Life contingent cases have a small amount of additional complexity that is explored on the Life Contingent page. We will skip over the complexities of life contingent case here and refer you to that other page for background information.
We will look at Doug for our first example of using life contingent Secondary Market Annuities.
Step 1: Lifetime Income
Doug was very smart, and used his assets first to secure his lifetime income stream. He bought five different lifetime guaranteed income contracts from three different carriers at the early age of 50. None of these contracts paid out until age 80, 85 or age 90.
But for a few hundred thousand dollars, Doug secured from $250-$350,000 per year, increasing each year, from age 80 through the end of his life. As a single man in excellent health, he plan to live past 100, as both of his parents did. He looks forward to sticking it to the life insurance company.
Step 2: Defined Term Planning With SMA’s
With the back end secured with Longevity Insurance, Doug then focused on the front-end. He had retired at age 45, and lived a modest life, but still, making his assets last until the lifetime income kicked in required careful planning.
Doug bought a variety of secondary market annuities, as well as a significant municipal bond portfolio.
The piece of the puzzle that a life contingent case filled brought Doug’s income up in the early years and offered an excellent rate of return.
Life Contingent Deal Details
Doug purchased an immediate income life contingent payment stream. The seller was also in his early 50s, and in good health, so the life insurance policy that secured Doug’s investment was added security but he felt the risk of the seller passing away was minimal. The payment stream started out slow, just over $1000 a month, but over 17 years, the payments grew to $7000 per month.
Doug is an active investor, and actually was pleased with the possibility that if the seller died, he would receive his principal back and could make a new investment. He was also pleased with the fact that if nothing went wrong, he would have an income that came very close to the point where his lifetime guaranteed payment streams started.
Doug enjoyed his retirement, with the best of both worlds.
By using a life contingent case, Doug was able to get a return better than 7%. Comparable yields on immediate income cases were 4.5%, and the extra yield meant Doug’s nest egg stretched farther and longer.
Second Life Contingent Example:
A second life contingent example is that of Colin. Colin is also in his mid-40s, and is a successful medical professional. Colin purchased a ten-year deferred, 20 year income life contingent structured settlement. The combination of 10 years of deferral, and a higher interest rate offered by the life contingent case, meant that for just $150,000, Colin was able to secure a 20 year income stream of $3000 a month.
By using a life contingent case, Colin got a higher yield, and if the seller were to pass away, Colin was quite comfortable with the possibility of reinvesting his principal that would be refunded to him via the life insurance payout.
In both of these cases, the investors were fully aware that the seller needed to verify with the annuity issuer that they were in fact still alive each year. That’s what kept the payments flowing. In both cases, the sellers retained a portion of their payments, so they also had a vested interest in maintaining contact with their annuity issuer.
A mortality verification company hired by us prior to closing took care of the details of contacting the seller, obtaining a signed affidavit, and forwarding that affidavit on to the annuity issuer.
For both Colin and Doug, purchasing a life contingent SMA was no different than a guaranteed deal, except that it came with more guarantees in the form of life insurance, and the slight unknown of possible return of principal and liquidity in the event of the seller’s death.