Are you looking to get out of your annuity?
So, what exactly are Secondary Market Annuities (SMA’s)? Well, they come in different forms and from different sources, but they are all essentially the same thing. An individual has an income stream from an annuity (or will have an income stream from the annuity down the road) that they would rather convert into a lump sum – there could be any number of reasons such as a major medical event or some other catastrophe- and (in the words of those irritating commercials you may have seen on TV) they “Need Cash Now.”
Here is an illustration that should make the situation perfectly clear:
Pretend you’re entered into a charity golf tournament supporting the local Hockey Team. Your entrance fee’s along with everyone else help to buy new uniforms, pay for trips, etc. Many different holes are sponsored by local businesses that also support the team. One short par three hole is sponsored by “Billy Bob’s Big Burger Buffet.” For a few bucks, you can participate in the “1 million dollar” hole-in-one contest. So, you pay your fee and smack that first ball clean off the tee and…into the hole. A hole in one! Great! A million bucks…great…or is it?
Chances are good that you didn’t read the fine print when you signed-up for the contest. Yes, you will receive 1 million dollars from Billy Bob – but it will come in the form of a 10 year payout at $100,000.00 per year. It’s basically more efficient for Billy Bob to buy an annuity that will pay out the required sum over the course of ten years because he can use less than a million to buy the annuity. But what if Mr. Golfer’s wants could actually use a large lump sum? Maybe pay-off his mortgage, for example.
The Secondary Market for Annuities could be of help to our million dollar winning golfer. He can sell his 10 year stream of payments to someone else and get a large lump sum payment instead. Mr. Golfer should be made aware however that he will be selling at a discount as $100,000.00 a year is worth less each year due to the effects of inflation. I encourage you to read more about this subject via the following link: How do you calculate how much money you will pay me?
Most people looking to sell the future payment streams are individuals who have won a court case in which damages are awarded via a structured settlement (annuity payments). Lottery winners are sometimes also sellers (for much the same reason as Mr. Golfer – they don’t want small regular payments, their looking for one large payout). If you have inherited an annuity, have a deferred annuity product or a period certain annuity and you are looking to get out of it, you may be able to sell your future payment streams and walk away with more money that if you simply terminated the annuity and suffered cancellation fees. Note that immediate lifetime annuities cannot be sold as they are based on your life expectancy.
In our next article on the topic we will look into purchasing Secondary Market Annuities.