What if you discovered a strategy where you could earn a considerably higher rate of return in the annuity market. Would that be important to you?
Additionally, would it be important for you to have guaranteed returns on that annuity?
And finally, what if you could purchase a higher-earning secondary market annuity using money from your self-directed IRA and still maintain your favorable tax status? Would that interest you as well?
Well, you can. Just keep reading to get the most important details about Secondary Market Annuities.
What is a Secondary Market Annuity? (SMA)
A Secondary Market Annuity (SMA) is a transaction where an annuity owner sells his or her future income stream from an annuity to a third-party for a one-time payment.
Typically, these annuities are income streams that originate from events like lottery winnings or lawsuits. The person who owns the annuity has agreed to a guaranteed payout over time that will eventually equal the amount of the lottery winnings or settlement rather than take a cash payout of a lesser amount.
As a purveyor of Secondary Market Annuities, Structured Wealth Strategies has received many questions from our prospective clients over time. The following are the most common and frequently asked questions.
Why do SMAs pay out higher interest rates than Traditional Annuities?
Secondary Market Annuity yields are generally higher than yields on a traditional immediate annuity because the seller of the annuity will typically sell at the annuity at a discount to get a quick cash settlement.
Do Secondary Market Annuities offer a cost of living adjustment?
Depending on where you are shopping for an SMA, most do not come with an annual cost of living adjustment, however, they are out there if you look far and wide. It’s worth it to do a deep search because if you find one, the COLA is generally 2 or 3%.
Is the interest rate in the SMA guaranteed?
Yes, the interest rate is stated in the contract and guaranteed by the financial strength of the insurer or lottery commission that issued the annuity.
How is the yield determined?
The yield of an SMA is determined by when the first payment is made and the length of time the income stream will be paid. The yield will typically be higher if the purchaser defers the starting date and opts for a longer payment period.
Are SMAs covered by the State Guaranty Association in my State?
Unlike traditional annuities, a secondary market annuity is not covered by your state’s guaranty association.
How much do SMAs usually cost?
The normal purchase price for an SMA is generally between $50,000 and $500,000. The purchase price will depend on how much the seller is willing to accept and the buyer is willing to pay. Terms can be one to 35 years but are generally 5 to 20.
How many parties are there to the SMA transaction?
There are generally five parties to a secondary annuity sales transaction.
1. The original insurer or lottery commission that issued the annuity
2. The Seller (current owner of the annuity)
3. The Buyer (payee)
4. The factoring company
5. The payment servicing company
After the transaction is complete, the Buyer will then become the assignee of the Seller.
Does a government agency oversee SMA transactions?
Yes, the transaction is typically governed by state law and must be approved by the state court. In most cases, a state judge will review the transaction and grant approval if the Seller and Buyer’s interests satisfactory.
Who actually pays the income stream after the sale is completed?
If the annuity was issued by an insurance company, that company will continue making the payments through a payment servicing company. If a state lottery was the original issuer of the payout, then the lottery commission in that state will continue the payments to the buyer.
Can I name a beneficiary to receive the money if I die before the term ends?
You cannot name a beneficiary to a Secondary Market Annuity. You can, however, direct the money to an heir using your will because the funds will be paid to your estate.
What about fees?
Ordinarily, the annuity company will not charge fees unless they use a payment service company who will likely charge a nominal fee of about $8 per month. If you are purchasing an SMA using a self-directed IRA, the IRA custodian will typically charge an annual fee that would range from $75 to $125 per year.
Who typically invests in Secondary Market Annuities?
The typical SMA investor generally has a relatively high net worth and is looking for higher than average returns but with limited risk. Many SMA investors have maxed out traditional investments, are close to retirement, and want an immediate income stream.
What are the risks when purchasing Secondary Market Annuities?
With almost any financial transaction there can be risks to consider and purchasing an SMA is no different. There are three risks to be aware of prior to completing the transaction:
1. Since SMAs are not protected by the state guaranty association, your purchase is at risk if the insurance company that issued the annuity or the lottery making the payments goes under. This could result in a considerable financial loss.
2. The court that approved the transfer of the structured settlement could be overturned if it is determined that fraud occurred or an error was made during the transaction. This situation would result in a complete financial loss.
3. If after the transaction is completed, the IRS determines the court didn’t comply with federal and state laws, the IRS can require the buyer to pay an excise tax retroactive to the sale.
Certainly, other questions are likely to come up during your search to purchase SMAs, so we encourage you to contact an annuity professional at Structured Wealth Strategies at (800) 595-1130 during normal business hours. You can also book a phone appointment and review our Live Inventory page that is updated regularly.
More Information about Secondary Market Annuities
What is a Secondary Market Annuity?
Secondary Market Annuity Pros and Cons
How to Buy Secondary Market Annuities