12 Great Tips to Buying a Secondary Market Annuity (SMA)

Written by Hersh Stern Updated Tuesday, July 9, 2024

Chances are good that you have a very simple goal in mind when shopping for a Secondary Market Annuity (SMA): to make the right choice at the right price and rest assured you’ve done the right thing.

Sounds easy enough, but for many consumers the SMA shopping process can feel quite overwhelming.

To help you get organized, I’ve broken it down into 12 key tips. By tending to each of these, you will be well on your way to making an informed and successful annuity decision.

Your “Before” Strategy.

This is the “getting started” phase and includes ways to help ensure your SMA shopping is off to a good start.

Tip #1 — Take your time. An SMA purchase is a big decision. Be sure you have a good reason to buy, and then avoid anything that feels like pressure to rush. Planning for your retirement takes patience and a carefully executed strategy. The right SMA advisor will understand that it may take a few months to move from your first contact to being ready to sign a purchase order.

Tip #2 — Shop around. The first SMA you see will likely not be the annuity you buy. Ask your advisor to explain how to compare the various options (be sure to compare “apples to apples”) and then take your time to investigate the marketplace. Your advisor may be able to help you look at the “top contenders” and break down the differences to help you hone in your buying decision.

Tip #3 — Consult with your Spouse and/or Beneficiaries. This is a significant decision, and it’s usually wise to include family members in the conversation. Some people find that retirement and estate planning details are uncomfortable to discuss, but your family may be relieved to understand exactly what you're thinking of buying and how it will work. What’s more, they may have insights and ideas that you may not have considered.

Tip #4 — Don’t put everything into an SMA. An SMA can be right for a portion of your savings – but not all of it. You want to be sure to have “emergency funds” on hand that you can access at any time.

Consider any other expenses that you can anticipate that would require extra cash. These could include a dream vacation, for example, or helping a family member pay for education.

Tip #5 — Diversify your purchases. Hopefully you will look to highly-rated insurance companies for your SMA purchase – and 99% of these have performed impeccably over the years through all kinds of economic ups and downs.

Nevertheless, your investment is not FDIC insured and can be vulnerable in the unlikely event that the insurance company goes bankrupt. For this reason, it is wise to spread your investment across two or three different companies and reduce your exposure in the unlikely event one company should fail.

Tip #6 — Don’t believe everything in the media. All writers have a point of view, and this is certainly true of financial writers. While some may have a goal of helping the consumer, many other stories you encounter will be sponsored by someone who is looking to sell a certain type of investment or even a specific company.

Sad as it is to say, some may even have a goal of scaring investors into or away from particular products. Take any ideas and concerns you may have to your advisor.

Questions to Ask.

As you get closer to purchasing your SMA, you will likely have lots of questions. I have clients come to me with a list of them. Do not hesitate to get the answers you need. Some of the more important questions to cover include:

Tip #7 — What type of annuity is right for me? While an SMA serves an important goal in retirement planning know that there are a number of different types of fixed annuities, and each is designed for a very specific purpose. Be sure you understand how an SMA compares, and understand the reasons for choosing yours.

The various types of fixed annuities include in addition to Secondary Market Annuities: Single Premium Immediate Annuities (SPIA), Deferred Income Annuities, Fixed Index Annuities, and Deferred Multi-year Annuities.

Tip #8 — What is the initial interest rate and how long is it guaranteed? Interest rates are structured very differently across the various types of annuities. Be sure you are clear on what rate your SMA offers and whether it can change across the life of the contract.

Tip #9 — Will my beneficiaries receive payments in the event of my death? This is a critical question. When choosing to provide for beneficiaries, keep in mind that most SMAs include beneficiary payments.

Tip #10 — How will the interest earnings from the SMA be taxed? Of course, your accountant is the best person to ask for tax advice and to help you understand this piece of annuity-buying strategy.

SMAs are often treated differently than other annuities. You typically will not receive an annual Form 1099 from the insurance company. So tax reporting becomes your responsibility.

Tip #11 — How are the companies I am considering rated? You should buy an SMA that is underwritten by an insurance company with high financial ratings.

This will help ensure that your money is safe and that your investment will continue to provide for you. You should also inquire into the stability of the SMA payment servicing agent.

Buying Your SMA

When you're ready to transact your SMA, your work is almost done. But there is one more very important thing to remember:

Tip #12 — Understand the closing book. Before you pay for the SMA, be sure you read and understand absolutely everything in the closing book document.

If there are sections that are not clear to you, ask your advisor to explain them or have another person you trust (preferably, an attorney) help you review them. Be sure that the contract reflects your expectations about the SMA you are buying.

Many people have found that owning an SMA provides a more secure financial future. But, as with any major purchase, you need to thoroughly understand what you're about to buy.