Discover the Value. Secondary Market Income Annuities

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1 Discover the Value Secondary Market Income Annuities

2 Welcome to Better Yields If you are looking for an opportunity to earn aboveaverage fixed income returns for a balanced portfolio or otherwise and you are in a financial position to hold an illiquid investment with a specific income structure, consider a Secondary Market Income Annuity (SMIA). Depending on the structure and duration of the payment stream, purchases of SMIA products can be appropriate for long-term income needs, growth needs or, in some cases, long-term savings needs. $ monthly payment stream purchased for 20 years Annuity $135, Purchase Cost Yield 4.23% Interest SMIA $115, Purchase Cost Yield 6.25% Interest An annuity paying $10,000 per year for 20 years would cost $135,738.98, with an effective interest rate of 4.23%. On the secondary market, a discounted price of $115, creates an effective interest rate of 6.25%. The above case is for illustration purposes only.

3 The Secondary Market Secondary Market Income Annuities (also called Secondary Market Fixed Annuities, Secondary Market Immediate Annuities and Factored Structured Settlements) refer to the resale of an existing annuity contract or lottery payments, where an insurance company or the state lottery commission (the Payor) guarantees a future stream of payments.* When individuals are awarded an annuity from the settlement of a lawsuit (such as a personal injury award) or they win a state lottery, they are often not in a position to wait or cannot afford to wait years for their entire payout. As a result, the Seller can elect to sell the future payment stream in exchange for a lump sum payment today. The Buyer purchases the existing annuity and its unique income/payout structure for a given price, which defines the Buyer s annual rate of return. Each SMIA is unique and has its own specific income stream and interest rate. Types of SMIAs Immediate Income Annuity This is a currently paying annuity that is sold by the original Annuitant in exchange for a lump sum payment. This asset is typically not liquid and has no commutable value that would allow the Annuitant to surrender it to the insurance company. So, the Annuitant or Seller turns to the secondary markets to supply the liquidity, in exchange for the remaining payments. Factored Structured Settlements Payment rights to these existing annuities are purchased by Buyers pursuant to state law. The annuity income stream the Structured Settlement is a direct obligation of a highly-rated insurer, such as New York Life, Metropolitan Life, John Hancock, Liberty Life, Pacific Life, Allstate, Prudential, The Hartford, and Aegon Group. As an obligation to a policyholder, the structured settlement is senior to the issuer s most senior debt obligations. The purchase and sale of each payment stream is approved by a court which issues an order redirecting the payments to the Buyer. *All guarantees are based on the claims-paying ability of the issuing company or the lottery commission and are not guaranteed by a third party. 1

4 The Secondary Market Lottery Prizes While not an annuity issued by an insurance company, Lottery Prizes (and a limited number of wide-area casino jackpot awards) are direct obligations of state lotteries or state regulated wide-area progressive jackpots, which pay out over time. Lottery payouts do not depend on future tax collections and appropriations. Typically, U.S. Treasury instruments fund these obligations and states maintain them in segregated trust funds. In some states, when a 25-year prize is awarded, the state lottery commission sets aside all the funds necessary to make all scheduled payments by purchasing 24 zero-coupon U.S. Treasury obligations, each timed to mature on 24 annual payment dates. With a SMIA, the Buyer acquires the right to receive lottery payments directly from the state lottery, in place of the original winner, by contracting with the winner to provide a lump sum of cash today. These assignments are court ordered and acknowledged by the particular state lottery commission. Every Buyer s situation is unique. Before making any purchase decision, many factors including financial goals, risk tolerance, and time horizon should be considered. Investing involves risks, and profits or losses may be incurred regardless of strategy selected. Please consult with a tax professional to understand the possible tax implications associated with the purchase of an SMIA. SMIAs are generally considered long-term investments that are available from your financial professional. 2

5 Types SMIA of Benefits SMIAs Benefits of purchasing a Secondary Market Income Annuity SMIAs provide a unique structured payment stream over a specific period of time, at a fixed rate of return. As a result, they are generally considered to be a good vehicle for safe money savings. WealthVest Marketing offers annuity-based SMIAs only from those insurance companies that are highly rated by Standard & Poor s for their Claims Paying Ability. The Secondary Market Income Annuities we offer are one of the safest fixedincome alternatives available today. A high rate of return: created by a discounted purchase price SMIAs typically offer a rate of return well above newly-issued fixed annuities, immediate annuities, or bonds of a similar credit quality. While many Buyers wonder how the SMIA pays such a high rate of return, it is important to understand that the mechanics of the factoring process the Seller s willingness to sell their payment stream at a discount creates the yield enhancement. The Payor is neither changing the payment stream nor changing the rates. Current yield Current yields on SMIAs generally range between 4.5% and 7.5%, but can be higher or lower depending on the structure of the SMIA. Since there are no fees to the Buyer, the interest rate indicated is a net yield. Payment term and Purchase Amount The purchase price of a Secondary Market Income Annuity is generally between $50,000 and $150,000, but can be higher or lower. Terms can range from 1 to 35 years, but typically are 5 to 20 years. SMIAs have unique payment structures and the payments are often not uniform for the term. 3

