Life Insurance In Secondary Market Annuities

Previously I detailed a Life Contingent SMA, but didn’t have time to talk about a key component…

We talked about Jane selling a life contingent payment stream that doesn’t start for 10 years, and lasts for an additional 20 years.  The costs of doing this transaction really ate into the amount that Jane got, but ultimately, it was a fair deal for all parties.  The biggest cost to the transaction was the life insurance on Jane’s life.

Why Does Jane Need The Life Insurance?

A life contingent secondary market annuity is really like a callable bond.  A callable bond can be prepaid by the issuing company at any time.  So if you own this bond, and the issuer decides to prepay, you get your principal back plus any interest accrued. You have a safe investment, but you don’t necessarily know how long the term will last.

Life insurance on Jane serves the same purpose to protect your investment in case it’s “Called”.  But in this case, being called means Jane passing away.

If Jane dies at any time in the 30 year term, in our proprietary system of life contingent transactions, you are the owner of a life insurance policy that is fulyl prepaid for the entire term of the assignment payments.  The peak value of the life insurance is 135,000, and the policy is tied to the amortization schedule of the assigned payments you purchased.  If Jane dies just before you start to get your monthly checks from MetLife, you would get up to the full $135,000.

If Jane dies any time after the start of payments to you, the life insurance policy still pays out, but the payout amount is for your accrued interest and principal.  There is no windfall at any time if Jane passes away, and in this way all issues of ‘STOLI’ or stranger owned life insurance are avoided.

Know Before You Buy

Now because you have a good agent who explained all of this beforehand, you understand all of this before you got into the deal.  The interest rate was great, and if Jane passed away, you got your money back and could reinvest it in something else.

And you are confident going in that all the paperwork was done right, and that the life insurance  is all documented, signed by Jane, the life insurance company, and by the Court.  All this was set up properly at first and is irrevocable by Jane.

After closing, you can sit back, secure in the knowledge that you made a safe investment.

No other secondary market annuity broker that you spoke with have this life insurance product that perfectly hedges Secondary Market Annuities.


So if you made it this far, you have an advanced level of understanding of how guaranteed Secondary Market Annuities and life contingent Secondary Market Annuities work.  You understand how factoring companies play into the equation, how buyer and seller come together, and how the broker and attorney work to ensure your investment is safe at all times.

And today, you learned how in life contingent transactions your principle is never at risk from the moment of closing till the end of the payment stream.

But how did your broker get you into these two great deals in the first place?  There’s a trite old saying “If you fail to plan, you are planning to fail.”