Secondary Market Annuities are generally Structured Settlement Annuities and lottery payments. They are sometimes referred to with a trade name like “In Force Annuities” or “Secondary Market Income Annuities“. These are simply cash flows that are being sold by one individual and purchased by another. They differ from primary market annuities in that they are individual transactions between two parties, facilitated by a broker and attorney, as opposed to a purchase of a defined product between business and consumer.
Lottery payments being sold at a discount by an individual can also be referred to as Secondary Market Annuities.
As a buyer of a Secondary Market annuity, you select a specific offer and purchase that, as opposed to picking a product from an insurance carrier. Secondary market annuities represent one of the best ways to attain a high yield in today’s low rate environment. The simple reason for this is that the seller of a cash flow is selling those future payments at a discount rate to the present value. The discount rate is greater than the rate of return currently being offered by primary market annuities.
Example Secondary Market Annuity
For example, a 10 year income stream from a structured settlement annuity will have a discount rate (or yield to you) of 4.5% to 6%. By comparison, a 10 year period certain immediate annuity is a discount rate of approximately 2.5%. You simply can buy more income with less principal with a secondary market annuity. These rates change on a regular basis, so it’s important to stay informed about currently available secondary market offerings. You can see current secondary market annuities here.
Types of Secondary Market Annuities
There are two types of Secondary Market Annuities. The first is a structured settlement, and the second is a lottery payment.
About Structured Settlement Annuities:
Very often, winners of legal cases- such as a workplace injury, a slip and fall claim, a car accident- elect to take their settlement over time, to have income instead of a large lump sum. this makes a lot of sense for people who have suffered injury and may not be able to work. The IRS favors these structured settlements because they want injured parties to have a reliable source of income, and consequently the IRS treats these qualified settlements as tax-free awards.
Life happens, however, and the circumstances may change for the individual who won the award. In future years after they receive their settlement, they may wish to sell their future payments for cash today. At that time, the seller engages the services of a factoring company who makes an offer to purchase the future income.
The future income stream is generally a fixed, definite payment contract. It may include lump sums, annual increases, deferral periods, or it may be contingent on the lifespan of the seller. But bottom line, it is a fixed series of cash flows that are being sold by the individual. The factoring company puts a discount rate on those future income payments, and makes those future income payments available through brokers such as Annuity Ace for individuals to purchase.
The purchase process can take 30 to 90 days, and requires that the individual selling the payments receive approval to sell from a court of competent jurisdiction (even if it was an out-of-court settlement!) for a change in the terms of their settlement. Specifically, they petition to transfer future payments to you a new buyer.
Each state has laid out specific transfer regulations because an improperly handled structured settlement transfer may be subject to a penalty tax by the IRS. The structured settlements that we sell at Annuity Ace all follow rigid legal guidelines to ensure that the payments are transferred as part of a ‘qualified order’ under IRS guidelines that are adopted by nearly all states.
About Lottery Payments
The second type of secondary market annuity commonly found are lottery payments. Individuals who win lottery payments and elect to receive their payments over many years as opposed to in one lump sum often change their minds in the future. Just as with a structured settlement, they approach a factoring company to purchase those future payments.The transfer of those payments to you as a buyer also requires a process to unequivocally assign the payments to you. This is an investor security measure that is very important.
An important distinction between structured settlements and lottery payments is that lottery payments are fully taxable to the original buyer. State lottery commissions withhold state and federal taxes from lottery payments, so as a new owner of a lottery payment stream, you will need to file a tax return in the state that the lottery originated in in order to reclaim some portion of that withholding based on your tax rate.
Security of Structured Settlement Annuities
Structured Settlement Annuities offer unparalleled safety for investors money because the issuing companies who make the payments to the original party are generally very high credit. These are companies such as Met Life, New York Life, Transamerica, etc- the top tier of insurance companies with A to AAA credit ratings. In addition, the court process and legal review we do on your behalf as the buyer during the purchase ensures that the payment stream is unequivocally yours.
The sellers credit history, any claims to income such as alimony, child support, or garnishment, are thoroughly investigated and cleared prior to court. You receive clear and complete title to the payment stream and an acknowledgment from the insurance company showing the payments have been transferred. The transfer process is absolute and thorough.
Benefits of Secondary Market Annuities and Structured Settlement Annuities
In addition to the credit quality of the underlying insurance carrier, secondary market annuities offer higher rates of return than primary annuities due to the discounted purchase price.
- Secondary market annuities also offer a fixed rate of return over a fixed period of time. In many situations, this is preferable to the unknowns of an indexed annuity, and when compared with a fixed annuity, the yield from a secondary market annuity is much higher.
- For investors seeking an above market, safe money rate of return for a known duration, there is no other investment currently available with comparable rates of return and safety.
- Secondary market annuities can also be purchased with IRA dollars in a self-directed IRA.
- In contrast to variable annuities and fixed indexed annuities, secondary market annuities have no fees or ongoing costs other than account servicing and IRA costs if applicable. The purchase price for a secondary market annuity includes all legal review, closing costs, and transaction costs. There is no annual cost, with the sole exception of nominal account servicing and costs to administer your IRA if that is applicable.
Drawbacks to Secondary Market Annuities
No annuity is without drawbacks, and secondary market annuities are no exception. First and foremost, secondary market annuities are generally not readily liquid payment streams. While we can facilitate the resale of payments, we can not guarantee a quick transaction or the rate at the time of sale. There is no opportunity to take a withdrawal from your secondary market annuity other than the contractually specified payments, in contrast to some other types of annuities.
Additionally, secondary market annuities take some time to place. Often an investor may need to buy multiple contracts in order to achieve the income stream they desire. Also, when buying secondary market annuities, occasionally contracts are not approved the court. This happens for a variety of reasons usually relating to the seller.
Consequently, investors considering secondary market annuities need to be flexible and willing to replace contracts that do not come together with new offers. Typically, they can take 1 to 2 months to find just the right set of offers to fill an investor’s order.
Secondary Market Annuities Summary
Secondary market annuities represent a fantastic way for investors to earn an above market rate of return with an excellent credit quality. For investors considering fixed indexed annuities with lifetime income rider’s, a secondary market annuity for a fixed period of time together with an immediate annuity in the future will often yield a higher level of income to the investor. To find out more about secondary market annuities, be sure to sign up for e-mail notifications from the site and refer to the Structured Settlement Annuity FAQ page.