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Secondary Market Annuities

A Primer on Secondary Market Annuities (SMAs)


(EDITOR’S NOTE: Buying secondary annuities is a complicated process layered atop a foundation of traditional annuities, the specifics of which can also be complicated. In addition, this is a challenging time to try to buy a SMA because fewer are available, the result of changing market dynamics. Potential SMA buyers need to fully understand the product and the intricacies of the purchasing process. This Q&A answers key consumer questions about SMAs.)

Q: What is a Secondary Market Annuity (SMA)?

A: A SMA is a transaction in which the current owner of an annuity sells his future income steam to somebody else in exchange for a lump sum payment. SMAs most commonly originate from lawsuit settlements or lottery winnings.

When somebody wins a state lottery, for example, they usually don’t get the entire amount at once. They can take a much smaller lump sum or elect to have the entire amount paid as an annuity – a series of payments over time. It often works the same way in a lawsuit. Frequently, the individuals who end up with these annuities want the biggest lump sum possible, not a stream of payments. They can elect to sell their future payments to someone else in exchange for a lump sum payment today – a SMA. SMA payments are direct obligations of insurance companies.

Q: Why are some people interested in buying a SMA?

A: SMA sellers price the product at a discount to attract sales. This typically provides the buyer with a higher internal rate of return (a type of interest rate) than is available on a traditional annuity.

Q: What is this rate today?

A: Typically 3 to 5 percent annually – roughly 1 percentage point higher than traditional annuities.

Q: Is this good?

A: While the payment is higher than that of a traditional annuity, it is low by historical standards, and not just because interest rates are extremely low. Institutional investors, also buyers of SMAs for re-sale, have pulled back from the market in recent years, undercutting supply and pushing rates lower than they would otherwise be. Roughly six years ago, the same annuities paid 5 to 7 percent annually, and the decline accelerated in the last two years.

Q: What are the drawbacks to SMAs?

A: SMAs have zero liquidity. Traditional annuities, by contrast, have limited liquidity. If you want to exit a traditional annuity early, you can do so by paying a surrender fee. Most traditional annuities also allow buyers to withdraw about 10 percent of their principal annually without penalty. None of this is true with SMAs. Once the court order approving the annuity transfer is rendered, the transaction cannot be undone and there is no opportunity for periodic withdrawals. In addition, SMAs take time to find and sometimes are not approved by the court, usually because of an issue with the seller.

Q: Who does an SMA make most sense for?

A: It may be best for a grandparent who wants to set up what is essentially an inherence to grandchildren. Capitalizing on the time value of money, a grandparent could, for example, pay a steep discount today for a stream of payments to a grandchild far in the future. For instance, he or she could spend $25,000 on a deferred income annuity that in 20 years would pay a grandchild $231 a month for 30 years. That would be a total of $83,160 in payments.

A SMA might also make sense for somebody in their 30s willing to pay roughly the same for a prolonged period of income in 20 to 30 years. Although it would be difficult for this person to know the particulars of their financial standing far in the future, the extra income should make any situation better.

Q: What are the purchase amounts and typical terms of a SMA?

A: The price of a SMA typically ranges between $20,000 and $400,000. The amount depends on what the annuity seller will accept as payment and what a buyer is willing to pay. Terms usually range from five to 20 years.

Q: How do you buy a SMA?

A: The easiest way is to deal with a distributor of SMAs. These includes firms such as Somerset Wealth Strategies, Pacific Structured Assets and In-Force Annuities. You should also hire an independent attorney to walk you through the process. Make sure he or she is a specialist in so-called factoring transactions, which broker the sale of annuity payment streams between annuity owners and prospective buyers.

Q: Can somebody transfer or sell SMA payments in the future?

A: Typically, the answer is no. The new owner must retain the annuity contract for the duration of the income stream.

Q: Are SMAs safe?

A: Yes. The court process makes sure the annuity seller is legitimate and, as previously mentioned, SMAs are financial obligations of the issuing insurance company. Historically, insurance companies have been safer money havens than banks.

Q: Can a SMA be bought with IRA money?

A: Yes.

Q: If you die before a SMA runs out, would a beneficiary get the remaining payments?

A: You can’t name a beneficiary on a SMA. But the insurance company obligation to keep making payments continues and becomes part of your estate.

— Steve Kaufman

A Secondary Market Annuity May Be Right for You – But Be Careful

A would-be secondary market annuity buyer must make sure the proper procedures are followed, and that the secondary market annuity is thoroughly vetted.

A would-be secondary market annuity buyer must make sure the proper procedures are followed, and that the secondary market annuity is thoroughly vetted.

Think you might want to buy a secondary market annuity – a guaranteed stream of payments you ultimately buy from someone else, usually at a discounted price of 10-15 percent? It might make sense if you’re seeking a higher rate of return in today’s ultra-low interest rate environment.

