April 18, 2019
How is a life insurance policy valued? There are many factors involved in an analysis of a life insurance policy. 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.
Life settlement transactions are frequently very complex and can be time-consuming to conclude. However, the aim of these transactions is generally the same, and that’s to achieve the maximum life settlement offer possible.
Since the guiding objective is to determine the market value for a given life insurance policy, it’s important for the policy owner to pay attention to the details of the sale offer, not just the offer value. It is also important to avoid common mistakes that can have the effect of devaluing your life settlement transaction.
Selling A Life Insurance Policy
Why would a policyholder sell a life insurance policy? There are many reasons a policy owner would want to sell a policy. For example, the owner may no longer want to pay future premiums. A more detailed review of the most common reasons for a life insurance policy sale can be found in this blog article.
How Much Is My Life Insurance Policy Worth?
What is the value of your life insurance policy? It’s not as easy as you may think to determine a life settlement valuation. A life insurance policy can be worth much more in the open market than the cash surrender value of the policy that the insurance company would pay if the policy were cancelled.
How much more? Well, that depends on a number of factors, including the size of the policy, the health and age of the insured(s), and the type of policy. There are three key inputs that are necessary to determine the value of your policy:
- Age. The older you are, the more valuable your policy is, based on actuarial data.
- Health Status. Life settlement funds review your medical records to complete a medical underwriting. Your health status is a key factor in pricing models. The worse your health, the higher the market price. Health status also factors into longevity risk.
- Type of Life Insurance Policy. Is the policy a whole life policy? A universal life policy? A term policy? The type of policy is needed to determine market prices, as future premiums depend on the type of policy.
An estimate can be done based on the face value (net death benefit) of your policy, but to get a more precise present value, the policy details are important. The policy details can be determined by reviewing an “in-force illustration” (shows annual premiums) which can be obtained either directly from the life insurance company or your life insurance agent.
While each life settlement fund has a slightly different methodology and risk management, investors take the information from the illustration to figure out what future premiums are projected to be paid over your lifetime. Life settlement investors then combine this analysis with your medical condition (also known as medical underwriting) 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. The analysis combines an actuarial review (by using a mortality table) and a discount rate to determine the life settlement valuation. The discount rate is the rate of return that the institutional investors are targeting.
Many life settlement companies have a pricing tool on their website to provide an initial estimate of your policy’s fair value. You can get an instant estimate of the value of your life insurance policy by visiting our Life Settlement calculator.
What is a Life Settlement Calculator?
A Life Settlement Calculator gives you an estimate of the market value of your life insurance policy. While not a precise valuation, a Life Settlement Calculator is an important tool to help you better understand your life insurance policy. What should you know about how a Life Settlement Calculator works? Here are a few tips:
- Size of the Policy. The larger the face amount of the policy, the more potential value that exists. Most companies that purchase life settlements have a minimum policy size of $100,000, but there are companies that will purchase policies with a face value as low as $50,000. Q Life Settlements works with properly licensed life settlement companies that buy policies with a face value of $50,000 and higher.
- Health Status. The insured’s medical condition is a key factor that goes into valuing a life insurance policy. Life Settlement Calculators will have you select a health “level” and, in some instances, identify some specific ailments. As a general matter, the worse the insured’s health is, the higher the value will be in a life settlement transaction.
- Age. The age of the insured on the life insurance policy will be an important factor in the value of the policy. The older the insured on the life insurance policy, the higher the life settlement value will be.
- Other Factors. Life Settlement Calculators typically do not take into account the type of policy or insurance policy design – future premium amount, guarantees, special riders, etc. – which is the reason that these calculators provide estimated values.
How does life expectancy impact the value of my insurance policy? For more detail on this topic, refer to this blog article.
Avoid Some Common Mistakes that Impact the Value of a Life Settlement
It is important to do your research about the market for life settlement policies before selling your insurance contract in the secondary market. The insurance industry and your insurance carrier do not want their policyholders to know about this asset class – life settlements and viatical settlements – or that the secondary and tertiary market for life settlement assets exist.
The result is that you must do your own due diligence because your life insurance agent or financial advisor may not know about the life settlement option. In fact, your agent or advisor may be explicitly forbidden from telling you about this life insurance market.
