4 ms·

So how much would you pay for 350 monthly payments of $1000 on the contingency the payments stop at death of the seller?

emodendroket 11y ago
That isn't really an answerable question without filling in a lot of demographic information. In addition, I'm guessing these companies typically have more than one "client" and get to amortize their risk across all of them and I can't help but imagine this is an extremely profitable enterprise (certainly from the article that seems to be true of Access).
- lips 11y ago
  Risk? The fact that these are legal settlements is exactly why this leaps directly into a distinct category from stuff like pay-day loans.
- emodendroket 11y ago
  Regarding risk, I'd say they're being more than compensated for their risk: > Taken together, the sample shows Access Funding petitioned to buy roughly $6.9 million worth of future payments — which had a present value of $5.3 million — for around $1.7 million. This is particularly true when you consider that the only real risk is the annuitant dying before you recoup the money you paid them and that most of the one-time payouts seem to be in the range of $16,000, while many of the monthly payouts seem to be around $1000/mo. Given those numbers, in two years (padding a bit for extra costs to close the deal) you've recouped your initial cost and the rest is just gravy until the annuitant dies. Payday loans (which are also extremely exploitative, frankly) at least have the more likely risk of the borrower being unable to pay you back to justify the raw deal.
- jeo1234 11y ago
  It's is actually pretty easy. You just you use a life table. The entire actuarial field is built on this understanding this stuff. https://en.wikipedia.org/wiki/Actuarial_present_value https://en.wikipedia.org/wiki/Actuarial_present_value
  - emodendroket 11y ago
    Well, yes, and I'd guess the exposure on these is probably better than on traditional life insurance. The article does make reference to present values of the things several times and the prices these guys are paying are much less. Nonetheless, the question, as posed, doesn't give enough information to really answer it.
dangerlibrary 11y ago
As little as I could. And that's the problem. When the seller has the mental capacity of a 10 year old with no guardian, it is almost literally stealing from children.
- Lawtonfogle 11y ago
  Yet she has rights that a child does not. Perhaps we should base childhood, both the protections and restrictions on rights, on mental ability instead of age.
bquinlan 11y ago
I don't have time to do more detailed analysis but, from the article, "In 2052, ...Rose would be approaching her 60s." So lets assume that Rose would be exactly 60 in 2052. So she was born in 1992. According to projections (http://www.census.gov/compendia/statab/2011/tables/11s0103.pdf http://www.census.gov/compendia/statab/2011/tables/11s0103.p...), a black woman who was 15 in 2007 would be expected to live to 63. So there is a significant risk that Rose would not live to the end of her payout period. But if the expected payout is >>18% of the present value of her payments (which it almost certainly is) then she got a bad deal. Someone with time could use the annual mortality probabilities (http://www.ssa.gov/oact/STATS/table4c6.html http://www.ssa.gov/oact/STATS/table4c6.html) to calculate the expected payout. I'm bad at analysis so I'd probably use a Monte Carlo simulation.
- BurningFrog 11y ago
  > a black woman who was 15 in 2007 would be expected to live to 63 People with lead poisoning probably live substantially shorter on average.
- IkmoIkmo 11y ago
  It says she's 20 and it's a 35 year period, or 55 years. That means she's born around 1995 and the life expectancy for a black female was 74 years, almost 20 years longer than the end of her payouts. I don't think the risk of death is anywhere near significant enough for her to sign away half a million dollars in payments for $60k. She barely got more than 10 cents on the dollar in nominal amounts, and still less than 20c on the dollar in present dollar terms. I'd gladly pay double what she got and I'd still make a ton of money all things considered. The number you were quoting (63) by the way is 'years of life remaining', not life expectancy as in 'age of death'. For example for a 100 year old the number is 2 years, which doesn't mean she'll live to 2 years old, obviously :)
Rapzid 11y ago
The value to the buyer isn't the issue.
SilasX 11y ago
I assume that's a solved problem in the sense that you can find the cost of a (dissipating) term life insurance policy on that person.
IkmoIkmo 11y ago
I'd easily pay double. An exact amount would require a proper analysis I can't be bothered with right now, but I'm sure investors would line up to pay more than double. Look just to give you a quick sense... The payments started at $1k but they go up. The average payment over 35 years is actually closer to $17k per year, and if you quadruple that (and the $60k or so she got in return) you get to amounts that make sense to many of us. You get to a salary of $70k per year, a salary that is totally 100% guaranteed for 35 years (until death, and she's 20 years old so run the actuarial tables), and requires 0 hours of work. Imagine you have that, $70k per year, guaranteed, can't be fired, and you put in 0 hours of work. It's independent of whether the market does well or not. And someone offers you $250k for you to forgo that for the rest of your life (well 35 years). It's a total joke. You'd want at least upwards of $1m - $2m for it to come close to financially interesting. She got pennies on the dollar.

