Structured Settlement Annuities: The Key to Secondary Market Annuities

by Rob Phillips, CPA

Secondary Market Annuities are typically 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 can be 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 specific types of Secondary Market Annuities. The first is called a structured settlement and the second is called 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 a lump sum, annual increases, deferral periods, or it may be contingent on the life of the seller. Bottom line, it is a fixed series of payments 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 may take 45 to 90 days, and it could require that the individual selling the payments petition a court that awarded the payments to change the terms of their financial settlement. Specifically, they can petition to transfer future payments to you as the buyer.

It is very important that the court process be followed when transferring payments from one party to another, 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 that win lottery payments and choose to receive payments over several years as opposed to in one lump sum often can change their mind 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 court process to unequivocably assign the payments to you. This is an investor security measure which has important consequences.

An important difference between structured settlements and lottery payments is that lottery payments would be fully taxable to the buyer of the settlement. State lottery commissions will usually withhold state and federal taxes from the payments, so a new owner of a payment stream will need to file a tax return in the state that the lottery winning originated in to reclaim a portion of that withholding.

Security of Structured Settlement Annuities 

Structured Settlement Annuities will offer safety for investors because the issuing companies who are making the payments to the original party are typically very credit worthy. These are companies such as Met Life, New York Life, Transamerica, etc- the highest tier of insurance providers with A to AAA credit ratings. Additionally, the process and legal review we do on your behalf as the buyer during the purchase ensures that the payment stream is unequivocably yours to own. 

The credit history of the seller and any claims such as alimony or child support are thoroughly investigated and cleared prior to transferring ownership. You received clear and complete title to the payment stream together a court order with your name in it entitling you to the payment stream, and an acknowledgment from the insurance company showing the payments have been transferred to you. 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. 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 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 of all, secondary market annuities are not usually very liquid investments. Once a court order is in place and payments are transferred to the buyer, you cannot undo the transaction. There is no opportunity to withdraw from the secondary market annuity other than under the contractually specified payments.

Additionally, secondary market annuities can 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 several 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. 

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