6 Overview Potential Risks Like other financial products, Secondary Market Income Annuities are not risk-free. The Buyer and his/her financial advisor must determine whether any given SMIA meets the Buyer s risk tolerance and objectives. Potential risks associated with SMIAs The safety of any given SMIA is directly related to the financial strength of the insurance company that issued the annuity and its ability to pay claims over the term of the SMIA. The court may not approve the transfer of the SMIA (Factored Structured Settlement and Lottery Prize Payouts), so the sale may not be completed. In this case, the Buyer s full deposit will be returned. SMIAs are not bank deposits, nor are they insured by the Federal Deposit Insurance Corporation (FDIC) or any other federal government agency. SMIAs are subject to interest rate risk. Market interest rates may rise while the rate of return on the SMIA is locked in. Fixed income purchases with longer terms are usually more sensitive to changes in interest rates. Since SMIAs cannot be resold, the Buyer is not subject to principal risk, except as described above. During a volatile rate period, the Buyer can hedge interest rate risk by building an annuity ladder consisting of a series of SMIAs with different payment dates, thereby averaging the rates of return. SMIAs must be held to term and therefore are not liquid purchases. 4

7 Types Additional of SMIAs Information Responsibility for payments and transference to the Buyer SMIA payments are usually paid directly to the Buyer by a U.S. insurance company with a Claims Paying Rating that is generally AAA to A rated by Standard & Poor s. The Buyer may choose individual SMIAs based on the ratings of the underlying insurance carrier of the offering. In the case of lottery offers, the state lottery generally pays the Buyer directly. State law governs the purchase and sale of annuity payments. A court must approve this transaction and issue an order redirecting payments to the Buyer. A judge reviews the proposed transfer and only issues the court order if the sale is in the best interest of the Annuitant. Selling the payment stream at a later date Once the Buyer purchases a Secondary Market Income Annuity, he/she must hold it through its term. SMIAs offered by WealthVest Marketing are generally not liquid or marketable. The transfer court order usually states that there are no further assignment rights. Purchasing a SMIA inside an IRA A SMIA may be purchased with either qualified (pre-tax) money or non-qualified (aftertax) money. To purchase with qualified money, the Buyer must have a self-directed IRA account. If the Buyer does not currently have a self-directed IRA account, WealthVest Marketing can help arrange one with a third party trustee familiar with SMIAs. How payments are affected by the death of the Annuitant The SMIAs offered by WealthVest Marketing are not based on the lifetime of the Annuitant. Payments upon death of the Buyer The SMIA is an asset that is transferred according to the Buyer s estate plan or IRA. 5

8 Overview The SMIA Purchase Process WealthVest Marketing and its agents oversee the SMIA purchase process. The sale of SMIAs occurs through a court supervised process, in most cases. To ensure that the transaction proceeds smoothly, and to protect the Buyer s interests, an outside attorney has been retained to review the transaction from the Buyer s perspective. The outside attorney rigorously reviews each transaction to ensure that it is clean and to expedite the transfer process. 1. Reserve a case from the WealthVest Marketing Offer Sheet Cases can only be purchased on an as-available basis. If there is a particular case/smia on the Offer Sheet of interest, the Buyer should contact his/her advisor immediately to reserve the offer. Once the Buyer reserves an offer, WealthVest Marketing takes that case off the market and holds it exclusively for the Buyer. Offerings are commonly only available for a matter of hours Payor or a very limited number of days. 2. Provide Buyer information To comply with all federal laws and regulations and to help fight the funding of terrorism and money laundering activities, WealthVest Marketing must obtain, verify, and record information that identifies the Buyer via the Purchaser Information Worksheet. To be eligible to buy a SMIA, a foreign Buyer must have a U.S. address, a U.S. tax identification number, and a U.S. bank account. Nothing in this document shall be considered a solicitation to buy or an offer to sell a SMIA, or any other product or service, to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful. 1 Annuitant (Seller) Future Payments SMIA 2 Lump Sum 3 Buyer 3. Execute a Purchase Agreement WealthVest Marketing prepares and sends a Purchase Agreement to the Buyer s advisor detailing the terms of the proposed transaction. The Purchase Agreement must be signed by the Buyer and the Buyer s advisor and returned to WealthVest Marketing. Generally, the Buyer provides a $5,000 deposit at this time (see next page for more information). 4. Receive notification SMIA transactions are subject to court approval and this process can take between 30 and 90 days to complete. WealthVest Marketing notifies the Buyer s advisor of the court date for judicial approval of the assignment which means that the case will soon fund and close in the Buyer s name. 6

