What is a secondary market annuity?
The term secondary market annuity or SMA for short refers to a flow of payment in effect, at certain times. The term secondary market is used to differentiate these existing payment streams from certain annuities from the primary market period.
Although there are payments in the market that come from lottery prizes and individual annuities. It is important to clarify that most annuity transactions in the secondary market arise from structured settlement clearing. For example, legal claims for personal injury or medical malpractice. It is also important to note that these transactions have nothing to do with life regulations. Life regulations place bets on actuarial tables, but the secondary market annuities discussed here are claims guaranteed by period.
So what are structured settlement annuities?
In short, the majority of SMAs are guaranteed payment streams backed by certain annuities. These ADMs come from major carriers who currently pay compensation for damage, injury or legal claims.
When an injured party chooses to receive their compensation in the form of a structured settlement over time, the US IRC 130 tax code allows the plaintiff to receive their compensation without income tax. By opting for a structured settlement over time rather than a lump sum, the claimant can receive both compensation and earnings from that compensation without tax liability.
Defendants typically use a qualified settlement fund or other vehicle to transfer the injured party’s compensation to a major carrier for tax purposes. Defendants then typically purchase a life insurance policy with a certain annuity to fund specific payments due under the settlement. The qualifying fund or an affiliated entity of the defendant is the owner of the annuity and the plaintiff is the beneficiary.
Formal settlements are a useful tool in the legal system that helps provide for the needs of minors, helps injured people support themselves if they are unable to work, and helps reduce reliance on public support systems.
However, times change and often settlement beneficiaries need cash. As the beneficiaries are not the owners of the annuity, their payments are not convertible directly with the carriers into cash. Payment sellers look to factoring companies to buy some or all of their future cash payments today, and must accept a discount rate for those future payments.
Why the high yield?
When sellers sell at a discount, a secondary market annuity is created that offers the new beneficiary a higher rate of return than the market. Secondary market annuity buyers may earn 1-4% higher returns than the comparable primary market, period some annuities of similar credit quality.