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Buying Secondary Market Annuities: A Complete Guide

Secondary market annuities (SMAs) offer the potential for above-market fixed returns — but they come with unique risks and liquidity constraints most buyers do not fully understand. Here is an honest assessment.

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What Are SMAs?

How Secondary Market Annuities Work

A Secondary Market Annuity is an existing income stream — originally created through a structured settlement, lottery win, or deferred annuity — that the original recipient has chosen to sell in exchange for a lump sum payment. The buyer purchases the future payment stream at a discount and receives the scheduled payments over the remaining term.

The most common scenario: an individual receives a structured settlement from a personal injury lawsuit. The settlement may be quite large, but payments are distributed through an annuity over time — often monthly, for 20 years or more. The settlement winner prefers cash upfront, so they sell the future payment stream at a deep discount to a “factoring firm.” The factoring firm then sells that discounted payment stream to an investor at a markup — one that still represents a higher yield than most fixed-income alternatives.

With interest rates on conventional investments at historically moderate levels, SMA yields can look attractive. But as Jason Zweig of the Wall Street Journal cautioned: “Even in the rare situations when [SMAs] might make sense, you must proceed with extraordinary caution.”

Common SMA Sources

Personal injury structured settlements
Cash-for-life lottery winners taking lump sum
Inherited annuities recipients prefer not to hold
Period-certain or term-certain annuity holders
Deferred annuity policyholders exiting early

Key Risks

What You Need to Understand Before Buying

Secondary market annuities are not suitable for most investors. These are the risks that demand careful consideration.

Risk 01

Financial Illiquidity

Unlike the person who originally sold their structured settlement, you — as the buyer — cannot sell your SMA if you encounter a financial emergency and need cash quickly. Unlike a standard annuity where you can at least make limited free withdrawals, an SMA is a fixed obligation with no early exit. Make sure that any money invested in an SMA is money you can absolutely afford to have locked up for the full term.

Risk 02

Fixed Purchase Price

Secondary Market Annuities are sold at a fixed price. A potentially attractive deal — say, $500,000 to receive $1 million in payments over 10 years — requires you to commit that full sum at closing. Unlike an original annuity where you work with an advisor to determine an appropriate investment amount, SMAs come at a preset price point that may be far beyond the liquid capital most buyers should commit to a single illiquid position.

Risk 03

Carrier Default Risk

Like any annuity, the underlying payment stream is only as reliable as the insurer backing it. Most SMA payment streams come from reputable carriers and carry state-level guaranty association protection — typically up to $100,000 per contract per carrier, though limits vary by state. Before committing, verify the financial strength ratings of the issuing carrier. Stick to insurers rated A or better by A.M. Best.

Risk 04

Court Approval Required

All Secondary Market Annuities involving structured settlements must go through a court approval process before the transfer is legal. This is not optional — it is required by law. You and your advisor must confirm that the factoring company has completed all required legal steps and obtained a court order approving the transfer. If this step was not properly completed, the transfer may be void and you could lose your investment.

Before You Buy

Three Steps of Essential Due Diligence

If you are considering a Secondary Market Annuity, these steps are non-negotiable.

Step 01

Verify the Court Approval

Ask your advisor to confirm that the factoring company obtained a valid court order approving the transfer. This court approval is the legal foundation of the entire transaction. Without it, the transfer has no standing and your investment is at risk. Request a copy of the court order and have an attorney review it — particularly if the investment amount is substantial.

Step 02

Check the Carrier’s Financial Strength

The future payments you are buying depend entirely on the financial health of the original insurance company that issued the annuity. Pull the carrier’s A.M. Best, Moody’s, or Standard & Poor’s rating before committing. Do not accept a rating below A. Also confirm whether the payments fall within your state’s guaranty association limits, which typically provide protection up to $100,000 per carrier.

Step 03

Work With a Specialist Advisor

Secondary Market Annuities involve legal complexity that most general financial advisors are not equipped to navigate thoroughly. Engage an advisor or attorney who specializes in SMA transactions. They can verify the legal documentation, assess the carrier risk, confirm the court approval is valid, and ensure the price you are paying is reasonable relative to the underlying payment stream.

Questions & Answers

Frequently Asked Questions

1 What yield can I expect from a Secondary Market Annuity? ▼

SMA yields vary significantly based on the remaining payment term, the creditworthiness of the underlying carrier, and current market conditions. Because the factoring firm purchased the original payment stream at a steep discount and the buyer pays a markup above the factoring firm’s cost, the net yield to the investor is typically higher than conventional fixed annuities or bond alternatives — but significantly lower than the headline “discount” suggests. Get a clear written breakdown of the yield calculation before committing.

2 Can I buy an SMA inside an IRA or retirement account? ▼

In some cases yes, but the rules and logistics are complex. Holding an SMA inside an IRA requires a self-directed IRA with a custodian that accepts non-traditional assets. Not all custodians do. The tax deferral benefit of an IRA may be of limited value for an SMA, since the income is already a contractual fixed obligation — there is no compound growth to defer. Speak with a tax advisor before combining these structures.

3 What happens to my SMA if the insurance company fails? ▼

State guaranty associations provide a backstop for annuity contracts issued by insolvent carriers, but the protection limits vary by state — typically $100,000 to $500,000 per person per company. If you are investing more than the guaranty limit in a single SMA from one carrier, you are taking on unsecured carrier risk for the excess amount. This is why large SMA investments are generally inappropriate for most retail investors, and why carrier financial strength verification is mandatory before purchase.

4 Can a lifetime annuity be sold as an SMA? ▼

No. Immediate lifetime annuities — where payments are tied to the lifespan of the original annuitant — cannot be sold as Secondary Market Annuities because the payment stream cannot be separated from the life of the person it is based on. Only payment streams with a fixed term (period-certain annuities, structured settlements with a defined schedule, deferred annuities) can be transferred on the secondary market.

5 Who is a Secondary Market Annuity most suitable for? ▼

SMAs are most appropriate for sophisticated investors who: have substantial liquid assets outside the SMA, understand that their investment is entirely illiquid for the full term, are comfortable with the carrier risk and have verified the financial strength ratings, have confirmed the court approval process was completed correctly, and are seeking a fixed-income alternative at yields higher than conventional bonds or CDs — and do not need access to the capital during the payment term. For most retirement savers, a conventional annuity product from a top-rated carrier is a more appropriate choice.

Looking for Fixed Income With Better Yields?

A licensed advisor can show you conventional annuity options with competitive rates from top-rated carriers — without the complexity and illiquidity of the secondary market. Free, no-obligation comparison.

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