9 Types The SMIA of SMIAs Purchase Process 5. Fund the SMIA purchase Stage 1: The Buyer provides a $5,000 deposit to the outside attorney trust account at the time he/she executes a Purchase Agreement. Stage 2: The Buyer submits 100% of the SMIA purchase price to the outside attorney trust account 15 days prior to the court date, where the funds are held until the closing of the transaction. Note: In fast-track cases, the Buyer must deposit 100% of the purchase price to the outside attorney trust account at the time of Purchase Agreement submittal. These cases are already court approved and usually close very quickly. 6. Complete the SMIA purchase Once the court reviews and approves the assignment and WealthVest Marketing receives confirmation from the insurance carrier that the assigned payment(s) will be paid directly to the Buyer, the outside attorney underwrites and reviews the file to ensure the Buyer is receiving an absolute assignment without encumbrance. Upon closing, the Buyer receives a Buyer Closing Book, which includes all of the pertinent documents and proves the transfer from Buyer to Seller. WealthVest Marketing s responsibilities to the Buyer We manage the overall SMIA transfer and sale process. We complete the annuity transfer process, including obtaining a transfer court order in accordance with U.S. State and Federal laws. We oversee the transfer due diligence process as determined in the Purchase Agreement. We ensure all transactions receive legal review prior to closing of the case. We safeguard the Buyer s funds, until the transaction closes, through the outside attorney trust account. We close the purchase of annuity payment rights with the Buyer and provide a Buyer Closing Book containing the Court Order, Stipulation or Acknowledgement Letter, Amortization Schedule and the Structured Settlement Agreement/Benefits Letter. 7

10 Overview Facts to Know 1 Secondary Market Income Annuities (SMIAs) can provide above-average returns compared with other fixed-income alternatives of similar risk. 2 SMIAs can be purchased with qualified (pre-tax) money or non-qualified (after-tax) money. 3 SMIA payments are contractual obligations and are not projections. The timing and stream of payments at a specified purchase price yields the stated interest rate over the term of the payments. 4 SMIAs have no hidden administrative fees. 5 A SMIA will provide payments, according to the Purchase Agreement, to the Buyer or the Buyer s estate. 6 SMIA transactions are not widely known to the general public, nor are they easily accessible to individual Buyers. 7 A Court of law scrutinizes and approves all SMIA transactions except for immediate annuity income. 8 Most often, a U.S. insurance company, with a Claims Paying Ability Rating that is generally AAA to A rated by Standard and Poor s or the state lottery commission, pays the payment stream directly to the Buyer. 9 SMIAs are paid out in U.S. Dollars. Foreign Buyers may be subject to currency exchange risk. 10 Just as every SMIA is unique, every Buyer s situation is different. Before making a purchase decision, the Buyer must consider many factors, including financial goals, risk tolerance and time horizon. Please consult with your financial advisor to determine if a SMIA is appropriate for your needs and with a tax professional to understand the possible tax implications associated with the purchase. WealthVest Marketing makes no representation that a SMIA is appropriate for any Buyer. 8

11 Glossary of Terms Acknowledgement Letter the letter sent by the issuing insurance carrier acknowledging receipt of the Court Order and the transfer of payments. Amortization Schedule the schedule of payments that the Buyer will receive, identified by interest and principal payments, as calculated using TValue software. Annuitant the person who sells the payment rights in return for a present value, lump sum cash payment. Buyer the purchaser of the Secondary Market Income Annuity. Claims Paying Ability Rating the rating, by Standard and Poor s, of the insurance company paying the fixed term annuity. Closing Book the documents showing the Buyer s ownership of the assigned payments. Collateral File the file that contains all of the supporting documents for the purchase of the SMIA. WealthVest Marketing or a WealthVest Marketing agent retains all Collateral File documents. Court Order the order issued by a court, in the appropriate jurisdiction, that approves the transfer of the payment rights from the Seller to the Buyer. Lottery Prizes the state lottery prizes that are offered to the winners as annuitized payment. Payor the insurance company or state lottery (commission) that is obligated to pay the future payments sold by the Seller to the Buyer. Present Value the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Purchase Agreement an agreement for the Buyer to purchase a structured asset from the Seller at an agreed upon purchase price. Secondary Market Income Annuities (SMIA) immediate annuity income streams, factored structured settlements, and lottery winnings. Seller the Annuitant who is selling the Secondary Market Income Annuity. Stipulation an agreement that clearly defines the responsibilities of all parties involved in the transaction. Structured Settlement a financial or insurance arrangement in which an individual accepts payments over a period of time to resolve a legal claim that often involves a personal injury. This type of payment plan is often in the form of a structured settlement annuity, issued by a highly-rated insurance company. Structured Settlement Agreement/Benefits Letter an agreement or letter that defines the remaining benefits of an existing structured settlement. Term the length of time before all principal and interest is paid under the fixed term annuity. We, us, our, and WealthVest Marketing, Inc. WealthVest Marketing, Inc., a licensed insurance agency, and its associated agents.

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