The sad fact is that many retirees today are living on very small fixed incomes – money from IRAs they may have started late in their careers, and the small monthly amounts they receive from Social Security. To help supplement their finances, some retired investors are being drawn to purchase secondary market annuities, which promise greater yields than the more secure bonds and CD investments that they may already have.
What exactly is a secondary market annuity?
When someone wins a lawsuit as the result of, say, a personal injury claim, or they are fortunate enough to win a substantial amount in a state lottery, payment is often made in the form of annuities that are disbursed over the course of many years, often as many as 25 years or more. Practically speaking, some claimants don’t have years to wait — or don’t want to wait — to receive the full payout of their winnings. When this happens, they can elect to sell their annuity for a lump sum cash payment. This is known as a secondary market annuity or structured settlement.
As an investor, you can purchase a secondary market annuity from the original owner at a substantial discount from its face value. For example, an annuity issued by a AA rated life insurance carrier, paying its beneficiary $20,000 per year for 20 years, would have a lifetime (face) value of $400,000. But you could purchase this annuity on the secondary market for as little as $250,000 cash. After that, the guaranteed payment stream would be assigned to you.
What you need to realize is that a structured settlement is a legal contract between the original owner of the annuity and the entity purchasing the payment flows. In order to transfer the payments securely, a sometimes-lengthy legal process is involved that may require court approval. Therefore, it is important to purchase your annuity from reputable structured settlement brokers and other financial experts who specialize in the secondary market area, and understand the legal processes involved in making the transfer and sale of annuities binding.
Is it a good investment for you?
With interest rates near their historic lows in recent years, secondary market annuities have grown in popularity. This is because they pay interest rates ranging from .5% to 2% higher than fixed income instruments of comparable term and credit quality. So if you can find a secondary market annuity to fit the size of your investment appetite, it may be an excellent option. Unfortunately, the majority of secondary market annuities — as high as 70% — are gobbled up by large investors before they ever hit the market. So these instruments may not be readily available to you as an individual investor.
Another factor you should consider is the financial creditworthiness of the entity making the annuity payments (typically an insurance company or state lottery). How comfortable are you that this entity will still be there years from now to make those payments to you?
After all is said and done, if you can find a secondary market annuity of a size, term and credit quality that suits you -- through a reputable structured settlement provider -- it may prove to be a very attractive investment, indeed. But as with any investment, do your homework. A healthy measure of due diligence today can prevent nasty surprises tomorrow.