Are SMAs Safe?

One of the main concerns most investors have, especially as they get closer to retirement, is the safety and risk-mitigation aspect of their investments. After all, as you get a bit older it’s often difficult to earn at the same pace you were at during your prime earning years. Michael Kitces shares his thoughts from his “Nerd’s Eye View” blog:

Is Structured Settlement Annuity Investing A Good Deal? Yes, but…

https://www.kitces.com/blog/is-structured-settlement-annuity-investing-a-good-deal-yes-but/A recent offering of rising popularity is investing into structured settlement annuity contracts, which often claim to offer “no risk” rates of return in the 4% to 7% range. In general, the opportunity for “high yield” (at least relative to today’s interest rates) and “no risk” is a red flag warning. But the reality is that with structured settlement annuity investing, the higher returns can legitimately be lower risk; the appealing return relative to other low-risk fixed income investments is not due to increased risk, but instead due to very poor liquidity. Which means such investment offerings can potentially be a way to generate higher returns, not through a risk premium, but a liquidity premium. Read more kitces.com

If you are wondering about SMAs and taxes, click here. More below on the risk and safety of secondary market annuities at the worth.com website:

Interest rate risk is another consideration, as yields on these annuities are fixed. However, one may be able to hedge against interest-rate risk by buying a series of annuities over different time periods. Investors who anticipate needing liquidity in the near future should avoid SMAs, as they typically cannot be sold or transferred after being purchased on the secondary market. The owner must hold the annuity for the duration of the payments.

For investors looking to generate a predictable, secure income stream, SMAs may be an attractive addition to an investor’s portfolio. This alternative investment vehicle may provide higher yields and minimal volatility, and may further diversify a traditional fixed-income portfolio. read more at worth.com

Although this story from InsuranceNewsNet is getting a little ‘long in the tooth’, it highlights well the thoughts of the experts a FYI Annuity and their advice about the safety of SMAs:

Annuity FYI, a leading retirement planning resource, announced today its endorsement of Secondary Market Annuities, which currently offer guaranteed interest rates as high as 7.75%.

Secondary market annuities require a fixed one-time investment amount, typically between $40,000 and $500,000. In exchange, the investor receives a guaranteed rate of return over a specified time period, through a series of lump sum and or periodic payments. The payment of secondary market annuities is safe and dependable — personal annuity receivables are direct obligations of insurance companies such as MetLife, John Hancock, Pacific Life, Allstate, Prudential, The Hartford, Aegon, and other A and AA rated carriers.

“Most investors have never heard of secondary market annuities,” commented Greg Shaughnessy, Director of Marketing for Annuity FYI. “They have no idea that they can participate in a long-term, guaranteed fixed rate of return investment that is currently much higher than fixed annuities, bank CDs, and bonds. Annuity FYI’s comparison table and free e-mail alerts is one of the few ways for investors to find out about these opportunities.” read more at insurancenewsnet.com

Finally, this excellent article from Nathaniel Pulsifer makes some really interesting points about SMAs as safe-money investments. He reminds us that only top carriers are usually involved, and goes on to give some pretty solid reasons for trusting secondary market annuities as an asset class:

The annuity companies that offer Structured Settlement Annuities  are the strongest in the industry- Met Life, New York Life, John Hancock, Genworth, Allstate, Symetra, Berkshire Hathaway… these are generally AAA rated carriers and in the business of conservatively managing risk and paying claims safely and on time.

SAFETY FACTOR #1
An insurance company paying a structured settlement would be held in contempt of court for failing to make payments according to the terms of a structure settlement.

SAFETY FACTOR #2
Each state has an insurance guaranty fund that covers the guarantees of insurance policies and annuities for insolvent insurance companies who can’t make payments.

SAFETY FACTOR #3
There are five key items that document a case transfer and ensure legal safety of payments to you:

  1. Benefits letter from the issuer to the payee.
  2. Court order changing the payee name to you.
  3. Acknowledgement letter or stipulation agreement after the court hearing from the Issuer naming you or an entity that benefits you as the new payee.
  4. Legal Review reviewing all documents, notices, filings, UCC statements and procedures in each case.
  5. Irrevocable Assignment of the cash flows from our entity that purchased the payments assigning the payments to you forevermore.

SAFETY FACTOR #4
Because a typical client of ours purchases multiple Secondary Market Annuities, purchasing contracts in the secondary market virtually assures that you will place assets in several companies with no sacrifice to average yield or overall performance. See full article (affiliate link).

You’ll always want to consider the full range of options in your investment opportunities, but if you’re intrigued by SMAs but still not convinced they represent a sound investment decision, a good first step is to sign up for the free newsletter at our sponsor’s site, SecondaryMarketAnnuity.net. Nathaniel and Bryan have some great information to get you started, and as you gather more information you’ll be able to make a truly informed decision. See our homepage for a comprehensive overview of secondary market annuities and the free SMA newsletter.