Structured Settlement Payment Rights vs. an Annuity

They sound like the same thing, and the industry term "secondary market annuity" does not help. But buying a new annuity and buying structured settlement payment rights are two different purchases. A new annuity is a fresh contract you buy from an insurance company at today's book rate. Structured settlement payment rights are an existing, court-ordered payment schedule that you buy at a discount on the secondary market, which is why the effective yield tends to run higher. Here is how the two compare, point by point.

What each one actually is

A new annuity is a contract you originate with an insurer. You hand the company a premium, and in exchange it promises to pay you a stream of income later, priced at whatever rate the carrier is offering that day. You are the first owner, and the terms are set when you sign.

Structured settlement payment rights already exist before you arrive. They began as a legal settlement paid out over time through an annuity the defendant's insurer funded. The original recipient later chose to sell some or all of those future payments for a lump sum, a court approved the transfer under the applicable state Structured Settlement Protection Act, and the right to receive that fixed schedule is assigned to a new investor. You are not creating a contract. You are stepping into an existing, court-ordered schedule at a discount, and the gap between what you pay and what you collect is your yield. That is the asset we sell, and our secondary market annuities guide covers it in full.

The two side by side

Pricing and yield

This is the difference most investors care about. A new annuity is priced at the carrier's current book rate, the same rate available to everyone that week. Structured settlement payment rights are priced by the discount you buy them at, because the original recipient wanted cash sooner and sold the future payments for less than their scheduled total. You are buying a comparable obligation from the same class of carriers, but at a better price, which is why effective yields on current inventory run roughly 4 to 7 percent rather than the lower rates a fresh annuity typically offers. Our rate report shows where those yields sit against Treasuries, CDs, and corporate bonds right now.

Backing and protection

Both rest on an insurance carrier's promise to pay, and both draw from the same pool of highly rated insurers. The difference is the guaranty-association layer. A new annuity you own is generally covered by your state's guaranty association up to that state's limit if the carrier fails. Structured settlement payment rights are an assignment of an existing obligation rather than a new contract in your name, so that guaranty-association coverage generally does not extend to the assigned rights. Neither is FDIC-insured, and neither is a registered security. With payment rights, your protection is the carrier's financial strength and the court order, which is why we place only top-rated carriers and show the issuer and rating on every listing. Our post on what backs the payments walks through this in detail.

Liquidity and flexibility

A new annuity is built to your specification at purchase, and many products offer some surrender access, though usually with surrender charges and a schedule. Payment rights are the opposite trade: you take an existing schedule as it is, and there is no ready resale market, so you should plan to hold for the life of the stream. A resale or reassignment may be possible later with our assistance, but neither the sale nor its price is guaranteed. The upside of giving up that flexibility is the discount, and therefore the yield. If liquidity matters more than yield, a liquid instrument is the better home for that money.

Taxes

Taxes are one more area where the two differ, but it is not one we give guidance on. Pacific Structured Assets does not provide tax advice, and how either option is taxed to you depends on your circumstances and how you hold it. Some investors hold payment streams in a self-directed IRA; whether that fits you, and what it means for your taxes, is a question for your own tax advisor. See our note on taxes and your advisor for what to bring to that conversation.

Which one fits

A new annuity makes sense when you want a contract built to your terms, with the guaranty-association layer and whatever liquidity features the product carries, and you accept today's book rate for those comforts. Structured settlement payment rights make sense when you want a higher effective yield on court-ordered income from a top-rated carrier, you can commit the capital for the long term, and you are comfortable with the trade: no guaranty-association coverage and no ready resale market in exchange for the discount. Many investors hold both, using new annuities or insured cash for flexibility and payment rights for the long-dated, higher-yielding part of their fixed income. Where each fits a portfolio is the subject of our fixed income alternatives guide.

Frequently asked questions

Is a secondary market annuity the same as a regular annuity?

No. A regular annuity is a new contract you buy from an insurer at today's rate. A secondary market annuity is an existing set of structured settlement payment rights that you buy at a discount, which is why it typically yields more. The industry term is confusing because you are buying payment rights, not a new insurance contract.

Do structured settlement payment rights yield more than a new annuity?

Usually, yes. Because you buy an existing schedule at a discount rather than at the carrier's current book rate, effective yields on current inventory run roughly 4 to 7 percent, generally higher than a newly issued annuity. The trade for that yield is limited liquidity and no guaranty-association coverage on the assigned rights.

How are these taxed?

That depends on your circumstances, and it is not something we advise on. Pacific Structured Assets does not provide tax advice; review the tax treatment of either option with your own tax advisor before you invest.

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