligence or liability of a property owner. After payments begin, recipients have the option to sell all or a portion of their structured settlement payments to a third-party funder, such as a structured settlement /factoring company, in order to access cash in a lump sum. They are offered to institutional and retail investors, ownership is then transferred by court order and is approved by a judge; the new owner is documented in the court records. The transactions are not considered a security so they are not regulated by the SEC or FINRA.

The most common type of sale, is where the seller sells just the number of payments to help him or her get access to the amount of cash that he/she needs immediately (within several weeks based on court approval). The agreed upon payments are re-assigned to the buyer of the structured settlement, and in exchange, the buyer gives the seller an upfront lump sum of cash. When an original structured settlement annuity payment stream is sold, it then becomes known as a Secondary Market Structured Settlement Annuity. The investor enjoys the safety and guarantee of high yield Secondary Market Structured Settlement Annuity, most returns are 4 to 6% and guaranteed by the issuing insurance carrier.

Due to the high rate of return and the safety of the investment, demand is very high for secondary settlements and inventory is very limited. Also there is a lag time between signing the purchase agreement and the actual funding of the settlement of 2 to 6 months because all deals are approved by a judge and documented in the court records. There is very little liquidity after closing on the settlement, so that should be considered before any purchase. Typically, a small deposit is placed in escrow from the investor while the Settlement Company proceeds with the court approval process, while the ownership is transferred. It is highly recommended to deal with reputable parties when it comes to investing in Structured Settlements / Discounted Annuities; there is some risk on the transfer of ownership which is where the factoring company plays an important part. The key is to receive an acknowledgement letter from the insurance company that states that the new investor is entitled to the payment stream.

About the Author:

Kenneth Olshein has been a financial advisor specializing in Guaranteed Payments and Tax Free Savings.  To receive personalized guidance from Ken, just send an e-mail to ken@olshein.com or call 866.O-L-S-H-E-I-N.  Be sure to visit his website to learn more – www.TheRetirementEdge.com.

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