emodendroket 11y ago

That isn't really an answerable question without filling in a lot of demographic information. In addition, I'm guessing these companies typically have more than one "client" and get to amortize their risk across all of them and I can't help but imagine this is an extremely profitable enterprise (certainly from the article that seems to be true of Access).

lips 11y ago
Risk? The fact that these are legal settlements is exactly why this leaps directly into a distinct category from stuff like pay-day loans.
emodendroket 11y ago
Regarding risk, I'd say they're being more than compensated for their risk: > Taken together, the sample shows Access Funding petitioned to buy roughly $6.9 million worth of future payments — which had a present value of $5.3 million — for around $1.7 million. This is particularly true when you consider that the only real risk is the annuitant dying before you recoup the money you paid them and that most of the one-time payouts seem to be in the range of $16,000, while many of the monthly payouts seem to be around $1000/mo. Given those numbers, in two years (padding a bit for extra costs to close the deal) you've recouped your initial cost and the rest is just gravy until the annuitant dies. Payday loans (which are also extremely exploitative, frankly) at least have the more likely risk of the borrower being unable to pay you back to justify the raw deal.
jeo1234 11y ago
It's is actually pretty easy. You just you use a life table. The entire actuarial field is built on this understanding this stuff. https://en.wikipedia.org/wiki/Actuarial_present_value https://en.wikipedia.org/wiki/Actuarial_present_value
- emodendroket 11y ago
  Well, yes, and I'd guess the exposure on these is probably better than on traditional life insurance. The article does make reference to present values of the things several times and the prices these guys are paying are much less. Nonetheless, the question, as posed, doesn't give enough information to really answer it.

dangerlibrary 11y ago

As little as I could. And that's the problem. When the seller has the mental capacity of a 10 year old with no guardian, it is almost literally stealing from children.

Lawtonfogle 11y ago
Yet she has rights that a child does not. Perhaps we should base childhood, both the protections and restrictions on rights, on mental ability instead of age.

bquinlan 11y ago

I don't have time to do more detailed analysis but, from the article, "In 2052, ...Rose would be approaching her 60s." So lets assume that Rose would be exactly 60 in 2052. So she was born in 1992. According to projections (http://www.census.gov/compendia/statab/2011/tables/11s0103.pdf http://www.census.gov/compendia/statab/2011/tables/11s0103.p...), a black woman who was 15 in 2007 would be expected to live to 63. So there is a significant risk that Rose would not live to the end of her payout period. But if the expected payout is >>18% of the present value of her payments (which it almost certainly is) then she got a bad deal. Someone with time could use the annual mortality probabilities (http://www.ssa.gov/oact/STATS/table4c6.html http://www.ssa.gov/oact/STATS/table4c6.html) to calculate the expected payout. I'm bad at analysis so I'd probably use a Monte Carlo simulation.

BurningFrog 11y ago
> a black woman who was 15 in 2007 would be expected to live to 63 People with lead poisoning probably live substantially shorter on average.
IkmoIkmo 11y ago
It says she's 20 and it's a 35 year period, or 55 years. That means she's born around 1995 and the life expectancy for a black female was 74 years, almost 20 years longer than the end of her payouts. I don't think the risk of death is anywhere near significant enough for her to sign away half a million dollars in payments for $60k. She barely got more than 10 cents on the dollar in nominal amounts, and still less than 20c on the dollar in present dollar terms. I'd gladly pay double what she got and I'd still make a ton of money all things considered. The number you were quoting (63) by the way is 'years of life remaining', not life expectancy as in 'age of death'. For example for a 100 year old the number is 2 years, which doesn't mean she'll live to 2 years old, obviously :)

Rapzid 11y ago

The value to the buyer isn't the issue.

SilasX 11y ago

I assume that's a solved problem in the sense that you can find the cost of a (dissipating) term life insurance policy on that person.

IkmoIkmo 11y ago

I'd easily pay double. An exact amount would require a proper analysis I can't be bothered with right now, but I'm sure investors would line up to pay more than double. Look just to give you a quick sense... The payments started at $1k but they go up. The average payment over 35 years is actually closer to $17k per year, and if you quadruple that (and the $60k or so she got in return) you get to amounts that make sense to many of us. You get to a salary of $70k per year, a salary that is totally 100% guaranteed for 35 years (until death, and she's 20 years old so run the actuarial tables), and requires 0 hours of work. Imagine you have that, $70k per year, guaranteed, can't be fired, and you put in 0 hours of work. It's independent of whether the market does well or not. And someone offers you $250k for you to forgo that for the rest of your life (well 35 years). It's a total joke. You'd want at least upwards of $1m - $2m for it to come close to financially interesting. She got pennies on the dollar.