Reference
Secondary market annuity glossary
The terms that matter when you buy a payment stream, defined plainly by our team that prices them. From effective yield and weighted average life to the court order and chain of title behind every deal.
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Secondary market annuityStructured settlementFactored structured settlement payment rightsGuaranteed payment streamLife-contingent payment streamAssigned annuityLottery payment rightsCourt order (qualified order)Structured Settlement Protection Act (SSPA)IRC Section 5891AssignmentEffective yield (effective annual rate)Weighted average life (WAL)Discount rateRated ageState guaranty associationServicerSelf-directed IRAChain of titleAnnuitant (payee)
- Secondary market annuity
- An industry term for existing future payment rights transferred to an investor at a discount through a court-approved process. Most are factored structured settlement payment rights rather than insurance annuity contracts, so the name is a discovery label, not a legal description.
- What a secondary market annuity is
- Structured settlement
- A legal settlement paid out as a schedule of future payments rather than a single lump sum, typically funded by the defendant purchasing an annuity from a life insurance carrier. The right to those payments is what later trades on the secondary market.
- Factored structured settlement payment rights
- The right to receive some or all of a structured settlement's future payments, sold by the original recipient for a lump sum through a court-approved transfer. This is what an investor actually buys; it is not an annuity, an insurance product, or a security.
- Guaranteed payment stream
- A payment stream whose amounts and dates are fixed and continue regardless of anyone's life. The most predictable category, and one that passes to an investor's estate or beneficiary if payments run past the investor's lifetime.
- Guaranteed payment rights
- Life-contingent payment stream
- A payment stream that continues only while the original annuitant is living. It yields more than a guaranteed stream to compensate for mortality risk, and the streams PSA places are hedged with a life insurance policy.
- Life-contingent payment rights
- Assigned annuity
- An in-force insurance annuity contract, such as a single premium immediate annuity, transferred to a new owner through a change of ownership or an irrevocable change of payee. Unlike factored payment rights, this genuinely is an annuity contract.
- Assigned annuities
- Lottery payment rights
- State-lottery prize payments assigned to an investor by court order. The payments are often funded through U.S. Treasury securities or insurance annuities, which is why they are considered among the most secure payment streams.
- Lottery payment rights
- Court order (qualified order)
- The judicial approval that transfers structured settlement payment rights to a new payee, reviewed against the applicable state Structured Settlement Protection Act. It makes the assignment enforceable and a matter of public record.
- Structured Settlement Protection Act (SSPA)
- State laws requiring court approval before structured settlement payment rights can be transferred. Every legitimate transfer in this market runs through an SSPA review, which is the source of the court order behind each stream.
- IRC Section 5891
- A federal statute that imposes a 40 percent excise tax on acquiring structured settlement payment rights unless the transfer is approved in advance by a qualified court order. In practice, it is why every legitimate deal goes through a court.
- Assignment
- The legal transfer of the right to receive the payments from the original payee to the investor. The underlying annuity itself does not change hands; only the right to collect the scheduled payments is assigned.
- Effective yield (effective annual rate)
- The true annual return that connects the price you pay to the exact schedule of payments you receive, with compounding accounted for. It is the figure to compare across streams and against other fixed income.
- Estimate an effective yield
- Weighted average life (WAL)
- The average time until you receive a dollar of the payments, weighting each payment by its size and how far out it is. A lower WAL means your capital comes back sooner, and it is a truer measure of a stream's horizon than the final payment date.
- Calculate WAL for a stream
- Discount rate
- The rate used to convert a schedule of future payments into a present value. The deeper the discount, the lower the price today and the higher the effective yield to the buyer.
- Rated age
- An age assigned to a life-contingent annuitant that reflects health and life expectancy rather than calendar age. It is used to price life-contingent streams and the life insurance hedge behind them.
- State guaranty association
- A state safety net that can protect insurance policyholders and contract owners, within limits, if a carrier fails. An investor who buys assigned payment rights is generally not a policyholder, so this coverage generally does not extend to the payment rights.
- Servicer
- A neutral third party that collects a carrier's payment and distributes each party's share when a payment is split. A servicer arrangement can also make a future resale or reassignment of the stream smoother.
- Self-directed IRA
- An IRA held through a custodian that accepts alternative assets, allowing an investor to hold a payment stream inside a retirement account, subject to IRA rules. How that affects your taxes is a question for your own tax advisor.
- Buying in a self-directed IRA
- Chain of title
- The documented history of ownership and assignment of a payment stream. A clean chain of title, confirmed in underwriting, establishes that the stream can be transferred to you free of competing claims.
- Annuitant (payee)
- The person whose life or settlement the payments relate to. For guaranteed streams the annuitant's life does not affect the schedule; for life-contingent streams the payments continue only while the annuitant lives.
Pacific Structured Assets, Inc. does not provide tax, legal, financial or accounting advice. The material on this website has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, financial or accounting advice. You should consult your own tax, legal, financial or accounting advisors before engaging in any transaction, including the acquisition of factored structured settlement payments. Pacific Structured Assets is not registered with the Securities and Exchange Commission and is not licensed to sell insurance in any state.
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