Saturday, May 29, 2010

Frank Is Considering Secondary Annuities

I got an e-mail from Frank in Minnesota that touched on a topic I never really thought about. Dear George, I am researching information about the Secondary Annuity Market, but from a buyer's perspective. I am 66 years old, and ready to invest a healthy chunk of my assets into immediate lifetime annuities, for both me and my wife (age 64). Some of the assets are from IRA accounts, and some from our joint account. I've received some quotes and did spreadsheet projections to 2046 (her 100th birthday). She comes from a family that has old age genes. Her folks are still alive. Her grandparents lived into mid 90's. She has a good chance to reach the century mark. I, on the other hand, was not so blessed with the same genes. If I live to 70, I will have beat the Cardiologist's prediction by 5 years. Anyhow, while researching my investment options, I stumbled upon the Secondary Annuity Market. I was most interested in those secondary annuities that pay on a regular monthly basis, rather than lump sums. I found some examples of payouts and applied them to a spreadsheet, and found some interesting results. For example, the secondary payouts may be more generous than current annuity quotes. And, some of the payouts result in a greater income stream while she is in her 70's-80's, versus receiving consistent income until age 100. After doing some more research, I found that I could not use IRA monies for the Secondary Market. Also, I found an article about State Insurance Commissioners opinions that Insurance companies are not bound by payments to Secondary Annuity owners, and can choose to opt out (that is very troubling!!) of future payments. So, bottom line is ... what are the pros and cons of Secondary Annuities from a buyer’s perspective? Any helpful information? Thank you for your consideration. And here’s my reply … Hi Frank, I've seen these advertised on TV, with people screaming "I want my money now!" but have never really researched them. I can see how you could get a higher return since the desperate sellers what a lump sum instead of ongoing payments. But I believe the issue is: Who is behind the payments? I checked out your allegation that the issuer could back out of the deal. And sure enough, you’re right! In fact, on February 22, 2010, the Interstate Insurance Product Regulation Commission, composed of the insurance regulators from 35 states and Puerto Rico, voted in favor of a uniform provision that would allow insurance carriers to terminate at their discretion guaranteed living and death benefits in the event of a change in ownership or assignment. To me, that’s downright scary! Think safety here, Frank. And that's the concept behind immediate annuities. In other words, a steady stream of income you and your wife cannot outlive. They let you sleep at night. For the few extra bucks you'd get each month, it doesn’t seem as though the secondary market is worth the risk. Have you looked into immediate annuities with joint benefits? That way when one of you dies, the other continues to get an income. Also, considering the low interest rate environment we're in now, you might think about only putting a small portion of your money into an immediate annuity. Then a little more next year, and more the year after that.
With the ballooning debt the U.S. is facing, Treasuries and all interest rates are almost guaranteed to rise. And by buying the annuities along the way, your income should rise, too. Good luck! If you’re looking for a reliable income that you can’t outlive, immediate annuities could be the answer. Be sure to do your research, though. And double-check everything anyone tells you. Because, like Frank, you may discover some important points once you peel back the onion. Best wishes, George

No comments:

Post a Comment