We finished up the previous post with your first SMA, where you bought a portion of Jane’s guaranteed settlement payments.
But what happens when our seller, Jane, decides to sell more payments? Read on…
Now if you remember from our story in the last three installments, (Part 1, Part 2 and Part 3) , 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. She wants to buy her new husband an expensive gift.
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 like you in 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 55. Actuarially, she should live until 92, so she decides to sell 20 years of $1000/ month payments that start in 15 years, after her guaranteed portion runs out, and stop when she is 75. At age 75, 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 somewhat higher discount rate but to Jane, that sounds pretty good, because it’s less than the interest rate on her credit card if she just bought a gift for her new husband. She also understands that the factoring company has to buy life insurance on her, so the deal makes sense.
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 15 years. They already know Jane and have a lot of paperwork on her, so they get right to work getting a 35 year term life insurance policy written for her.
The factoring company gets a $150,000, 35 year term insurance policy on Jane. The entire premiums is prepaid and while Jane is the policy owner, the investor is the collateral assignee during the term of the investment. In this way, if Jane dies, the life insurance pays to the investor to replace their capital and accrued interest.
In addition, MetLife requires the factoring company track down Jane every year to verify that she is alive and still entitled to the payments, so they hire a company who specializes in mortality verification to track databases on Jane for 15 years of deferral, then contact her every six months and get her to sign an affidavit letter for an additional 20 years.
This mortality verification service company charges an upfront fee for the service, which the factoring company pays. Altogether, making a life contingent payment stream available, safe, and documented is not cheap for the factoring company, which is why Jane receives less net proceeds from the same.
Now let’s say you elect to buy this deferred, life contingent income stream. You get the payment at a higher rate, which reflects the added complexity, but 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 tomorrow’s post…. Stay tuned!
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