After several conversations 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.
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?
Life contingent cases in many ways are MORE safe than guaranteed SMA’s. But they do have a couple of extra steps we put in place prior to purchase
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. But before you worry, read on…
In order to make this a rock solid and safe investment for you, life insurance is purchased on the life of the seller. If the seller passes away, the life insurance pays you any amount due to you under the remaining terms of your contract.
It works just like a callable bond. With callable bonds, if the bond issuer decides to prepay, you get your money back. Your principal and interest earnings are never at risk, only the full duration is subject to change.
In many way, Life Contingent cases are a great answer for people who do not like the illiquid nature of other guaranteed payment streams.
Let’s use an example of a current deal on our list.
This Genworth case has payments starting in February, of 2013. There are 7 monthly payments of $2400, and in September 2013 they jump to $2540. The payments continue for 232 months, and every 12 months, the increase another 4%, so that the last 12 months of payments are $5351.40
The total payout on this case is $881,624.64 on an investment of just $484,677.
In this case, the seller has a $500,000 life insurance policy that is fully paid at closing. You as a new owner would have a collateral assignment of this policy that is an irrevocable assignment by the seller- only you can change that.
If the seller were to pass away at the end of 2021, you would be entitled to $410,293.53 of that life insurance payout, and the balance would go to the sellers heirs.
Where did that number come from? It came from the amortization table of this particular case- this is a table that shows the entire payment details. You can see this exact one, here. and the snapshot of it below.
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 if a seller were to pass away.
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 financial flexibility that is welcome. That depends on your situation.
As for qualified funds, 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 rate is reflective of the slightly more complex nature of the transaction and the possibility that the seller would pass away. But it’s really important to note that the costs of this complexity are borne by the sellers through the higher discount rate they accept when selling life contingent payments- you benefit with a higher rate, and your principal is at all times fully insured.
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.