by John Darer
John F. Wasik's "pickle" on structured financial products published in this month's AARP magazine has been seen as the proverbial "turd in a punch bowl" by my industry's trade association.
It is clear to me from reading "Wasik's pickle" that "How Safe Are Your Savings? The truth about structured products and Why Brokers Promote Them", has NOTHING to do with structured settlements.
Structured settlements for seniors and retirees are an excellent choice for those who qualify, because they addess one of the major concerns of seniors (and those even younger), outliving savings. A February 2008 Gallup poll found that 43% of 18-29 year old s and 53% of 30-64 year olds expressed cocnerns of outliving income in retirement.
Unlike the structured products referred to in "Wasik's pickle", a structured annuity is an insurance product, issued by insurance companies, regulated by state insurance departments and sold by licensed insurance agents and brokers.
On the otherhand, a structured product, also known as a market-linked product, is generally a pre-packaged investment strategy based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuances and/or foreign currencies, and to a lesser extent, swaps. The variety of products just described is demonstrative of the fact that there is no single, uniform definition of a structured product. A feature of some structured products is a "principal guarantee" function, which offers protection of principal if held to maturity. For example, an investor invests 100 dollars, the issuer simply invests in a risk free bond that has sufficient interest to grow to 100 after the five-year period. This bond might cost 80 dollars today and after five years it will grow to 100 dollars. With the leftover funds the issuer purchases the options and swaps needed to perform whatever the investment strategy is. Theoretically an investor can just do this themselves, but the costs and transaction volume requirements of many options and swaps are beyond many individual investors Source: Wikpedia
The closest thing to a "structured product" in the structured settlement market is the split annuity concept which simply involves pairing two different types of annuity products (usually one providing a guarantee of principal return at the end of a given period and the other a deferred fixed or variable annuity.