by John Darer CLU ChFC MSSC CeFT RSP CLTC
Investors in Secondary Market "Annuities" have been hoodwinked
Years after investing perhaps tens or hundreds of thousands in
investments in structured settlement receivables marketed to them as annuities, some are learning that such receivables aren't in fact annuities and that the investors do not enjoy the protections they may have thought they had (or some case, may have been sold).
40 states in all have adopted the 2017 revisions to the Life & Health Guaranty Association Model Act. According to the NAIC and states I canvassed, these states presently include AK, AR, AZ, CO, CT, DE, FL, GA, IA, ID, IL, IN, KY, LA, MD, ME, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NV, OH, OK, PA, SC, SD, TN, TX, UT, VA, VT, WA, WV, and WY, as of late 2023.
The Hammer is Coming Down
The hammer is coming down on the possibility of any investors in structured settlement receivables/ factored structured settlement payment rights, deriving any benefit from insolvency protections designed to protect buyers of annuities and life insurance. For many years it was not unusual to see the companies market investments in factored structured settlements using the false flag of "secondary market annuity". Some even made reference to state guaranty associations as through what they were selling to investors was actually an annuity. It wasn't, and had these companies (and/or their representatives) actually held licenses, the mere mention of the fund's existence in sales presentation might violate state law.
Companies that Sell Structured Settlement Payment Rights to Investors Do Not Contribute in the Event of Insurer Insolvency
According to the National Association of Life and Health Guaranty Associations (NOLHGA), "When an insurer fails and there is a shortfall of funds needed to meet the obligations to policyholders, state guaranty associations are activated. Guaranty associations have two main sources of funding when providing coverage to policyholders. First, guaranty associations have subrogation rights to a proportionate share of the assets remaining in the failed insurer. Those assets, which can be substantial, may be used by the guaranty associations to pay covered claims. Second, insurers doing business in that state are assessed a share of the amount required to meet the portion of the guaranty associations’ covered claims not otherwise funded with estate assets. The amount insurers are assessed is based on the amount of premiums that they collect in that state.
Insurance Consumers Indirectly Contribute to State Insolvency Schemes, Investors Do Not
Arguably insurance consumers (including buyers of legitimate annuities) are also contributing to the insolvency schemes by virtue of the initial and/or ongoing payment of premiums for their insurance or annuities to the insurers that issue those products. However an investor who acquires structured settlement payment rights in the secondary or tertiary market is arguably, not contributing anything. The investor is buying a receivable, not an annuity or an insurance product. It's possible that the investor is buying a subset of rights to payments.
While the "pennies on the dollar" merchants may provide a service, history has shown that unethical business practices are rampant. With exceptions in a few states, these companies are essentially unregulated. In any case, neither factoring companies nor tertiary market companies contribute to the insolvency pot in the event there is an insolvency. Investors do not contribute to the pot either since they are not paying insurance premiums.
It's may not end well for Mom and Pop investors in structured settlement receivables. History has shown that many structured settlement factoring companies are very poor bartenders. Theye just keep "pouring and pouring" even after someone is obviously "drunk". They often "bite off the head" the head of the victim's annuity first, figuratively speaking. That is to say they encourage the sale of guaranteed payments, sometimes leaving the annuitant with just life contingent payments way out into the future. Where does that leave a structured settlement annuitant? Possibly needing public assistance. Now the public sector (i.e. tax payers ) is affected.
Where does that leave the investor?
States Where Factoring Companies are Located
It's an interesting observation that the states where many structured settlement factoring companies are located have such exclusions [FL, DE, PA, NJ], having adopted the 2017 revisions to the Life & Health Guaranty Associations Model Act (#520).
States Where There Have Been Allegations of Significant Cases of Reported Abuse of Annuitants
One can further observe that states which have had some of the worst cases of annuitant abuse by structured settlement factoring companies have adopted the 2017 revisions [MN, FL, VA, IL, TX, NC, SC, MD, WA]. It's notable that several of what were for many years the leading purveyors of scam labeled "secondary market annuities" are/were based in Oregon, a state that has not yet adopted the 2017 revisions. It's a pity for investors that Oregon could not do a better job of regulating SMA Hub distributed payments to investors originated from from Advanced Funding and Access Funding as well as purported cash flows from professional athletes where things didn't go so well for investors. What is Oregon waiting for?
States Where Senior Investors Are Located
According to the US Census Bureau 2020 population estimates, 52 million Americans are 65 years or older, according to the U.S. Census Bureau, and a quarter of them live in just three states: California, Florida, and Texas**. While Florida and Texas have adopted the 2017 revisions, California had not done so at time of publication. Seniors with retirement accounts have been targeted for investment in factored structured settlement payment streams marketed under the false flag "secondary market annuity". What is California waiting for?
In response to my query, the Life Insurance Company Guaranty Association of New York responded June 9, 2022 that at present, there is no factored structured settlement exclusion under the New York insolvency statute.