Understanding Structured Settlement Annuities
Posted on March 5, 2014
Secondary market annuities are a fairly new area on the financial landscape. However, a recent LIMRA study found that 61 percent of annuity consumers conduct their research online.
What does this mean? That buyers all across the nation find out about secondary market annuities online so they know what to ask when they look for someone to help them with the transaction.
The term secondary market annuity refers to existing, in force period certain payment streams.
The term secondary market is used to differentiate existing payment streams from newly issued period certain annuities.
While there are payments in the market that originate in lottery prizes it is important to clarify that most transactions come from structured settlement compensation for legal claims.
It’s also important to note that secondary market transactions have nothing to do with life settlements.
The majority of secondary market annuities are guaranteed payment streams backed by period certain annuities from major carriers that currently pay compensation for damages, injuries, or legal claims.
When an injured party elects to take their award as a “structured settlement” over time, U.S. tax code IRC 130 allows the plaintiff to receive their compensation tax free. By opting for a structured settlement over time rather than the whole amount at one time, the plaintiff can receive both the award and the earnings of that award tax free.
Structured settlements are a useful tool in the legal system because they help provide for minors, and help injured people support themselves when not able to work, which in turn reduces these people having to rely on public support systems.
Over time however, things can change and these same people may have a need for immediate cash. As they are not the owners of the annuity, their payments are not commutable directly with the carriers into cash. Sellers of payments turn to factoring companies to purchase some or all of their future payments for cash today, and must accept a discount rate for those future payments.
When sellers sell their annuities at a discount, a secondary market annuity is created which offers the new recipient a higher-than-market rate of return. Buyers can receive yields of 1-4 percent higher than comparable primary market period certain annuities of similar credit quality.
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