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.