The high-yield secondary market annuity trap

By Tyson Wright

SMA Hub, Inc.

Secondary market annuities bring greater yields to the annuity marketplace, but watch out for those interest-eating traps that some secondary annuity providers won't warn you about.

So, what is a secondary market annuity, and what should I look out for?

Secondary market annuities offer fixed term payment streams from top-quality insurance carriers. The high-quality creditworthiness of the insurance carriers usually translates to lower returns to the investor; however, secondary market annuities come with yields 1 percent to 4 percent higher than comparable assets. This is because the original owners of payment streams sell their future payments at a discount, creating a secondary market annuity and thus passing on that discounted rate to an end purchaser at a much higher rate than traditional products.

Prior to 2008, these alternative annuity cash flows were not available or known to the average retail investor. The marketplace was mainly controlled by large institutional purchasers and banks. With the credit crunch of 2008, these institutions stopped purchasing and securitizing the asset, which in turn gave way to a surge of interest in the retail market and would forever change the fixed investment marketplace.

With the demand for higher-yielding products, many companies tried to capitalize on the market by brokering these structures to investors. The problem was not the asset class but the companies brokering the income streams. In order for a secondary market annuity to be transferable to an investor, it must go through a long, daunting and unrefined process that could take a few months or even a year to complete. These companies, some of which still exist today, require a nonrefundable deposit and investment premium to be held in an attorney’s non-interest bearing account while the agent and investor wait for the case to get approved, reviewed and acknowledged by the insurance carrier.

Be cautious. While an investor may earn 4.5 percent on their investment, their funds may be tied up for several months, earning 0 percent on their money. Not only does this become an issue for the investor, but also the agent of record. Prepare yourself, agent, for when the investor gets fed up, forfeits their deposit and settles with their local big box insurance advisor on a low-yield primary annuity.

Fortunately, there are newly developed processes and strategies with the secondary market annuity class that addresses the current issues in today’s marketplace.