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.
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, life insurance 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.
Typical life insurance products are ill suited to properly insure a life contingent payment stream. Questions also arise in these transactions about the quality of the underwriting and application, STOLI issues, the ownership of the policy, and how premiums are to be paid over the term of the investment.
However, with our current vendor partners, we are confident in a return to the Life Contingent Secondary Market Annuity marketplace. With medically underwritten annuitant sellers, and purpose built, fully disclosed single premium life insurance policies, we feel that the additional transaction elements are easily understood, and the additional yield to the investor is worthwhile.
Look for transactions marked as “Insured” on our inventory for current Life Contingent offers.
Why We Do It
The DCF Exchange helps savvy institutions and investors earn uncorrelated, guaranteed yields in a unique “set-and-forget” product.