An emerging secondary market for annuities is providing investors as well as the brokers and agents who advise them with flexibility and new opportunities to maximize the investors’ financial resources.
But, the question investors and advisors are asking is, what kinds of annuities offer the most value in the secondary market and which do not?
One area that tends to offer investors the most value in the secondary market are single premium immediate annuities and deferred annuities in payout. The main reason is that, once an annuity is in a payout stage, there are virtually no policies in force with liquidity options. Thus, for the investor that needs or wants liquidity, the secondary market is opportune.
Imagine a life-with-period-certain SPIA, where the annuitant has the flexibility to sell all or a portion of the remaining period-certain payments for a lump sum while retaining the guaranteed lifetime payments thereafter.
Testimony to the value of liquidity is the spate of new annuity products being introduced that have liquidity options built into them already.
Insurance companies recognize they can appeal to a larger market if their products offer cash-out options. But the fact is, these annuity products have yet to gain, and will have trouble gaining, traction. This has more to do with the higher costs and lower rates on these products rather than a conceptual miscue.
Another area where investors can realize value in the secondary market is with deferred annuities that can be, or are required to be, annuitized at a value significantly higher than the cash surrender value.
This opportunity exists because of a differential in the discount rates.
Specifically, buyers in the secondary market can purchase the asset, annuitize it and discount it back to a present value that can be significantly higher than the cash surrender value in the original annuity contract.
The high cost of liquidity and low rates in many deferred annuities are ultimately attributable to the rigidity of insurance company balance sheets.
Buyers in the secondary market have an advantage, because unlike the issuers of annuities, they are not matching the duration of their assets and liabilities. As a result, they sometimes can offer more value on a resale basis than investors are likely to find ‘baked in’ to the product itself.
Generally speaking, for deferred annuities, policies that can be annuitized for the full account value immediately have shorter annuitization periods, such as five years, and have larger differentials between the account and cash values–generally north of 15%–will increase the value consumers can realize in the secondary market.
On the opposite end of the spectrum, annuities in which investors are likely to realize relatively little value in the secondary market are those that don’t have any form of guaranteed payment.
There are several reasons for this, but almost all of them relate to the capital structure of annuity buyers in the secondary market. While there may be some companies that purchase annuities that have no guaranteed payment option, most will not.
Specifically, the ‘funders’ in the secondary market operating with any degree of scale will likely finance their asset purchases with a warehouse line of credit and ultimately securitize these assets. These warehouse lines and securitizations can have covenants that preclude the purchase of assets without guarantees or may require higher interest rates for purchases of assets without guarantees.
This places downward pressure on the price buyers will pay for such annuities or it can cause buyers to avoid purchasing these annuities altogether.
Also noteworthy, regarding where value can and cannot be found in the secondary market, is whether or not a particular annuity has a qualified retirement tax status. Those having a qualified tax status offer investors no resale value since the products are inherently non-transferable and non-assignable, violating a fundamental requirement in the secondary market.
In addition to optimum product profiles, there are also optimum investor profiles.
Those most likely to derive satisfaction from a sale in the secondary market include investors who have shifted their financial plan toward wealth transfer, those who have inherited annuities, those who have had a significant life change requiring a lump sum of cash or those who have found that the initial decision to purchase an annuity was a regrettable one.
There are many reasons for seeking liquidity in the secondary market, but the important thing is that consumers know the option is now available and that the agents and brokers advising them are there to help.