What is a secondary market annuity?
The term secondary market annuity or SMA in short refers to a certain period of validity of payment flow. The term secondary market is used to differentiate these existing payment streams from the primary market period in certain annuities.
While there are payments on the market that originate from lottery prizes and individually owned annuities. It is important to clarify that most secondary market annuity transactions come 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 agreements. Life settlements make bets on actuarial tables, but the secondary market annuities discussed here are certain guaranteed period receivables.
So what are structured settlement annuities?
In short, most SMAs are guaranteed payment streams backed by certain annuities. These SMAs are among the top operators currently paying compensation for damages, injuries or legal claims.
When an injured party chooses to view their award as a structured settlement over time, the US tax code IRC 130 allows the plaintiff to receive their compensation free of income tax. By opting for a structured settlement over time instead of a lump sum, the claimant can receive both the award and the winnings from that award without tax liability.
Defendants typically use a qualified settlement fund or other vehicle to transfer the injured party’s compensation to a primary carrier in a tax-qualified manner. Defendants then typically purchase a life policy with a specified annuity period to fund the specific payments owed under the settlement. The defendant’s qualified fund or affiliated entity is the owner of the annuity and the plaintiff is the beneficiary.
Structured settlements are a useful tool in the legal system that help support minors, help injured people support themselves if they are unable to work, and help reduce dependence on public support systems.
However, times change, and often the beneficiaries of a settlement need cash. Since the beneficiaries do not own the annuity, their payments cannot be directly converted to cash with the carriers. Payment sellers turn 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 performance?
When sellers sell at a discount, a secondary market annuity is created that offers the new recipient a higher-than-market rate of return. Buyers of secondary market annuities can receive returns 1% to 4% higher than comparable primary market, period, certain annuities of similar credit quality.