But buyer beware – these are complicated instruments, flush with legal requirements and pitfalls. Make sure all the rules are followed, or the deal may just unravel. Worse yet, you can wind up paying a penalty of 40 percent federal excise tax on the principal.

Most of the time, you’re best off hiring a lawyer to walk you through the process. Make sure he or she is a well-regarded specialist in so-called factoring transactions, the process used by factoring companies – i.e., specialized finance companies — to broker the sale of payment streams between annuity owners and prospective buyers. The annuity owners get a lump sum payment; the buyers get the annuity at a discount.

Some Background

Some background is in order. You’re probably aware that when someone wins a state lottery, they don’t get the entire amount all at once. They can take a much smaller lump sum, or they can elect to receive the entire amount as an annuity – a promise of a series of payments over time.

Similarly, when people win a legal settlement, such as a personal injury lawsuit, they often settle not for a lump sum but for a promise of regular future payments – again, an annuity. The payment of these annuities are direct obligations of insurance companies and are safe and dependable.

In purchasing a secondary market annuity from the original owner – a so-called structured settlement — the stream of income is assigned to you. Secondary market annuities typically offer a rate of return well above the norm because the original owner wants a lump sum payment, not a series of payments, and so sells the annuity at a discount. The insurance company is obligated to make these payments regardless if it is the original owner or the new owner.

The development of structured settlements was a relatively smooth affair. But the development of a secondary market for structured settlements, which ushered in factoring companies, was not. Many annuity sellers who dealt with factoring companies were forced to swallow unusually sharp discounts. This, among other things, sparked so much controversy that 38 states enacted statutes that invalidate transfers of payment rights under structured settlements unless they get court approval in advance.

Then the Internal Revenue Service reinforced the state statutes, cracking down on improper structured settlements even more by imposing a 40 percent federal excise tax if a transfer of structured settlement payment rights does not receive required court approval.

Where Does This Leave Potential Buyers Today?

Fast-forwarding to today, where does this leave potential buyers of secondary market annuities? They typically have a robust inventory to sort through in a given year, typically valued at $600 million to $1 billion-plus, and buyers have more protection than ever. Nonetheless, it is still a case of caveat emptor.

A would-be secondary market annuity buyer must make sure the proper procedures are followed, and that the secondary market annuity is thoroughly vetted. Otherwise, he can still wind up with a bad deal and a very fat penalty. Most of the time, you have to hire a specialized attorney, and you have to make sure he or she is good at what they do.

Here are two specific tips:

  • One way or another, make sure the payments of the structured settlement exist and are unencumbered.
  • If you deal with a factoring company that has an outside attorney to oversee the purchasing process, make sure he is an honest broker, not merely doing the bidding of the factoring company. Check that is he not incentivized to approve the deal. Regardless of whether he approves or disapproves of the transfer of funds, he needs to be compensated.

Andrew Murdoch, president of Somerset Wealth Strategies, a wealth management company that sells secondary market annuities, summarizes the whole situation succinctly. “These transaction can go wrong,” he says. “Having an independent attorney review them is good protection. The extra money offered by secondary market annuities might not be worth it if these transactions are not properly vetted.”


  • Secondary market annuity: This is an annuity owned by someone else that you can purchase at a discount and have the stream of income re-assigned to you. The insurance company that originated the annuity continues to guarantee payments.
  • Structured settlement: The process of buying a secondary market annuity.
  • Factoring company: A specialized finance company that brokers the sale of payment streams between annuity owners and prospective buyers. The annuity owners get a lump sum payment; the buyers get the annuity at a discount.
  • Standard annuity: Unlike a secondary market annuity, this is purchased directly from an insurance company. There are many types of annuities sold by many insurance companies, but they don’t offer terms as attractive as a secondary market annuity because they are sold at full price.

Secondary Market Annuities: The Safe, Reliable Transfer of Lottery Winnings


When an individual is awarded an annuity as a result of a lawsuit or winning of a state lottery, instead of receiving a one-time, lump sum of cash, they are given a series of payments over time. Often, these individuals either don’t want to, or can’t afford to wait the many years for their entire payout. When this occurs, they have the option of selling their future payments to someone else in exchange for a lump sum payout. The “resale” of these annuities is referred to as secondary market or pre-owned annuities, and they have become quite popular in the investment industry.

Secondary market annuities (SMAs) are often bought at a discount and offer a rate of return well above standard fixed annuities, immediate annuities, CDs, or bonds. Additionally, the payments are safe and dependable, making them extremely attractive to the savvy investor. There are several SMA types, including Factored Structured Settlements, Annuity Income Streams, Life Settlements, and Viatical Settlements. But it’s the resale of lottery winnings that is currently gaining momentum, according to Mr. Brian Horn, Executive Vice President of Somerset Wealth Strategies. And here’s why.

