Secondary Market Annuities Explained
The secondary market for annuities is a relatively recent development. A number of firms have been established for the sole purpose of buying long-term annuity contracts. This market gives an annuity contract owner the option to sell the contract for cash, without paying surrender fees to the insurance company. For those who no longer wish to keep their contracts, either because they no longer need the income or they would rather put the money to work in another investment opportunity, it's possible to sell an annuity to a third party.
It's important to note that not all annuities can be sold for cash. Annuities that are part of tax-qualified accounts, such as individual retirement accounts, simplified employee pension funds, 401k accounts, etc., cannot be transferred. Ownership of a kind of immediate annuity, known as a "life only immediate annuity" because it does not have a guaranteed payout, cannot be transferred either.
How Much is an Annuity Worth
The price an annuity sells for is determined by the total dollar amount that will be distributed, the length of time for which the payments will be made and the current rate of interest. Other factors that may affect the value of the annuity are the financial strength and stability of the insurance company and whether the contract has riders attached to it, such as a death benefit. The more features it has, the more valuable it is.
When to Sell an Annuity
There are three circumstances in which annuity owners can benefit from selling an annuity into the secondary market: When the annuity will create a taxable event for a beneficiary, when the price paid offsets the surrender fees, and when an annuity is inherited. It's important to remember that when selling an annuity, the investor isn't selling the annuity so much as he or she is selling the payments that are guaranteed by the annuity.
Leaving an Annuity to a Beneficiary
While annuities grow tax-deferred, they are not passed on to an heir tax-free. If an annuity owner is concerned that his or her beneficiary will have to pay a substantial amount of tax, either at the federal or state level, when he or she dies, a portion or all of the annuity payments can be sold. The proceeds can then be used to purchase a life insurance policy. Under most circumstances, the death benefit paid on a life insurance policy is paid tax-free.
Reducing Surrender Fees
If an annuitant needs a large lump sum amount rather than smaller monthly or annual payments, he or she can sell into the secondary market and usually get a higher price than he or she would if the annuity were to be sold back to the insurance company.
Selling an Inherited Annuity
Monthly annuity payments made to a retired account owner past the age of 59 ½ are different than those made to a beneficiary who is not yet that old. An inherited annuity is often one of the best annuities to sell to the secondary market, as the tax rate on the sale of the contract may be less than the tax rate of the payments over time.
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Secondary Market Annuities and Structured Settlements
While it's common for inherited annuities to end up being sold in the secondary market, it's even more common for annuities that were awarded or won as structured settlements to find their way there.
A structured settlement is an annuity that is awarded to a plaintiff by the court as part of a judgment. It's called a structured settlement because the money that is awarded is not given as a lump-sum payment. Rather, payments are made over a series of months or years. They can even be made for life. Structured settlements are also used when lottery players win cash for life.
Just like the more common types of annuities that are purchased by individuals, structured settlements are administered by some of the largest and most well-known insurance companies in the United States. Courts and states who award structured settlements need to make sure that the payments are made on time and in the amount they're required to be.
The majority of secondary market annuities come from structured settlements. In most cases, people who own the annuities either don't want to wait for the smaller payments each month, or, they need a larger amount of money. This is most often true with medical malpractice and personal injury cases. Medical bills, insurance payments and other bills that may not have been paid, now need to be. The owner of the structured settlement can sell the payments on the open market and be able to take the entire amount of cash.
To Purchase a Secondary Market Annuity
Secondary annuities can be purchased by individuals or by companies. The annuity is purchased at a discount from the contract owner. The payments are then assigned to the new owner. A secondary annuity often provides a higher return than that of a standard fixed annuity, an immediate annuity or a Certificate of Deposit. This is because the owner of the annuity is willing to sell the annuity at a discount to its appraised value.
In other words, he or she would rather take less money in total now as one payment instead of taking a larger amount over several years. The insurance company that sold the annuity is required to make the income payments to the new owner. Therefore, it's important to remember that the sale of an annuity into the secondary market is between the original owner of the annuity and the new owner, not the new owner and the insurance company.
While individuals can and do purchase secondary market annuities, they are most often purchased by large, well-capitalized financial services companies. These companies have substantial assets to buy hundreds of contracts each month. And, because they are so well-funded, they can negotiate the price of the contract more effectively with someone who wants to sell his or her contract.
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