A secondary annuity is one which is sold by its original owner to a third party. Often sold to companies which specialize in their purchase, secondary annuities have usually been annuitized and are generating periodic payments, usually monthly. A person receiving regular annuity payments — the annuitant — may turn to the secondary annuity market to sell the right to those payments in return for a single, immediate lump sum payment. Annuities purchased on the secondary annuity market are very safe, as they represent obligations by insurance companies or, in the case of lottery winnings, state governments. Although the secondary annuity market has traditionally been the preserve of companies purchasing annuities from individuals, individual investors are increasingly becoming involved in the marketplace due to its safety and relatively good returns.
Annuities can only be sold in the first instance by insurance companies. Their purpose is to provide a regular periodic income; they are often employed as part of a retirement savings strategy. Some annuities, after being purchased, are allowed to grow in value over time, while others start paying the income to the annuitant immediately. These immediate annuities are often purchased by individuals who have recently retired and are converting their retirement savings into a guaranteed monthly income stream. The periodic payments of state lottery winnings are also in the form of immediate annuities.
Another popular reason for purchasing immediate annuities is lawsuit settlements. Losing defendants, when ordered to pay ongoing medical or other costs to plaintiffs, often purchase annuities to make the payments rather than encumber their assets for a long period of time. These annuities, like lottery annuities, are considered structured settlements.
The size of the periodic payment made by an annuity is determined by a complex formula used by the insurance company. In general, the sum of an annuity’s periodic payments exceeds the principal value upon annuitization. Variables include the value of the annuity upon annuitization, the number of payments the insurance company expects to make, and the growth it expects the principal to experience. When the annuity is paid out over the annuitant’s lifetime, the number of payments projected is based on the annuitant’s life expectancy; annuity contracts can be structured to provide for additional payments to be made to a named beneficiary if the annuitant dies before a specified date. Structured settlements, on the other hand, are usually paid only for a specified number of months, reducing the risk to the insurance company.
When an annuity is purchased on the secondary annuity market, the offer made by the purchaser is based on a similar formula. In the case of a structured settlement, the purchaser knows exactly how much will be paid out by the insurance company under the contract. This amount is adjusted for projected inflation as well as profit. A similar process is used when the annuity payments are based on the annuitant’s lifetime, but since the annuitant’s date of death is unknown, the total amount of the payout is unknown.