What is a pre-owned annuity?
Many investors are already familiar with annuities as a means of providing steady cash flow during retirement. What most people do not know, however, is that existing annuities may be bought and sold on the secondary market as pre-owned annuities. Also known as “in force annuities” or “secondary market annuities”, a pre-owned annuity can provide a steady stream of income for one’s retirement years as well as a strong rate of return at a lower cost than a traditional annuity.
A pre-owned annuity offers a rate of return higher than a traditional, low yield investment, such as a certificate of deposit. This comes as the result of the original annuity holder selling the fund for less than it is actually worth. As a result, an investor is able to invest less than the present value of the annuity and still receive the rate of return on the original investment, as well as the scheduled payment amounts according to the dates of the original annuity.
Here’s how a pre-owned annuity works. The annuity holder, who is in need of a lump sum of cash, agrees to sell his or her annuity rights. Before the rights can be sold, the present value of the investment is calculated. This figure accounts for the interest rate of the annuity and future payouts in order to arrive at a single number for the present value of the annuity payments. The present value is then negotiated between buyer and seller at a rate that satisfies the seller and provides the buyer with a higher than average rate of return for their investment. The seller gets his or her lump sum of money in the present and the buyer is rewarded with a good investment opportunity.
What is the difference between in-force and pre-owned annuities?
There is no difference between an in-force and pre-owned annuity. These financial instruments may also be more commonly known as a ‘secondary market annuity’ or ‘structured settlement transfer’. In any case, these terms refer to the same transaction: purchasing an existing annuity fund from a seller who wishes to accept a large current sum in exchange for a schedule of future payments.
A pre-owned annuity is slightly different from a traditional financial transaction. In most cases, a court is required to mediate the transaction between the buyer and seller in order to arrive at a selling price that satisfies all parties involved. Due diligence on the part of the buyer is also required. A pre-owned annuity, like any investment fund, must meet the needs of the buyer, who should also ensure that the fund is being sold by a reputable third party with a high rating from a financial ratings bureau. Ultimately, a pre-owned or in-force annuity can be a worthwhile transaction for both parties and provide a great investment opportunity.