The obvious weakness in such a deal is that the customer disappears after taking the upfront money. Instead of disappears this could also be "suddenly loses interest in working" or "gets into a car accident and physically cannot work anymore" or any other variation, it doesn't have to be fraudulent or malicious. I think it would be very difficult to find investors who would agree to terms like "10% of income, whatever it is" since it would be so unreliable.
If you change the terms to "give me $X00,000 now, for $XYZ each month over the next 10 years" then you get a regular loan, which is obtainable from a variety of institutions. If you are particularly worried about being disabled or laid off, insurance can cover most of that but those only pay out at the time of any incident actually happening, not upfront.
The standard advice for people who are worried that their current good times might not last is to keep your monthly spending well below your monthly income and build up an emergency fund of at least 6-12 months of living expenses. This will give you enough time for job hunting if you are ever laid off unexpectedly and (more importantly IMO) relieve you from most of the stress of being dependent on your current job to survive. Look up the FIRE/ERE movements online for strategies to get started with this.
Yes, moral hazard is an issue. But in general a 10% cut doesn't eliminate the incentive for people to work, and the legal system makes "disappearing" non-trivial. That's also why I've included the possibility of automatically skipping low-income years, and not counting them towards the 10 years; ie, it's not just the next 10 years but the next 10 reasonably-profitable years. Finally, a chunk of the risk can be managed by the investor by diversification across different individuals, industries, skill sets, etc. And the rest is risk premium, which would result in a higher average return than a simple loan.
I don't think the difference between a guaranteed annuity and a lump sum is the main blocker here, those tend to be relatively interchangeable (at the appropriate interest/return).
The part I'm more interested in is the insurance aspect. As mentioned, disability insurance is a part of it, and an emergency fund is another part for short-term changes in income. But even with both of these in place, the remaining risk means that eg my effective buying/renting power for a house is significantly diminished.
Note that income share agreements already exist for student loans. They're not so widely used and have their own issues, but it's also a much harder market than people who are already confirmed to be able to take in high earnings.
Comments
The obvious weakness in such a deal is that the customer disappears after taking the upfront money. Instead of disappears this could also be "suddenly loses interest in working" or "gets into a car accident and physically cannot work anymore" or any other variation, it doesn't have to be fraudulent or malicious. I think it would be very difficult to find investors who would agree to terms like "10% of income, whatever it is" since it would be so unreliable.
If you change the terms to "give me $X00,000 now, for $XYZ each month over the next 10 years" then you get a regular loan, which is obtainable from a variety of institutions. If you are particularly worried about being disabled or laid off, insurance can cover most of that but those only pay out at the time of any incident actually happening, not upfront.
The standard advice for people who are worried that their current good times might not last is to keep your monthly spending well below your monthly income and build up an emergency fund of at least 6-12 months of living expenses. This will give you enough time for job hunting if you are ever laid off unexpectedly and (more importantly IMO) relieve you from most of the stress of being dependent on your current job to survive. Look up the FIRE/ERE movements online for strategies to get started with this.
Yes, moral hazard is an issue. But in general a 10% cut doesn't eliminate the incentive for people to work, and the legal system makes "disappearing" non-trivial. That's also why I've included the possibility of automatically skipping low-income years, and not counting them towards the 10 years; ie, it's not just the next 10 years but the next 10 reasonably-profitable years. Finally, a chunk of the risk can be managed by the investor by diversification across different individuals, industries, skill sets, etc. And the rest is risk premium, which would result in a higher average return than a simple loan.
I don't think the difference between a guaranteed annuity and a lump sum is the main blocker here, those tend to be relatively interchangeable (at the appropriate interest/return). The part I'm more interested in is the insurance aspect. As mentioned, disability insurance is a part of it, and an emergency fund is another part for short-term changes in income. But even with both of these in place, the remaining risk means that eg my effective buying/renting power for a house is significantly diminished.
Note that income share agreements already exist for student loans. They're not so widely used and have their own issues, but it's also a much harder market than people who are already confirmed to be able to take in high earnings.