Considering buying Secondary Market Annuities?
Secondary Market Annuities: An individual receives a structured settlement from a personal injury lawsuit (this is the most common scenario). The settlement amount may be quite large, but the payments are distributed through an annuity over time. Payments are made, usually monthly and often for a very long period (20 years is a not uncommon). However, as the winner of the settlement, you would prefer cash up front – so you decide to sell your payment stream at a deep discount for a lump sum payout to one of the many Firms (called “Factoring” Firms) that make these kinds of purchases.
Here are some things to consider:
Because the factoring firm has bought the income stream at a discount, they can make a profit and maintain high value for potential customers. With the markets currently running at low-interest rates, this may seem like a boon to many potential investors because they can get interest rates that are much better than generally available – often twice as good.
“But as is so often the case when investments are promoted on the basis of high yield, these deals are unsuitable for most investors. Even in the rare situations when they might make sense, you must proceed with extraordinary caution.” (Read The Entire Article In The Wall Street Journal)
So what are the risks? Well, like any normal annuity there is little risk that the issuing insurance company will fail – but do your due diligence, make sure the company is well rated and is solid financially. Annuities (including SMA’s) also have some State-level guarantees – each State is different so you’ll need to inquire with your Trusted Advisor, but most will insure up to $100,000.00.
The major investment concern when dealing with Secondary Market Annuities is FINANCIAL LIQUIDITY! Just like a normal annuity, SMA’s generally require a fairly substantial investment. Unlike an annuity, where you can work with your Advisor and determine an appropriate amount to invest, Secondary Market Annuities are sold at a fixed price. Sure it might be a screaming deal to get say, 1 million in payments for 10 years at half price, but can you afford to tie up $500,000.00? You need to be sure that you can because unlike the person who originally sold their structured settlement, you cannot sell yours if you should have an emergency and “need cash now.”
Lastly, you need to be aware that all Secondary Market Annuities need to go through a court process before they can be approved for sale – you should make sure that your Advisor can confirm that the company you are considering a purchase from has done all the necessary legal work, and your Advisor may recommend that you hire an expert in Secondary Market Annuities and their complexities to make sure that everything is in order.
If you are looking to speak to a Trusted Advisor regarding Secondary Market Annuities you can COMPARE RATES with us and we will help you find a reputable source for SMA’s.