by Carolyn EllisMs. Ellis is Features Editor for LIFE&Health Advisor.
Connect with her by e-mail: [email protected]
John Bulbrook is CEO of Bulbrook/Drislane Brokerage, a Wellesley, Ma., wholesaler of life and annuity products. We talked with John about secondary market annuities, new to the retail arena for the safe money portion of a client’s portfolio.
L&HA: What are secondary market annuities?
JB: A good analogy is the New York Stock Exchange, a secondary market where you are buying stocks from somebody else rather than directly from, let’s say, Apple Computer. In the case of a secondary market annuity, rather than buying a brand new annuity from a carrier like New York Life, you are buying New York Life annuity payouts from somebody that already owns them and you are buying at a discount or wholesale. The effect of that is instead of getting 2 or 3 percent, you are getting 4, 5, 6, or 7 percent, and you are still getting the payments from New York Life.
L&HA: Is this a concept you pioneered?
JB: We introduced this product to the retail market. Secondary market annuities had previously been sold to hedge funds and securitized on Wall Street but not to the retail market in any organized way. We’ve been doing this for four and a half years.
L&HA: Is secondary market annuity a concept consumers and agents find easy to understand?
JB: There are people who look at the product and say, “Wow, that’s a good deal, I want one.” There are others who want to analyze it to death. The concept is relatively straightforward. You are buying annuity payments from a highly rated life insurance company, but you’re not buying them brand new. You still have the guarantees of the insurance company, so for people who want something extremely safe, this has all the safety of a regular annuity payout but it gives you a higher interest rate.
L&HA: Is it problematic that there aren’t infinite quantities of these annuities and that each is one of a kind?
JB: There aren’t unlimited choices, but there are a good number of choices in length of time, monthly payments coming in, or lump sums coming in the future. An example might be a $100,000 lump sum payment from Metropolitan Life in ten years that you buy today for $64,000. There also might be a payment stream of monthly income that goes out for 10, 15, or 30 years. We have an available supply of different payouts to choose from. It’s more complicated in that you have to choose from existing, defined annuities, but you get significantly higher rates for your trouble.
L&HA: Could one compare it to going to a consignment shop versus buying a new dress off the rack?
JB: In a way, you could. Another way of looking at it would be buying a vehicle through a pre-certified program like BMW’s. Somebody else leased a car worth $86,000 three years ago, and you can get it for $40,000 at end of lease. It’s still a BMW with a pre-certified BMW warranty (in most cases). With a pre-owned annuity you don’t have to worry about dings or scratches, and you have the benefit of the company’s current financial ratings that cover policies issued in the past.
L&HA: Do you need to worry about the previous owner?
JB: These payouts are transferred by court order so the title transfer is extremely secure. We take care of screening the previous owner, making sure there are no bankruptcies or liens or anything else that would cloud the title. No one has overturned one of these court orders once the judge has banged the gavel.
L&HA: Would you say it’s possible that some agents might not fully understand the riders and features of traditional annuities, and is that a possibility with secondary market annuities?
JB: I do think some of the GMIB and other riders are so complex that not all agents and not all clients fully understand them. I’m sure in a transfer of these annuities there’s IRS Section 5891 and other aspects that not everyone understands, but they have developed over time with an impressive track record of safety. If you’re dealing with a firm like ours, we take the credit risk of the insurance company and the transactional risk very seriously, and so that is the reason the safety record of these is so good. No one has lost a penny with any of our transactions.
L&HA: Can you describe the ideal client or the ideal agent for a secondary market annuity?
JB: The ideal agent is someone who is not selling these 100 percent of the time, but as one of the products he or she offers. A typical agent, if there is one, has sold anywhere from five to 60 of these deals. Many buyers are clients age 55 and up, and they don’t have to be multi-millionaires. This is a middle class product; it’s not for someone who wants to buy $50 million at once. There aren’t enough deals available for that. Also they are suitable for putting in IRAs or defined benefit plans, because you have a number of deals available with deferred payments as well as immediate payments. Approximately 35 percent of our business is in qualified accounts.
L&HA: Are these selling well right now because interest rates are low?
JB: These tend to have a spread over regular interest rates, CDs, and annuities as things move. But yes, they are selling because they do offer higher rates and they offer guarantees. Also, I should add that agent compensation is attractive.
L&HA: If interest rates go up or if we begin to experience inflation, will secondary market annuities be less attractive?
JB: New purchases will have higher interest rates available in most deals. One of the values of existing deals is their rates are guaranteed. They can’t change, so you won’t lose your money. Interest rates will not rise, but that is also true for a regular annuity. Many people ladder secondary market annuities. They buy shorter and longer ones, so at various times they have an annuity coming up to repurchase at the then higher (or lower) rate.
L&HA: Is there adequate supply?
JB: There are around $800 million of this particular product available for sale each year. About $500 million of this is taken off the market by one or two large purchasers. That leaves the balance for this market. We try to have enough annuity cases for our agents to sell but not so many annuities that we have to purchase the balance. That’s important because we have to buy them. This is different from being a real estate broker, where if you don’t sell the house it’s not a big deal, except that you’ve lost a commission and the owner hasn’t sold his house. In our situation we have an agreement that we have to buy the annuity even if we don’t have a buyer.
L&HA: You used the term structured settlement. Is that a source?
JB: Structured settlements make a good source for these because they allow a different configuration of payments from a regular single premium annuity. In a classic single premium annuity, you can’t defer the payments past a single year, but in court structured settlements this is often done. You can have lump sums out in the future, payments that increase every year, etc. And they tend to be placed with quality companies.
L&HA: What is the most important thing for agents to know about secondary market annuities?
JB: I’ve been working with annuities for 30 years and it’s exciting to have secondary market annuities come into the marketplace to augment traditional annuities. It’s great to have another product for the safe money portion of client portfolios.