How Life Contingent Secondary Market Annuities Work

After several conversations this week with prospective buyers about life contingent secondary market annuities, I felt it was important to broadcast some information about these exciting high-yield opportunities to everyone.  The two deals that I am highlighting today are new on our list.   They might be gone soon, so if they look good, let’s chat soon! I will  quickly highlight a life contingent deal, and then explain how life contingent deals work.

The first deal is a large Prudential deal.  This deal will absolutely drench you in income for 30 years.  The final years worth of monthly payments is an astounding $17,875.56 per month- this contract pays out a total over $4 million over 30 years, on an investment of just $1.4 million today.  This astounding 6% yield simply cannot be matched anywhere.  The seller in this case is younger- in his 20s- and life insurance is already approved. 

Life Contingent Secondary Market Annuities

Life Contingent Secondary Market Annuities as of 6/27/12

The full payment stream is as follows:

4 life contingent monthly payments of $1,860.25 beginning on 09-01-2012 through and including 12-01-2012; 360 life contingent monthly payments of $1,916.06 beginning on 01-01-2013 with a 3% annual increase through and including 12-01-2042;

264 life contingent monthly payments of $7,181.79 beginning on 01-01-2021 with a 3% annual increase through and including 12-01-2042;

Plus Lump Sums:

01/01/26 = $100,000

01/01/31 = $200,000

 This is just an incredible, long-term, increasing income stream.

So how does a life contingent payment stream work?

 I am going to start out by saying that life contingent deals are not for everyone. If you don’t understand the Secondary Market for annuities, or feel unsure about handling investments, they might not be for you. They add a little bit more complexity to the secondary market annuity transaction, and honestly sometimes they do not close.  Where about one in 10 SMA transactions fail to get approved in court, we have an even lower success rate with life contingent deals.

 So with that disclaimer out of the way why am I telling you about these deals?  Because they come with a higher yield. 

 A life contingent secondary market annuity simply means that the payments due to the seller – and thereby due to you as a new buyer – depend on the seller’s life.  If the seller dies after you buy the payments, the payments will cease to be made by the insurance company. 

 Therefore, in order to make this an attractive and safe investment for you, life insurance is purchased on the life of the seller that will pay you any amount due to you under the remaining terms of your contract.

 Let’s use an example of a current deal on our list that is new today.

Life Contingent Secondary Market Annuities

Life Contingent Secondary Market Annuities

Looking at the CIGNA deal, the payments start in December of 2019.  On this deal, the first 36 payments are guaranteed.  The remaining 126 payments are contingent on the seller’s life.  In this case, the seller is a 40-year-old male. 

 The benefits statement is:

36 guaranteed monthly payments of $1,590 beginning on 12-11-2019 through and including 11-11-2022;

116 life contingent monthly payments of $1,590 beginning on 12-11-2022 through and including 07-11-2032.

 On 12-11-2022, the date of the 37th payment, your accrued principal and interest balance is $140,674.  Life insurance in excess of this amount has already been purchased by the seller, with you as the buyer of these payments to be named as a beneficiary under a collateral assignment. 

 If the seller is to pass away at any time during the life of this 14 year contract, the amount due to you under the amortization schedule of this deal will be paid to you.  If there are more life insurance proceeds than what remains owed to you, the remainder amount pays to the heirs of the seller.

Pros and cons of Life Contingent Secondary Market Annuities

Because life contingent deals are not absolute payment streams, they’re not for everyone.  Some investors do not want the uncertainty of receiving a lump sum in the future. 

However the flipside is also a possibility – receiving a lump sum might be an unexpected windfall.  It might allow you to reinvest in a different rate environment, or it may be flexibility that is a pleasant surprise.  There can be some complications purchasing life contingent deals with IRA money, so be sure to give us a call.

The important thing to look at right now is that life contingent deals have a higher rate of interest.  This reflects the added complexity, and sellers are willing to accept a higher discount rate to sell life contingent payments.

If you are seeking a higher yield, then a life contingent deal might be for you.  We do not publish all the life contingent deals available to us, so be sure to give us a call.  We can discuss your needs, and find the right deal for you.

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