Life Contingent Payments

Previously,  I showed how you bought a portion of Jane’s guaranteed settlement payments.

But what happens when our seller, Jane, decides to sell more payments?

Now if you remember from our story in the last three pages, five years ago Jane had a car accident and received a structured settlement for $1000 a month for life and guaranteed for 20 years.  John, the guy who hit her in the car, was insured by Progressive, and Progressive bought an annuity from MetLife to pay Jane and close the court case.  John got a giant premium increase after the accident.

Five years after the accident, Jane sold you $500 a month guaranteed for 15 years.  Like clockwork, you get a check from MetLife for $500 a month, and so does Jane.  Jane used the money from selling her payments to get a new car.

Five more years go by, and Jane gets married to a wealthy man.  She doesn’t need the $500 a month she’s receiving, and really doesn’t need the $1000 a month for life that is due to her either.

Selling More Payments:

Jane goes back to the factoring company to sell more of her payments.  She still has 10 years of guaranteed payments of $500 a month that sells in one transaction to an investor just in like the previous example.

Then in a separate transaction, the factoring company makes her an offer for the ‘$1000 per month for life portion’ of her structured settlement.

This is what is known as a life contingent Secondary Market Annuity

MetLife will pay Jane $1000 a month for her life as long as she is alive.  If she dies, the payments stop, but Jane can sell and assign this portion of her payments just as she could assign her earlier, guaranteed payments.

Jane is in good health and is now 40 years old, and the life contingent payments start when she is 50.  Actuarially, she should live until 92, so she decides to sell 20 years of $1000/ month payments that start in 10 years, after her guaranteed portion runs out, and stop when she is 70.  At age 70, she will probably still be alive, and the lifetime income of $1000/ month will revert back to her.

Because of the extra costs of the life contingent transaction, the factoring company offers Jane a little over $41,000 for this payment stream at a 10% discount rate.  Jane thinks that sounds pretty good, because it’s less than the interest rate on her credit card.   She also understands that the factoring company has to buy life insurance on her, so the deal makes sense.

Selling Life Contingent Payments

Once Jane signs her sale contract, the factoring company makes available to its trusted brokers a Life contingent deal of 240 monthly payments of $1000 a month starting in 10 years. They already know Jane and have a lot of paperwork on her, so they get right to work getting a life insurance policy written for her.

The factoring company estimates that this payment stream will eventually sell for a 6.5% discount rate, or for about $72,512.76.  Because there is 10 years of deferred compounding interest, the investor who buys this deal will have an accrued interest balance of $135,000 before the monthly payments start.

In a new development as of 2016, we are able to offer life contingent payments using a proprietary life insurance product tailor made to this asset class.  Rather than buying a large and level payout policy of $135,000 in this example, this new type of life insurance is able to start it’s death benefit payout at the investor’s $72,512 requirement, and increase the payout to $135,000, before declining down with the payments made.  At the end of the 30 years, the insurance is over, and at no time is there any residual value or conflicts of ownership with Jane’s heirs.

Costs Of Life Contingent Cases:

Now, life insurance is not cheap, and even though Jane only got $41,000 for her payments, the total cost of the deal to the factoring company is $63,500.

Now let’s say you elect to buy this deferred, life contingent income stream.  You really like the 6.5% rate made available to you, and make an investment of $72,000 to buy the deal.  Jane gets $41,000, the costs of the transaction are $22,500, and the factoring company makes a profit and the broker makes a commission for its efforts.

Just as with our earlier example, all parties really get a pretty fair deal, and you have more payments from MetLife that pick up when your first deal of $500/ month stops.

The only hitch with this transaction is the ‘what if’ scenario if Jane dies before you get all your payments.

Your broker really knew his business, and you understand it fully too, so we will pick that up in the next Page