November 5, 2018
Your life insurance policy is a valuable asset that can be sold just like any other personal property. In 1911, the U.S. Supreme Court ruled in a case known as Grigsby v. Russell that life insurance policies are personal property that can be sold and transferred to third-parties like any other personal property. Historically, if you no longer wanted or needed your life insurance policy, your only option was to lapse or surrender your life insurance policy back to the insurance company.
What your life insurance company will not tell its policyholders is that your permanent life insurance policy (e.g., universal or whole life insurance) may have a market value that is greater than the cash value. Further, if you have a term life insurance policy that does not have any cash value, your life insurance policy may still have a market value.
A sale of a life insurance policy in the secondary market to an unrelated third-party is known as a life settlement or a viatical settlement.
What is the Value of Your Life Insurance Policy?
It’s not as easy as you may think to determine what the value of your life insurance policy is. The key factors that are necessary to determine the value of your policy include four items: your age, health condition, the amount of coverage, and the type of life insurance policy you have.
An estimate can be done based on the face value (net death benefit) of your policy, but to get a more precise value, the policy details are important. The policy details can be determined by reviewing an “in-force illustration” or the actual policy contract, which can be obtained either directly from the life insurance company or your life insurance agent.
The value of the policy is driven by four primary factors:
The older you are, the more your policy is worth, based on mortality data. For a life settlement, most companies required the insured to be at least 65 years old, with most policies purchased on people aged 75 and older. In a viatical settlement transaction, where the insured has either a chronic or terminal illness, the medical conditions and current treatments are more important factors than the insured’s age.
Amount of Coverage
What is the policy’s death benefit? The larger the policy’s face amount, the more value potential exists. It is also important to understand if the policy’s death benefit changes over time (either higher or lower) and if the policy has a maturity or expiration date.
What type of policy do you have? Permanent life insurance policies (universal, whole, variable, indexed, survivorship, as examples) and term life policies are valued differently. However, many term life policies have the option to be converted into a permanent policy. What riders, guarantees, or special provisions does the policy have? All of these items are relevant to the valuation process.
Along with the type and design of the policy, the monthly premiums on the life insurance policy are an important factor in the valuation process. The lower the monthly premium, relative to the policy’s face value, the higher the potential market value of the policy.
Life Expectancy and Underwriting
Prospective policy buyers will underwrite your health status to determine the estimated period of time remaining before a potential payout. The insured’s life expectancy has a dramatic impact on the market value of a life insurance policy. It is important to understand that no medical exam is required like when you originally took out the life insurance policy.
Calculating How Much Your Policy is Worth
Life settlement investors take the information from the illustration to figure out what premiums are projected to be paid over your lifetime and combine that with your medical condition to estimate the timing of the payout of the death benefit on the policy. In the life settlement industry, this would be called a probabilistic discounted cash flow analysis.
No medical exam is required, life settlement companies will do an underwriting of your health based on your medical records. A life settlement company may also ask you questions about your health and medical history on a phone call to get additional details.
What Happens After I Sell My Life Insurance Policy?
After you sell your life insurance policy, you will no longer be the policy owner and your loved ones will no longer be the beneficiary of your life insurance coverage. In addition, you will no longer be responsible for the premium payments or any other life insurance costs. With relief from the life insurance premiums on your policy, you can use the extra funds however you see fit. Your financial advisor can present you with potential products that can help you supplement your retirement income and social security.
The Life Settlement Market
The sale of a life insurance policy in the secondary market is known as a life settlement. The life settlement market is an excellent option to a policy lapse or a surrender for cash value for those who qualify. When you sell a policy in the life settlement market, you will always receive an amount greater than the cash surrender value (if there is any) but less the policy’s death benefit.
The life settlement market is regulated by state insurance departments in 43 of the 50 states, including large life settlement markets like Florida, New York, California, and Texas. In 2021, according to the Life Insurance Settlement Association (LISA), the life settlement market completed $4 billion face value in policy purchases, delivering more than $660 million to policyholders above their cash surrender value.
The life settlement market is expected to continue growing in the coming years as more policyholders learn about the benefits of a life settlement. Life settlements are quickly becoming a top retirement planning tool for financial advisors and life insurance agents.
What Types of Policies Qualify?
All types of life insurance policies qualify for a life settlement, including:
- Universal life insurance policies
- Whole life insurance policies
- Variable life insurance policies
- Term life insurance policies
- Survivorship life insurance policies
- Group life insurance policies
Typically, a minimum policy face value of $50,000 is required to sell a policy. Life settlement companies will analyze your policy, including the monthly premiums and life expectancy, to provide you a formal offer. Life settlement companies will also look at the financial strength rating of your life insurance company. Investors prefer a financial strength rating of A- or better.
Life Expectancy and Policy Value
The value of your life insurance policy is greatly impacted by your health profile. Life settlement companies review your medical records to underwrite your health profile and determine a life expectancy, an actuarial estimate of your remaining life span. The shorter your life expectancy (the worse your health), the higher the market value of your life insurance policy is.
Life settlement companies look at the life expectancy to determine their estimated rate of return and calculate a purchase offer. Life settlement investors are large institutional investors that purchase large numbers of life settlements.
Life Settlement Calculators
Many life settlement companies have a pricing tool on their website to provide an initial estimate of your policy’s value. You can get an instant estimate of the value of your life insurance policy by visiting our life insurance calculator. Life settlement calculators provide an estimated life insurance quote of the market value of a policy, the lump sum amount you could expect to receive in a life settlement transaction.
A life settlement calculator is an important tool to help you better understand how much life insurance market value you could get. Here are a few tips about life settlement calculators:
- Life settlement calculators are estimates. Follow up with the life settlement company to get a more precise estimate or offer based on more data points.
- Don’t be discouraged if your policy comes back with no estimated value. The calculator only takes into account a few data points. If you follow up with the life settlement company, it is still possible that your life insurance works for a life settlement.
- Cash value life insurance (permanent policies) as well as term insurance qualify for life settlement transactions.
- Calculators do not take into account policy premiums or policy loans. If you have a policy loan, you should assume that the loan amount would be deducted from the estimate for the net lump sum you would receive in a policy sale. If you premiums are extremely high (as a % of your death benefit), your policy may be worth less than the estimate.
- Policy riders, guarantees, waiver of premium, and other policy-specific design elements are not considered in a calculator. These items can impact the market value of your policy and will be considered in a more detailed analysis.
How does life expectancy impact the value of your client’s life insurance policy? For more detail on this topic, refer to this blog article.
You can talk to one of our experts by calling us at 888-388-0988, email us at email@example.com. or leave your information here for us to contact you to discuss your client’s situation. Our team is available and ready to explain to you all that you would want to know about life settlements. You can also visit our life settlement genius portal for materials and client discussion points.