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What Are Secondary Market Annuities
A secondary market annuity (commonly referred to as a SMA) is a transaction in which a present owner of an income annuity or structured settlement sells their future income stream to a third-party for a discounted lump-sum payment. Annuity income streams can be the result of lawsuit settlements, lottery jackpot payout, or insurance money just to cite a few examples. These annuities are generally guaranteed by top financial institutions like MetLife, New York Life, Provident and others, making them a very safe investment. SMAs are sold on the secondary annuity market.
Secondary Market Annuities For Sale
Secondary market annuities are known by several other terms including in-force annuities, discounted cashflow, structured settlement annuities, guaranteed income, assigned annuities and secondary market income annuities. All pertain to the same thing – the transfer of the right to receive future payments in exchange for a fixed price today. In the event that the original owner of the annuity decides it no longer advantageous for them to receive income payments over several years, they can opt to sell said payments for a lump sum.
Structured settlements are a form of financial arrangement negotiated from a lawsuit, guaranteeing the recipient a series of income payments over a defined number of years, rather than a lump sum. Ultimately, they provide security and a financial safety net to the recipient, as many are unable to work, thus needing the steady income stream. Additionally, the Internal Revenue Service (IRS) rules dictate that these settlements are tax-free to the original recipients.
Yet, the recipient of the structured settlement could later decide for whatever reason that they prefer a lump sum, and therefore are willing to sell the income stream. Known as a structured settlement factoring transaction, the income stream can be transferred in exchange for a single discounted lump sum. The seller acquires the services of a factoring company, who in turn, makes an offer to purchase the future income stream. The factoring company then makes the future income stream available at a discount through annuity brokers, who then resell said income stream to investors. It is important to note that any factoring transaction must first have approval from the court that originally awarded the payments, to transfer the future income stream from seller to buyer. If the transfer does not abide by the local state structured settlement protection act and IRS rulings, the IRS may levy a penalty tax.
In recent years, the market has expanded further to purchase the annuity payments of lottery jackpot winners. Lottery winners often choose the annuity option, then, decide later that they would prefer a lump sum payment of the winnings. The process is analogous to that of structured settlement factoring transactions, including getting court approval for the transfer of payments. A caveat, however, is that lottery annuity payments are not deemed tax-free by the IRS. Those who buy a lottery payment must file a tax return in the state where the payments originate.
From the standpoint of the buyer, secondary market annuities can be good long-term investments, as they usually have high-interest rates. It is important to note that each SMA is singular in nature, based upon the respective structured settlement – the payments, the length of the income stream, interest rate, and parameters of the settlement amongst other factors.
Secondary Market Annuities Inventory
Considering that SMAs are unique investment opportunities, below are examples of previously sold secondary market annuities inventory to provide an idea of the specific components governing each of these financial tools.
Example 1
Guaranteed Payments
Company: Hartford
Purchase Price: $27,035.74
Rate: 5%
Payments: 12 Monthly Payments
$500/mo from 5/3/2026 to 4/3/2027
$300/mo from 5/3/2027 to 4/3/2039 with a 3% Cost-of-Living Adjustment (COLA)
Total Return: $57,091.20
Reference Number: 01-2378
Court Date – 3/27/2017 Quick Close
Example 2
Insured Life Contingent Payments
Company: Genworth
Purchase Price: $50,919.48
Rate: 5%
Payments: 174 Monthly Payments of $415
From 9/30/2017 to 2/29/2032
Estimated Close Date: 5/15/2017
Reference Number: 01-2372
No Court Date Yet
Example 3
Guaranteed Payments Combined With Insured Life Contingent Payments (Same Seller)
Company: Met Life
Purchase Price: $191,590.43
Rate: 6%
Guaranteed Payments:
5 Monthly Payments of $4,439.65 7/20/2021 to 11/20/2021
12 Monthly Payments of 4,711.40 12/20/23 to 11/20/2024
1 Payment of 4,805.62 on 12/20/2024
Insured Life Contingent Payments:
72 Monthly Payments of $5,858.03 with a 2% COLA From 12/20/2034 to 11/20/2040
Total Return: $526,978.59
Estimated Closing Date: 5/5/2017
Reference Number: 01-2396
No Court Date Yet
Example 4
Guaranteed Payments
Company: Allstate
Purchase Price: $683,681.14
Rate: 4%
Payments:
84 Monthly Payments
$5,721.14/mo from 8/15/2019 to 7/15/2026
Lump of $150,000 on 7/15/2021
Lump of $200,000 on 7/15/2026
Total Return: $876,133.40
Priced as of: 4/1/2017
Reference Number: 11-02
Secondary Market Annuities Risk
Akin to any investment, there are risks involved in secondary market annuities. A concern pertaining to secondary market annuities is the issue of illiquidity. A SMA cannot be sold, so the buyer is locked in until the end of the contract. An investor must be able to manage the illiquidity, seeing as they are subject to the detailed of the payment schedule.
Likewise, buyers of secondary market annuities must be mindful of the fact that not all transfers are approved in the court process. Therefore, the investor might have an inordinately long waiting period before actually acquiring the financial tool and thus begin receiving the payments.
As with any investment, there are risks with secondary market annuities. There are a few instances of outright fraud perpetrated by bad actors in law firms and factoring companies that have resulted in vacated structured settlement transfer orders or the suspension of payments. That said, there are tens of thousands of transfers done annually, and just a handful of ‘bad apples. Working with a competent secondary market annuities broker with thorough legal review procedures greatly mitigates this risk.
