Types of Secondary Market Annuities

by Hersh Stern - Revised Friday, November 29, 2024

A Secondary Market Annuity (SMA) has many names: Structured Settlement Annuities, In Force Annuities, Secondary Market Income Annuities. All boil down to the same thing. They are cash flows being sold to you by owners who have opted to sell their payments for a lump sum. Therefore, it is not a purchase between you and an insurance company, but between you and the recipient of a stream of cash, facilitated by an attorney and a broker.

One of the best ways for you to attain a higher yield in today's interest rate environment is to purchase a secondary market annuity. This is because the seller is accepting a discounted rate in return locate for your purchase of the cash stream. On the chart below is a list of currently available secondary market annuities, showing their rate, start date and purchase price. By clicking on the chart below, you will see the full range of products offered.

Secondary market annuities allow you to buy a greater income with a smaller premium. You'll need to stay current on what is being offered as there is a great demand for these annuities.

Structured Settlement Annuities

Frequently, the winners of a legal case involving accidents such as slip and fall claims, car accidents, workplace injuries, etc., wind up taking their settlements as income payments instead of taking one lump sum. This is beneficial to the recipient as many are no longer able to work and need a steady stream of income. Also, the IRS considers these settlements to be tax-free.

However, circumstances sometimes change for the winners of these legal cases, and they may later change their minds in preference of a lump sum. The seller can then render the services of a factoring company. The factoring company will make an offer to purchase the future income. The factoring company then puts a discounted rate on the future income stream and makes them available through annuity brokers. The brokers can then offer these products for you to purchase.

The seller must petition the court who originally awarded the payments to transfer future payments to you as the buyer. The whole process can take up to 90 days. If this court process is not followed when transferring the payments, there may be a penalty tax levied by the IRS.

Lottery Payments

Frequently, those who win the lottery choose to take the annuity option. However, many later change their minds and desire the lump sum. Just as you would do with a structured settlement, the owner of the annuity approaches a factoring company. If you choose to purchase a lottery payment, you still need to go through a court process which will assign the payments to you. It is a security measure which is very important to the process.

While with a structured settlement the IRS deems the payments to be tax free, this is not true of lottery payments. The lottery commissions will withhold both state and federal taxes from the payments. You will need to file a tax return in the state in which the lottery payments come from in order to reclaim some of the withholding based on your tax rate.