In a typical structured settlement, the original payee has a monetary award for life, with a certain number of years guaranteed. An award may read ‘$2000 per month for life, with 240 months guaranteed starting on 1/1/1995 and lasting until 12/1/2014’.
But what if the seller wants to sell 180 monthly payments from 1/1/15 to 12/1/2029? These are ‘Life Contingent” payments that stop if the seller dies, and life insurance is a perfect hedge to insure the payments.
Enter A Life Insurance Hedge
The cost of life insurance in an amount sufficient to insure the investor’s principal and any accrued interest is part of the discount that seller must take to sell the payments, but thanks to the insurance, the investor’s unreturned principal and interest is fully protected during that entire assigned 15 year term.
Properly insured, life contingent payment streams are an excellent addition to this safe asset class. You can think of them as you would view a bond with a call provision that may return your principal early.
Structuring Life Contingent Transactions
In years past however, typical life insurance products were ill suited to properly insure a life contingent payment stream. The traditional method of hedging involved a collateral assignment of the life insurance policy with a face value high enough to cover the maximum amount of principal and interest due to an investor.
But this method of insuring the payments would leave excess life insurance (after the investor was repaid) to be allocated to the sellers heirs. This is an opportunity for contention in the future. Questions also arose in these transactions about the quality of the application, STOLI issues, the ownership of the policy, and how premiums were to be paid over the term of the investment.
In short, the ‘old way’ of doing life contingent secondary market annuity transactions was fraught with pitfalls. Sadly, other vendors of SMAs offer insured payments with this hodgepodge of insurance, but we stopped offering payments insured this way several years ago
A New Way Of Doing Business
Our wholesale firm DCF Exchange is proud to offer a new, proprietary insurance product on life contingent payment streams that addresses all the concerns we had with the market, and finally delivers investors a safe, higher yield.
With a sophisticated institutional partner, we now have access to a proprietary insurance product tailor made for life contingent payment streams. The policy is backed by an AM Best A- global re-insurer, and payments wrapped with this insurance are only available through us and our partner.
What makes this uniquely valuable to investors is that the life insurance is tied directly to the value of the investment- the life insurance benefit rides up with deferred compounding, then declines with the payment stream, and perfectly matches the amortization schedule of the investment.
In addition, there are no issues of ownership, no collateral assignment, no issues of underwriting, and the policy is prepaid in full at the outset of the transaction. Best of all, the amortization schedule of your investment is an attachment to the insurance policy, and you take full and re-assignable ownership of the insurance. The seller is simply the measured life.
All the issues with the old way of transacting life contingent payments have been eliminated with this new system. We are excited to get back to life contingent offerings now knowing these transactions are properly structured and hedged.
At SecondaryMarketAnnuity.Net we will offer more and more of these life contingent payment streams. You will note, life contingent payments carry yields approximately 1% higher than a comparable guaranteed deal. We feel this yield premium will decline as this innovative insurance product gains traction.
If you have been hoping for a higher yield, this is your chance. Call today, and we can discuss this revolutionary new insurance product in more detail and look at specific cases to suit your needs.