The process of purchasing a secondary market annuity is somewhat extensive, considering the seller is attempting to offload their court ordered annuity settlement. Before any money exchanges hands, the sale of the annuity has to be approved by a court of law, and more and more courts are refusing them. In fact, one-third of annuity transfers are not approved. When someone is awarded an annuity as a settlement after an accident, for example, the judge in the initial case felt that the money would help them recover, whether from injury or financial distress. When attempting to sell those annuity payments, it isn’t difficult to understand why a judge may deny the request, especially if they feel it isn’t in the seller’s best interest. This isn’t the case for lottery winners. The sale of annuity payments as a result of a lottery win is almost always approved, and because the payments are guaranteed by US Treasury bills, they are very safe and reliable. In the more than 20 years that this practice has been occurring, there is no record of a default in payment by any state lottery commission.

Safe, reliable, and almost always approved makes the purchase of the pre-owned annuity from lottery winnings a smart choice. It is not surprising that more and more sophisticated investors are asking their financial advisors about this promising product. Check out our current SMA inventory, the most extensive and respected in the industry, and contact one of our highly-qualified advisors for further assistance.

Secondary Market Annuities Article by “Stan the Annuity Man”

Yesterday’s (10/29/2013) MarketWatch article by Stan “The Annuity Man” Haithcock is the most well written, thorough and complete article on Secondary Market Annuities (AKA In-Force Annuities and Pre-Owned Annuities) I’ve seen to date. My hunch is his has <1000 words to get his point across and get it across in a manner that most can understand and I think he did a tremendous job. He covered most every significant point and it was fair and balanced, e.g. you can’t just go out and do this on your own but if you can find someone who is reputable and you want safe fixed income then you’ll want to give them serious consideration (and I’m not just saying this because I’m quoted in the article). You can find Stan's MarketWatch article here --> “Secondary Market Annuities Boast Higher Yields”.

Written by Tom Hamlin

WSJ: Most Americans not financially prepared for retirement


A new working paper published by the National Bureau of Economic Research, “Americans’ Financial Capability” surveyed nearly 1,500 Americans two summers ago, and highlighted some shocking trends illustrating the inability of many Americans to properly save for retirement.

We’ve included some of the findings:

– Half of Americans surveyed had trouble keeping up with their bills.

– Half of Americans surveyed had no money saved to cover their expenses in the event of loss of income.

– 23% surveyed used high-cost borrowing, such as a pawn shop, tax advance or payday loan.

– 58% have never tried to figure out how much to save for retirement. 51% of those 45-to-59 said the same.

– 17% of responders had no idea what they’ve invested in, when asked what was in their retirement accounts.

– One-third surveyed said they experienced a large and unexpected drop in income over the past year.

Many, many American consumers are experiencing unease and uncertainty in the market, and retirement age is approaching more quickly than you might think. A lack of education and a lack of motivation aren’t helping consumers invest with confidence or competency:

So who is to blame? “It’s hard to point a finger,” Prof. Lusardi says. “It takes two to tango. But it’s certainly true that this economy in the past 10 years has made it very difficult for people to make decisions. We’ve shifted the responsibility to individuals and they don’t have the capability to make those decisions. Still, some of the things we found in the survey are going to be with us for several years.”

One way to ensure you know what you’re getting out of your investment is to invest in safe, high-yield Secondary Market Annuities. Invest in a stream of income that’s guaranteed for years to come, and bring yourself closer to your retirement dreams.

You’re welcome to browse our offerings here.

A Risky Secondary Market Strategy: Betting on Death


Only two certainties in life: death and taxes. It’s a well-worn cliche, but in the case of the secondary life market, death just isn’t certain enough.

Both supply and demand for this hotly-contested  after-market are ballooning. Investors are gobbling up life insurance policies from third parties, and collecting death benefits when they die…if they die.

Policyholders are now living longer than ever, and not dying quickly enough for the buyer to recoup on their investment.

Retirement Value, a Texas firm specializing in this field, was closed down by regulators this year, and will only be on the hook for 10% of payouts promised to over 900 investors.

This is a common mistake in the secondary life market: Without death, there can be no return on investment.

Betting on a stranger’s death is risky, as this Texas investor discovered. Managing risk may not be the sexiest component of an investment strategy, but it is just as crucial as chasing street-beating returns.

To find real success purchasing fixed income annuities and structured settlements on the secondary market, it’s best to steer clear of death-centric payouts.

Our Secondary Market Annuities backed by reputable insurance companies are a great way to hedge your risk and ensure guaranteed returns without banking on someone else’s demise.

You can bet your life on it.