This is a two part blog on Pre-Issued Annuities. In part 1 we examined some of the reasons why someone might consider a Pre-Issued Annuity for a portion of their portfolio.
In this entry we highlight some of the concerns and and negatives that must be considered when examining a Pre-Issued Annuity.
**Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.
So now let’s consider some of the negatives on a PRE-ISSUED ANNUITY ™ :
- Limited liquidity selling your payment stream prior to maturity could result in a considerable loss.
- The court order process should be monitored by an expert attorney that is retained by you.
- The best PRE-ISSUED ANNUITIES ™ never make it to the internet or retail lists.
- The industry is controlled by a few power players catering to institutional investors.
- Contracts require a 10% to 20% escrow to secure your future ownership during the court order process tying up some of your money at low or no interest for up to 90 days.
- Approximately thirty percent of initiated contracts get rejected by the court and you get your escrow back to start over.
- The industry is full of highly motivated commission oriented sales people that will promise the world and then fall short on delivery they would prefer for you to not have your own expert attorney.
- Contracts are often discounted by two to four brokers away from the source diluting your potential yield.
- Most contracts available on the internet are older inventory that has been picked over already
- Life contingent contracts can end abruptly with an insurance company paying back your principal and yield early since the annuitant died unexpectedly.
- Not FDIC insured.
Is a PRE-ISSUED ANNUITY™ right for you? [Read More…]
Annuity guys Video Transcript:
Eric: We talked about IRAs, and this always my biggest concern with IRA’s because you have RMDs that you’re going to have to eventually get to. Liquidity is of one that concerns because you’re buying that stream, or that lump sum, it’s already predicated. It’s already set out.
Dick: You need to balance that, in terms of your overall IRA, that you’ve got money to draw your RMDs from, or that your income stream will be adequate from the pre-issued annuity to cover your RMD. That is a consideration that you have to look at.
Eric: Liquidity in and of itself.
Dick: Let’s just talk about liquidity. That is probably, in all fairness, folks, that is the biggest negative of a pre-issued annuity. Once you buy it you have to know that you’re in a good position to hold it to maturity. If you’re in a good position, it can be a great strategy, a great financial vehicle, but if you’re not and you buy one, then you’re going to be forced to sell it on the secondary market, go through the court order process so your payments streams. That will be at a considerable loss typically.
Eric: There’s a reason that there’s so many players in this market. They’re able to sell low buy high, or . . .
Dick: Buy low, sell high.
Eric: Unfortunately in this case, the people selling are selling at a low point. We really encourage you to know exactly that you can handle that payment stream as it’s been setup, or that lump sum, those criteria fit your situation.
Dick: Another aspect of this, that folks get a little bit frustrated. You talk to a lot of people out there that are basically a commission sales person, they’re claiming to be an expert, they may have done several of these transactions, but they really don’t have what’s called a fiduciary responsibility to the client. If they are incompetent, if they’ve not done well, they’re on to their next client after they’ve placed you with something that may not have been handled properly. This is where we highly recommend that you work with someone, first of all, that is very experienced, but in addition to that, that would be an attorney, because there is a court order process that these go through and you really want to make certain that it’s properly identified, named, that all the parties involved are properly represented, and your closing documents and everything have been reviewed by an attorney; and that that attorney actually has a certain fiduciary obligation to look out for your best interest. If they don’t, they’re in danger of losing their practice.
Eric: We actually would say, we’d encourage you to actually have a retainer with an attorney signed in order to ensure that client/attorney privilege that they’re obligated to basically act in your best interest. That’s that fiduciary responsibility.
Dick: Let’s be fair, that’s going to cut down on the yield a little bit, but when we’re talking about a substantial yield, way better than what’s available in the market and you have to put out $500 out of your pocket to ensure that’s done correctly, that’s a very small part of that yield. It might be 10 basis points over 10 years or 1/10th%. I’m just throwing out some approximations here. It could be way less than that, it could be slightly more.
Eric: Exactly. Next thing is you’re not just going to run down to the corner drugstore and pick one of these up off the shelf.
Dick: No. There’s really some major players in this, and there’s not that many of the major players, 4 or 5 of them. Of those players some of them sell pretty much exclusively to institutional investors, so that leaves less to pick from. There are some smaller entities that are in this distribution vein, but what you really want, and we always are telling our clients this or the website visitors, is you want someone that’s really connected to the sources. They can have multiple avenues to look at the better pre-issued annuities that come along with better yields and better payment terms in this type of thing that most people that are out on the internet buying from a commissioned salesperson, they’re not going to actually know about these.
Eric: The earlier you are in the process, the better return you’re going to get. Insider’s advantage.
Dick: It really is. There’s nothing illegal or wrong about it. It’s not like insider trading or something, this is just knowing how to get to the item first that’s paying the highest yield. There’s another aspect, Eric, that we need to be aware of. I’m going to look back here at my notes so I can make sure that I don’t just keep rambling on and on here, make sure that we hit all of these points.
Eric: We talked about the escrow.
Dick: Right. That was . . . go ahead.
Eric: Where you were going to go?
Dick: Where I was going on it, yes.
Eric: It’s basically when you start to work with somebody, and especially on the insider aspect where you indicate this is what you’re looking for; typically, you’re going to put an escrow out there in order to initiate the process.
Dick: Right. That is the aspect that we want to be aware of, and that is that about 30% of these that enter the court order process will not go through. They’ll be declared invalid by the court system. About 70% of them are going to go through. Just what you were talking about, you have to escrow, get ahead of the curb to get the better ones, you have to actually be willing to say, “That’s a payment stream I would like to have.” Like you said escrow 10%to 20%, to hold that particular contract, that particular pre-issued annuity while it goes through the court order process, and it takes about 90 days. The worst case scenario is you’ll get your escrow back.
Eric: You’ve lost time, that’s all you’ve lost in a sense. Again, the court is protecting your process so that’s a safety side. The negative side is there are procedures and pieces that have to go through in order for this to come to fruition.
How many people are competing in this world? There’s a whole bunch of motivated commissioned people that are in there, but it’s a very small insiders group.
Dick: Yes. When we start getting into attorney’s that work in this area, that are very proficient in this area, that have some real experience, a lot of those attorney’s are actually working for the companies that are buying the settlements, selling the settlements, and this type of thing. There are some available, you can find them typically on the internet. If you’re somehow connected to the industry, you may know some, and that’s something that we can do for our site visitors, is recommend an attorney that we can refer, that would assist them.
Eric: That’s the key, I think. Our strength in this area is working with insiders. We work with somebody that’s key in the industry, that has an insider advantage, and that’s what’s benefited our clients.
Dick: It really makes the difference. I think, folks, that when you look at this whole strategy and this direction for a higher yield, I think you just need to do a little bit more homework, a little more research, become comfortable with how it works. Once you understand it, it can be a very effective, very high-yield safe type of financial strategy.
Eric: It’s an excellent tool for your toolbox. Especially in this extremely low rate environment, it gives you another option.
Dick: For that portion of your money that you want to see grow with a good yield and you can structure the payment stream to fit your needs, it’s hard to beat.
Eric: Thank you for checking out our pre-issued annuities section.
Dick: Yes. We’ll come back with more on this at a later date, and maybe go into more of the mechanics of it.
Eric: Sounds good. Have a great day.
Dick: Thank you.