What is an annuity in the secondary market?

What is a secondary market annuity?

The term secondary market annuity or SMA in short refers to a current, periodic payment flow. The term secondary market is used to distinguish these existing payment flows from certain annuities during the primary market period.

While there are payments on the market that originate in lottery winnings and individually owned annuities. It is important to clarify that most annuity transactions in the secondary market derive from structured settlement compensation. 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 settlements. Life settlements make investments in actuarial tables, but the secondary market annuities discussed here are periodic guaranteed receivables.

So, what are structured settlement annuities?

The majority of SMAs are, in short, guaranteed payment flows backed by periodic annuities. These SMAs are from major carriers that currently pay compensation for damages, damages or legal claims.

When an injured party chooses to take his award as a structured settlement over time, the US tax code IRC 130 allows the plaintiff to receive his compensation free from income tax. By choosing a structured settlement over time rather than a lump sum, the plaintiff can receive both the award and the profits from that award without tax liability.

Defendants usually use a qualified settlement fund or other vehicle to transfer the compensation of the injured party to a major transport company in a tax-qualified manner. Defendants then generally purchase a life insurance policy with a certain annuity to finance the specific payments under the settlement. The qualified fund or an affiliated entity to the defendant is the annuity holder and the plaintiff is the payee.

Structured settlements are a useful tool in the legal system that helps to support minors, helps injured people to support themselves if they are unable to work, and helps to reduce dependence on public support systems.

But times change and often during a settlement, payees have a need for cash. As the payee is not the owner of the annuity, their payments cannot be converted directly with the carriers into cash. Payment sellers turn to factoring companies to buy some or all of their future cash payments today and must accept a discount rate for these future payments.

Why the high return?

When sellers sell at a discount, an annuity is created in the secondary market that gives the new recipient a higher return than the market. Buyers of secondary market annuities can receive returns 1 to 4 percent higher than comparable primary markets, periodically certain annuities of similar credit quality.

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