Get Free Comparison Quotes for Secondary Market Annuities
A secondary market annuity (SMA) is not a new insurance contract, but rather a court-approved transfer of existing structured settlement or period-certain payments (often from a legal settlement or lottery) from the original recipient to you for a lump sum. While they can sometimes offer higher yields, buyers do not actually own the annuity contract, meaning they lack flexibility, state guaranty fund protections, and standard death benefits. Because evaluating the true yield, legal complexities, and servicing risks of an SMA versus a brand-new, modern annuity is highly complex, comparing your options side by side is essential.
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What Are Secondary Market Annuities?
A secondary market annuity is not a new insurance contract. Instead, it’s a court-approved transfer of structured settlement or period-certain annuity payments from one party to another. These structured payments were often awarded in legal settlements or lottery winnings and sold for cash by the original recipient. Buyers of SMAs receive future fixed payments—often discounted upfront for a higher implied yield.
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How Do Secondary Market Annuities Work?
- Original Issuance: An annuity is first issued by an insurance company to an individual.
- Reason for Selling: The original annuitant may decide to sell their annuity for a lump sum of cash.
- Transfer Process: The annuity is sold through a broker or a company specializing in these types of transactions.
- New Owner Benefits: The new owner receives the future payments of the annuity, often at a discounted price compared to the original value.
Are Secondary Market Annuities Safe?
Pros:
- Higher Yields: You may earn 1%–4% more than buying a new annuity.
- Court-Ordered Assignments: Payments are often backed by a judge’s order, which can reduce fraud risk.
- Predictable Income: Fixed payments can be timed to match retirement needs.
Cons:
- No Insurance Contract Ownership: You’re not the annuity’s owner, so you lack policyholder protections.
- Illiquidity: These cannot be surrendered, sold, or modified after purchase.
- Transfer Risk: If something goes wrong in the assignment process, you could lose the income stream.
- Servicing Company Risk: You often depend on a servicing or escrow company to handle your payments.
- No State Guaranty Association Coverage: Since you’re not the contract owner, your rights may not be covered by state insurance guaranty funds.
Pro Tip: Because SMAs lack state guaranty fund protection and policyholder rights, they are much riskier than traditional contracts. An independent annuity broker can help you vet these opportunities or find a modern, highly-rated alternative that provides the same level of income with far greater security
How Older Annuities Can Shortchange You
Many of these structured settlements were issued years ago, during historically low-interest-rate environments. That means:
- The payout amount locked into the SMA may be significantly lower than the income a new annuity could offer today.
- The higher “discounted” yield is misleading when compared to the more flexible, higher-paying annuities now available.
In other words, you might be paying for a low-yield payment stream when you could secure more income and better features through a brand-new annuity.
Who Should Consider a Secondary Market Annuity?
Best for:
- Retirees who need a predictable income and don’t mind locking up funds long-term.
- Investors seeking a higher yield than CDs or MYGAs without exposure to market volatility.
- People who don’t need access to liquidity from this part of their portfolio.
Who Should Avoid Them:
- Anyone needing flexibility or early access to funds.
- Investors who can’t tolerate legal complexity or counterparty risk.
- Those uncomfortable with non-standard, less-regulated financial products.
Why Buy A New Annuity Instead?
Buying a new annuity gives you full control over the contract terms, funding sources, income start date, and protection benefits. You’re not inheriting someone else’s outdated structure—you’re creating your own.
