Tuesday, February 8, 2011

Secondary Market Annuity - is it for you?

Lets start with understanding what annuity means. An annuity is a contract between you and an insurance company, under which you make a lump-sum payment or series of payments. The insurer, in return, commits to make periodic payments beginning immediately or at some future date.

Now lets understand the secondary market. A secondary market is one in which an investor purchases a financial asset from another investor rather than the issuer, subsequent to the original issuance in the primary market.

Lump them together and you get some idea of what secondary market annuity means. In this article,we will focus on the simplest kind; an annuity that guarantees a fixed payout for a fixed time period.

why should you consider an annuity...simply put, it guarantees fixed income. Interest rates will go up and down, bond yields will vary, stocks will fluctuate but an annuity income once guaranteed and in contract with the insurance company is set in stone. You are pretty much guaranteed the cash flow.

why secondary market...only 2 basic reasons. First, there is a seller who is desperate to sell at a discount. Second, for every seller there is a buyer eager for a higher ROI. Of course, the underlying assumption is that the average interest rate on a secondary market annuity beats all other investment options for the same period. The insurance company does not reset the contract to a higher interest rate, its simply that you purchase it at a discount from the original buyer for an effective higher interest rate.

what are the risks...any investment is as good as the strength of the insurance company backing it, so the stronger the credit rating and stability of the insurance company, the better off you are. Another consideration is your own outlook on future interest rates. If you expect CD rates, bonds, regular annuities to provide better returns in the future, you need to evaluate the secondary market offering for a like to like comparison. If you are investing with foreign funds, exchange rate fluctuations need to be factored in and last but not the least is the fact that the funds you invest will NOT be available to you. This is not an investment that you can liquidate easily. Only funds that you do not ever intend to use should be invested.

this is complicated, how can one get more info...Mr Andrew Murdoch from Somerset Wealth Strategies was my guide to understanding this complex investment vehicle. I am sure he can be of help if needed. Also the following web sites.

Additional Info:


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