The secondary annuity market is where goods and services are re-sold. A robust secondary market developed around annuity and structured settlement payments being sold for up-front cash. Buyers gained popularity with sellers in the 1980s and remain competitive today by providing investors with options.
Within only a few decades of its creation, the secondary annuity market developed into a large, competitive and regulated industry. The market consists of lottery winners, lawsuit winners, wrongful death claimants, some workers’ compensation claims, and owners of other structured settlements who collect monthly or yearly financial payments.
The market developed when laws were enacted that permitted these owners the option to get some or all of their money now rather than wait months or years to get it all.
The industry connects these annuitants to investors willing to pay cash now in exchange for the rights to long-term payment streams. In the primary annuity market, insurance companies sell annuities to people looking for a guarantee of long-term financial security. In the secondary market, some of these same people decided they need cash now, not later, and they sell.
Owners may sell payments from $25,000 to $200,000 or more. They like the secondary market because they benefit from flexible timelines, customizable purchase amounts and, of course, fast access to cash. Annuity.org connects these people with our partner, CBC Settlement Funding, which purchases thousands of single-premium annuities (SPIAs) and structured settlements.
These SPIAs and structured settlements happen from a variety of circumstances. A majority of them come from court. That is, people who win large court judgments or settlements from wrongful death lawsuits and personal injury claims. These financial windfalls, which sometimes represent hundreds of thousands of dollars, don’t get paid out in one lump sum. Instead – especially in the case of court settlements – the awards are doled out in a structured manner, over a period of months or years.
The explosion of personal injury lawsuits in America over the past three decades drove the number of structured settlements increasingly higher.
SPIAs – annuities paid for by one up-front premium payment – typically stem from people pre-funding their retirement years ahead of time. These types of annuities also carry the ability to be sold on the secondary market as future retirees trade long-term money for up-front money.
When annuity or structured settlement rights holders resell their payments to a third party, the periodic income transfers to a new assignee and usually provides a higher rate of return to the purchaser. While the third party pays a discounted price for a secondary market annuity, they must wait until payments are due – which may be as much as 10 years later – to receive income.
The secondary market started in the 1980s with financial companies acting as the “lender of last resort” for annuity owners. Clients ranged from lottery winners tied into contracts to physical injury structured settlement recipients. All looked for a way to access their cash, rather than waiting for monthly or yearly payments.
It wasn’t until the primary market grew that investors began using this alternative solution. After the 1982 Periodic Payment Settlement Act helped promote the use of structured settlements by offering recipients tax advantages, the new owners of annuities provided a consumer base for companies capable of providing immediate capital.
The practice of buying the payments established in the primary market became known as “factoring.” By 1997, at least five major companies competed to buy periodic payment rights. This industry quickly developed into a profitable market. It also functioned amid minimal regulation.
Companies in the primary annuity market objected to the second-, third- and fourth-hand sale of their products. They said it the sales undermined the rationale behind them. If the point of a structured settlement is to prevent the misuse or dissipation of a lump-sum payment, which historically had been awarded to personal injury victims, how could converting it back to lump-sum payment be in the best interests of the payee?
Government regulators were not swayed, and the secondary market persisted. However, the lack of uniformity and regulations for factoring company practices left annuitants vulnerable. Unsophisticated annuitants sold their payment rights at steep discounts, and some unscrupulous factoring companies purchased payment rights with little regard for the future financial needs of their sellers.
Despite its controversial start, state governments recognized the secondary market supplied a demand in the annuity industry. People wanted their money and wanted an ability to swap their long-term payment rights for money now. Governments also realized the secondary market needed regulation.
Legislators instituted state and federal regulations to protect consumers with Illinois acting as the first state to institute a Structure Settlement Protection Act (SSPA), in 1997. In all, 49 states adopted their own SSPAs.
The federal government in 2002 amended the tax code to ensure companies comply with SSPAs. Section 5891 of the IRS code imposes a 40-percent excise tax on factoring transactions that were not in accordance with a “qualified state statute.”
Federal law also mandates that structured settlement transfers be approved by a state court judge, who determines if the reason for someone selling the rights to structured settlement payments is not only “legitimate,” but also in the best interests of a payee and those of any dependents.
Two other protections were introduce in the form of, the National Structured Settlements Trade Association (NSSTA, formed in 1985), and the National Association of Settlement Purchasers (1996). These associations monitor legislative activity and work to protect annuity owners and the companies purchasing payments.
Industry experts expect this market to grow, propelled by the constant flux of consumers’ changing financial priorities. As long as there are structured settlement and annuity buyers in the primary market, there will be people who search for a way to access their funds.
Other factors which keep the secondary market strong:
In addition, participation in the primary market ensures a stream of potential participants in the secondary market. An adage that continually seems to be true is that people always need money now.
Today, the secondary market services a vast array of consumers. Our partner, CBC Settlement Funding provides capital for clients including lottery winners; owners of deferred or single premium annuities; and those receiving structured settlements from wrongful death claims, workers’ compensations cases, and personal injury or insurance cases.