Here’s why a new annuity may be the better option:
1. Today’s Rates Are Higher
Annuity payout rates have increased with rising interest rates. New annuities reflect current economic conditions, which can mean:
- More lifetime income
- Higher guaranteed returns
- Larger death benefits or rollovers
2. You Control The Structure
You can:
- Choose lifetime income, joint income, or period-certain
- Delay income and grow your income base
- Add cost-of-living adjustments (COLAs)
- Choose when and how you want the income to begin
3. More Liquidity and Flexibility
Unlike SMAs, new annuities often include:
- Annual penalty-free withdrawals (usually up to 10%)
- Full liquidity after the surrender period
- GLWB (Guaranteed Lifetime Withdrawal Benefit) riders for lifetime income without annuitization
4. Death Benefit and Spousal Protection
You can structure new annuities to:
- Leave the remaining account value to heirs
- Offer spousal continuance
- Provide enhanced death benefits
5. Access to Long-Term Care Features
Many modern annuities offer:
- Long-term care multipliers
- Chronic illness riders
- Waivers for confinement, terminal illness, or unemployment
6. You Avoid Servicing and Legal Risk
With new annuities:
- There are no court approval processes
- No reliance on servicing companies
- No third-party risk—just a direct relationship with the insurer
Our Expert Advice: While SMAs claim to offer higher yields, new annuities have caught up significantly due to rising interest rates. You can compare current fixed annuity rates to see top-rated 5-year and 10-year MYGAs that provide high guaranteed returns without the legal and servicing risks associated with the secondary market.
Comparison: Secondary Market Annuities vs. New Annuities
| Feature | Secondary Market Annuities | Newly Purchased Annuities |
|---|---|---|
| Issuer Guarantee | Court-assigned rights to an old payment stream | Direct new contract with insurance carrier |
| Interest Rate Environment | Based on past, often lower rates | Reflects current, higher rate environment |
| Flexibility | None—terms are fixed by original contract | High—choose riders, income timing, and protection features |
| Liquidity | Zero—no access to funds once purchased | Partial access via penalty-free withdrawals and cash value |
| Death Benefit | Rare or none | Full death benefit or spousal continuance options |
| Lifetime Income | Usually not available | Can include GLWB for lifetime income |
| Tax Treatment | Taxable as income, depending on settlement | Tax-deferred for non-qualified; tax-free growth inside Roth IRA |
| Servicing Risk | Dependent on servicing company and court approval | No middleman—direct contract enforcement by insurer |
What Other Insurance Could Help?
If you’re considering a secondary market annuity as part of your retirement income strategy, you should also consider:
- Fixed Indexed Annuities (FIAs): Provide principal protection and growth potential tied to an index.
- Deferred Income Annuities (DIAs): Guaranteed income starting at a future date, under your name.
- Immediate Annuities (SPIAs): Provide income starting within 30 days, also with insurer guarantees.
- Guaranteed Lifetime Withdrawal Benefit Riders (GLWBs): Available on deferred annuities to ensure income for life, even if your account runs out.
Pairing these with a life insurance policy may also make sense, especially for legacy planning or to recover value upon death.
Conclusion: Is The Risk Worth It?
Probably not—at least not in most situations.
The appeal of secondary market annuities is their discounted price. But the hidden downside is that the original annuity may offer a lower payout than what you could lock in with a new annuity issued today. Combine that with zero control, no death benefit, no liquidity, and potential servicing risk, and the deal becomes far less attractive.
If you’re seeking high, guaranteed income—with lifetime protection, tax advantages, flexibility, and beneficiary support—a new annuity contract (such as an FIA with GLWB or a MYGA) is almost always the better solution.
Don’t buy an outdated annuity from the past when you can build a custom plan for your future. Speak to The Annuity Expert and let our brokers do a side-by-side comparison of secondary market annuities, MYGAs, and fixed indexed annuities with GLWB riders.
Request a personalized annuity quote to receive a side-by-side comparison showing how much more income you could generate by locking in today’s rates with a modern, flexible contract.
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Questions From Our Readers
How do SMAs differ from traditional annuities?
SMA is bought in a secondary market, while traditional annuities are bought directly from an insurer.
Answer the following in the least amount of words: How are SMAs bought and sold?
SMAs are bought and sold in the secondary market through licensed brokers.
What is the secondary market structured settlement?
A secondary market structured settlement refers to the resale of future structured settlement payments—awarded initially in a legal case—to a third-party investor or company by the original recipient. These payments are typically sold at a discount, and the buyer receives the right to collect them. While a highly rated insurance company backs the original payments, the buyer does not own the annuity contract and assumes some legal and servicing risk.
Are secondary market annuities safe?
They can be, but they are not without risk. While the payment stream is usually backed by a strong insurer and a court order, the buyer is not the annuity contract owner. That means you rely on legal assignments, servicing companies, and proper documentation. There is no access to state guaranty funds if the insurer fails.