Structured Settlement Annuity

Secondary Market Annuity

In Force Annuity

Factored Structured Settlement

Structured Insurance Payment

Assigned Annuity

What do all these words have in common? They are all different names for the same underlying asset.

Now, what not to call it:

Insurance Linked Derivative

Insurance Linked Securities

A ‘secondary market annuity’ is a term used to describe the court ordered right to receive payments backed by annuities issued in conjunction with structured settlements. The most common transactions are handled pursuant to IRC§5891(c)(2) and relevant state-specific structured settlement transfer protection act guidelines.  

The term ‘secondary market annuity’ may also be substituted with other commonly used terms such as factored structured settlement, structured settlement payment right, or assigned payments.  The term is not at all synonymous with or a relative of a derivative.

When the ownership of structured settlement payment rights is transferred, the ownership of the actual insurance contract does not change hands.  What transacts is the right to receive the payments due under the contract.

Origin of the Structured Settlement Secondary Market

Initially structured settlement payments rights were primarily packaged up by large buyers such as JG Wentworth, securitized,  and sold to institutional investors.

During financial crisis of 2007–2008 a number of intermediaries began marketing structured settlement payment rights to investors.  Various labels included the term “annuity”, such as in force annuities, secondary market annuity, secondary market income annuity and/or the acronym SMA or SMIA.   None of the terms are incorrect or misleading, as “An annuity is a series of payments made at equal intervals.”

How Do Regular Annuities Compare With a Secondary Market Annuity?

Primary annuities come in a wide range of configurations, from life only immediate income annuities, to growth oriented fixed and fixed index contracts.  Typically, structured settlements utilize period certain guaranteed and life contingent lifetime income annuities issued by highly rated carriers to make the payments due under the terms of the settlement.

In most cases, annuities are shielded from creditors in accordance with their statutory protections. Even in bankruptcy proceedings, they are usually considered an exempt asset and cannot be accessed by creditors.

However, once the right to receive payments due under a structured settlement annuity goes through the assignments and court proceedings to change the payee, it would lose this creditor protection and, like any other asset, be open to the claims of creditors.

Regulation of Sales Practices

Originators of structured settlement payments are typically factoring companies and attorneys.  Most factored structured settlement payment rights are acquired by special purpose vehicles and securitized in institutional asset-backed transactions.  

However, a small percentage of the transactional flow on an annual basis is labeled as “secondary market annuities” and may be offered for sale to individual investors.  Sales agents are currently not subject to state based licensing requirements as the transaction does not change the ownership of the underlying annuity, which is an insurance licensed activity, nor does the assignment and sale of a payment stream backed by a structured settlement annuity constitute a securities transaction per the Howey Test.

Practically speaking, however, consumers typically encounter secondary market annuities from licensed insurance agents and financial advisors who may be subject to various licensing requirements for their other lines of business.  Consumers should inquire as to the professional qualifications of the agent they are working with.

However, reference to the State Insurance Guarantee Funds is questionable, as most states have, as part of their insurance laws, an advertising prohibition which specifies that insurance companies and insurance agents may not use the existence of the guaranty association for the purpose of sales, solicitation, or inducement to purchase insurance, including annuity contracts