Another risk with all fixed income investments is inflation. The income payments of a structured settlement are fixed and certain, and may not keep pace with inflation.
Another concern with all annuities issued by insurance companies is credit risk. Insurance companies are generally very strong financial institutions, but sometimes they do fail, and even though they are regulated, have financial reserves, and are typically very conservative, they are still subject to market conditions.
Secondary Market Annuities Companies
Below are some of the companies that provide secondary market annuities, complete with a description of the company.
SecondaryAnnuities.com is a web property of Nathaniel M. Pulsifer, who has been intimately involved in bringing secondary market annuities to investors and agents since 2010. He started in the market as a founding partner in Annuity Straight Talk, which then grew into role as a founding member of SMA Hub. That experience led him to start DCF Exchange, which he continues to operate in addition to his retail sales activity at this website, SecondaryAnnuities.com.
Through this website, he serves individual investors throughout the country with exclusive Secondary Market Annuities. He also operates a wholesale trading firm, DCF Exchange that serves Secondary Market Annuities to advisors and institutions nationwide.
DCF Exchange buys Discounted Cash Flows. The company buys payments backed by annuities from structured settlements.
The company is well capitalized and is constantly buying payments from a wide range of originating sources such as attorneys and factoring companies.
The company performs all due diligence on these cash flows and purchase them in-house.
They utilize an industry-leading legal structure to acquire assets, and employ specialist independent counsel to review each transaction. They have partnered with a best-in-class third-party payment servicing company that handles billions in client assets.
DGF Exchange distributes these high credit quality payment streams directly to institutions and through select agent relationships to end retail investors.
Their unique “set-and-forget” guaranteed income product helps investors achieve higher uncorrelated fixed-income yields.
AskMrAnnuity.com is a comprehensive financial services firm committed to helping clients improve their long-term financial success. Their customized programs are designed to grow, protect, and conserve our clients’ wealth by delivering an unprecedented level of personalized service and expertise. Since 1985, the company has provided innovative solutions to clients and has shown the ability to be dynamic in an ever-changing financial world. They have representatives in all 50 states.
Steve Lance is the founder, author, radio show host and expert on retirement and income planning. Steve’s book Annuities: The 21st Century Pension Plan is a “Roadmap to Retirement and is available free on this website. Steve’s Team of retirement & income specialists are located in most cities across the United States.
Andy Cockrell, Vice President of Sales and Marketing, started with Ameriprise Financial (Formerly American Express Financial Advisors) as a Financial Planner in 1994 and started working with Steve in 1998. From 2002 through 2008, Mr. Cockrell ran a successful Estate and Financial Planning practice in Phoenix, Az. Now Steve and Andy are together helping people secure their financial future with creative, safe, and lucrative investment strategies.
Learn more about all the different SMA companies here: https://sophisticatedinvestor.com/top-annuity-companies-reviews/
Financial Professionals Weigh In About Secondary Market Annuities
Pros of SMAs
Profitability – You can get a higher yield by allocating fixed income to your SMA. The profitability rate is higher in comparison to other investment options such as bonds, CD’s, and fixed annuities. So if you can commit to your investment and stay put, an SMA will be more profitable if you can wait until it matures.
No Volatility – SMAs are priced based on the current market discount rates. If the rates drop, you may be able to make a profit by selling off the contract. So you can be assured that you won’t lose your investment, and in the best-case scenario even make a profit.
Cons of SMAs
Liquidity – Due to unpredictable circumstances, you may need to liquidate an SMA before it reaches maturity. Although it’s possible, you might lose some money since the payment stream will need to be re-marketed and re-calculated using the current market conditions. In addition, there are also legal costs to factor in when you need to re-market a case.”
Igor Mitic, Co-Founder, Fortunly.com
“A Secondary Market Annuity is where the present owner of an annuity generating income sells it to another for a lump sum cash value Understand that anyone owning annuity contracts to collect annual payments on a specific basis, in most cases geared to the rest of his or her life. It may connect to an insurance arrangement, possibly a lottery payoff, lawsuit settlements, or a will legacy but doesn’t suit the beneficiary. That’s when the latter puts it up for sale as described above. From the buyer’s viewpoint: Secondary Market Annuities (SMAs) earn high interest and represent a low risk.
The bottom line is that it’s a viable long term consideration. SMA buyers, common sense tells us, should know they are sinking a load of money into an inflexible contract for an income stream. A big sticking point is that SMA sales frequently require court approval, notwithstanding the annuity provider is very safe – of institutional caliber. It can take months, if not years, to get approval if you try it on your own. Officially the original owner is considered the last owner, and overturning the status is a huge task.
We recommend tying in your efforts with a professional advisor, whether a buyer or a seller. The attraction is that SMA purchase prices significantly boost interest rates because they are well below current value (i.e., a discount). After-sale, if approved, nothing changes except the recipient.”
Gordon Polovin, finance expert, serves on the advisory board for Wealthy Living Today
As with every investment, some are a good fit for an investor, while others are not. If you are interested in buying secondary market annuities, consult a financial professional before you make the purchase, review the associated risks, and do always do your due diligence.
Sarah Bauder is a financial writer with over a decade of experience at numerous online publications, writing about alternative investments, retirement, US politics, world economy and more.
