Previously, (Part 4) I detailed a Life Contingent Secondary Market Annuities transaction, but I 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 15 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.
What is the life insurance on Jane for?
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 35 year term, you hold an irrevocable collateral assignment on that prepaid term life insurance policy. With a face amount of $150,000, if Jane dies just before you start to get your monthly checks from MetLife, you would get the full amount of the $150,000.
If Jane dies after 10 years of payments are made to you, the life insurance policy still pays out $150,000, but because you have already received 10 years of payments, your balance of principal due to you is lower. The actual amount owed to you vs what is due to Jane’s heirs is tied to the amortization schedule of a case and is calculated as of the date of death.
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 collateral assignment, mortality verification service, the use of the life insurance, and division of life insurance proceeds was 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.
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.”
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