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 ‘$2,000 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. We mark these payments as “Insured” on our online inventory.
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 un-returned principal and accrued interest is fully protected during that entire assigned 15 year term.
If the seller dies, a collateral assignment of the life insurance policy pays out to the investor to return the investor’s accrued interest and principal. It is very similar to a callable bond, where the bond may be ‘called’ and the principal returned at any time.
If properly insured, a life contingent payment stream can offer an enhanced yield on this safe asset class. View them as you would a bond with a call provision that has potential to return principal early.
Both Term policies and Universal Life policies are used to insure a life contingent payment stream. Policies are owned by the sellers and are fully disclosed in the application and underwriting process. It must be stated from the outset with the insurer that the proceeds are to be collaterally assigned to insure the structured settlement transfer transaction.
In the unlikely event of the death of the seller, life insurers would pay death claims into a GoldStar administered escrow account and the proceeds would be allocated to the purchaser according to their amortization table, and any remainder life insurance proceeds would pay to the seller’s heirs.
Some annuity carriers require investors to perform ‘proof of life’ affirmations on the sellers after a transfer. There are several vendors for this service available in the marketplace and the cost is typically a one-time fee paid by the originator up front. Finally, if the life insurance policy is to be paid annually instead of in full up front, an escrow or prepay arrangement is set up to administer premium payments over the term of the investment.
GoldStar Trust is ideally positioned as an integrated service provider to handle all aspects of life contingent payment transactions, from initial escrow, to payment servicing, to life insurance premium payments, mortality verification, and claims administration.
Look for transactions marked as “Insured” on our inventory for current Life Contingent offers.