It is not every day that federal regulators issue a warning about secondary insurance market transactions.
So, it is newsworthy that the Securities and Exchange Commission (SEC) has issued a warning about selling or investing in pension payments or structured settlement payment streams.
Transactions involving pension factoring and structured settlement payment factoring involve risks, and participants should proceed with caution, according to the news alert jointly issued on Thursday, May 9, by the SEC and the Financial Industry Regulatory Authority (FINRA):
According to the SEC and FINRA:
Do you receive a monthly pension from a former employer? Are you getting regular distributions from a settlement following a personal injury lawsuit? If so, you may be targeted by salespeople offering you a lump sum today to buy the rights to some or all of the payments you would otherwise receive in the future. Retired government employees and retired members of the military are among those being approached with such offers. Typically the lump sum offered will be less — sometimes much less — than the total of the periodic payments you would otherwise receive.
After acquiring the rights to a future income stream (such as a retiree’s pension payments), these pension purchasing or structured settlement companies, sometimes called “factoring companies,” may turn around and sell these income streams to retail investors, often through a financial advisor, broker or insurance agent. These products go by various names — pension loans, pension income programs, mirrored pensions, factored structured settlements or secondary-market annuities. They may be pitched to investors with words like “guaranteed” and “safe” — and may tout robust returns that outpace more traditionally conservative investments such as CDs or money market accounts. The advertised returns may sound enticing, but investors should be aware that these investments can be risky and complex.
FINRA and the SEC’s Office of Investor Education and Advocacy are issuing this Investor Alert to inform anyone considering selling their rights to an income stream — or investing in someone else’s income stream — of the risks involved and to urge investors to proceed with caution.
The SEC and FINRA offer several suggestions to potential sellers of income stream rights, as well as to potential investors.
For sellers, the advice includes asking the following questions:
- Is the transaction legal?
- Is the transaction worth the cost?
- What is the reputation of the company offering the lump sum?
- Will the factoring company require life insurance?
- What are the tax consequences?
- Does the sale fit your longer-term financial goals?
For investors, the SEC and FINRA offer another set of (sometimes overlapping) questions to consider, given the “risks and complexities” of such secondary market transactions:
- Is the financial professional selling the product registered with a state or federal regulator or with FINRA?
- How is the salesperson being compensated?
- Is the salesperson authorized to sell this product?
- What is the reputation of the company selling the product to me?
- What are the tax consequences?
- What organization is ultimately paying you?
- Who is sending the check?
The alert is available in full here and the authors of Secondary Insurance Market Blog encourage readers to read the whole thing.
We expect the alert to generate additional discussion.