Are secondary market annuities a good investment?

The appeal is the yield, and the yield is real. You buy an existing payment schedule at a secondary-market discount rather than at a carrier's retail book rate, and the difference between what you pay and what you collect is your return. On current inventory that works out to roughly 4 to 7 percent, above a newly issued annuity of the same carrier class. Our page on where those higher yields come from breaks down the math.

Four things make that yield defensible. The payments are fixed and scheduled, so the income does not move with the stock market. The transfer is completed by a court order under a state Structured Settlement Protection Act, a matter of public record. The payments are the obligation of a top-rated carrier such as Berkshire Hathaway, New York Life, or MetLife. And with guaranteed-category streams, the schedule continues regardless of anyone's life, so payments that run past your own lifetime pass to your estate or named beneficiary.

For an income-focused investor, that combination is hard to find elsewhere: a known set of payments, on known dates, at a yield that beats comparable fixed income. It is why many buyers use these to build a retirement income floor, often inside a self-directed IRA so the income compounds inside the retirement account.

Search this question and you will find plenty of writers who conclude these are not worth it. They are right about the trade-offs above, and you should take those seriously. But two of the common criticisms deserve a closer look.

The first is that the original contract pays less than a new annuity issued today. That is often true of the contract, and beside the point for a buyer. You are not paying the original price. You are buying the remaining schedule at a discount, and what matters is the effective yield on the price you pay now, which is generally higher than a new annuity. You can test that yourself with our yield calculator.

The second is servicing risk, the worry that a split payment or a resale gets tangled after the sale. It is a fair concern in a market with plenty of brokers. It is also why buying from a direct funder matters. Most of our inventory is originated by our sister company, Catalina Structured Funding, so we underwrote the file, petitioned the court, and are still here afterward to help with a split or a future reassignment. That is the difference between a broker who moves on and a funder with a continuing stake, which we cover in how to choose a secondary market annuity company.