Here is a list of some of the common mistakes made that can impact life settlement valuation:
- Miscalculating the timing of a transaction
- Having unrealistic expectations
- Failure to maintain premium payments
- Failing to provide full disclosure
- Not working directly with someone who will solicit multiple offers
See the additional detail below regarding each of these common mistakes and how they can be avoided.
Miscalculating the Timing of a Transaction
Generally speaking, an insurance policy owner is seeking to obtain a life settlement as a result of some kind of changed circumstances in their life. It could be their health or financial situation, or it could be the sale of the family business, but there’s generally a significant change of life event which is triggering the need for a life settlement and liquidity.
Life settlement investors prefer to work with life insurance policy owners that are looking to sell their life insurance policy on a timely basis. Any situation where there are delays will tend to lengthen the process of selling the policy and make the sales process less appealing to a life settlement investor.
The life settlement provider will spend a lot of time and money working on a life settlement transaction. When timing is uncertain or the policyholder is unresponsive, the sale may fall through, simply because the life settlement provider may have another policy in their pipeline that can close faster, and the life settlement funds go to the transaction that closes first.
Having Unrealistic Expectations
When it comes to evaluating a life settlement offer, the policy owner needs to have realistic expectations. The value of a life settlement depends on a methodology with many factors (as more fully outlined above), and pricing models take into account volatility, interest rates, and risk management metrics based on the current market environment.
When you are presented with a life settlement offer, it’s fairly common to think that the policy will have an increased value in the future. This is not necessarily the case however, since life expectancy underwriting is not linear math. Some health issues become much less of a factor over time, and this can have an impact on the inputs and value of any life settlement asset. It’s also true that the pricing of a life settlement offer can be fairly dependent on the buyer’s access to funds at any point in time.
As the policy owner, you need to base your decision whether or not to sell your life insurance policy on your individual needs, liquidity requirements, tax implications, replacement products, and opportunity costs. While difficult to ignore, the premium payments paid in the past are sunk costs and should not factor into your analysis.
Failure to Maintain Premium Payments
It’s always the responsibility of a policy owner to maintain premium payments, right up until the time that a life settlement transaction is fully completed. Regardless of what stage the transaction is in, premium payments must be made until an actual transfer has taken place. Even if a policy slips into a grace period, it may have the effect of diminishing or eliminating any value the policy had.
You can always ask the life settlement provider if the life settlement investor will reimburse you for any premium payments made during the sales process. But, the policyholder needs to make sure there is an agreement in place about premium payment reimbursement ahead of time, otherwise you need to assume that premium payments are your responsibility until the life settlement investor owns the life insurance policy.
Failing to Provide Full Disclosure
Whenever a policy owner fills out a life or viatical settlement application, it’s essential to provide full disclosure to the life settlement broker or life settlement provider, so that the true nature of the policy is known. For instance, it should be fully disclosed if a premium has ever been financed in any way, if there has ever been or currently is a collateral assignment on the policy, if there is a policy loan in effect, or if policy ownership has previously ever changed since the policy was issued.
Without fully disclosing any of these items or any other relevant facts around the life insurance policy ownership and policy beneficiaries, you are risking a life insurance policy sale transaction not happening at all, slowing down the sales process, and/or life settlement companies deciding not to make an offer at all.
Not Working Directly with Someone Who Will Solicit Multiple Offers
Given the fact that the life settlement process is unfamiliar to most people, including life insurance agents, there are many potential complications that can arise during a life settlement transaction. You are always much better off working with a licensed life settlement broker or life settlement provider that will offer your policy to multiple market participants. Both a life settlement broker and life settlement provider will be able to obtain offers from multiple life settlement investors, but a life settlement broker takes a significant fee in exchange for their service.
A life settlement provider is the company responsible for ensuring that the entire life settlement transaction is compliant with state regulations and laws (even if you use a life settlement broker). A provider gets paid by the life settlement investor and is able to garner multiple offers from their entire network of life settlement funds and investors.
Many life insurance policies are just too small for a life settlement broker to work with as the broker needs to make their fee too. So working directly with a life settlement provider may get you a higher offer (even more likely the case after deducting the life settlement broker fee), even if a broker would consider your policy.
Is It Safe to Sell a Life Insurance Policy?
Life settlement and viatical settlement transactions are regulated in almost every state. The regulatory agency that is responsible for overseeing the life settlement and viatical settlement industry is the state insurance department or financial services department. Refer to this blog article for additional information on why life settlement transactions are safe.
How to Evaluate a Life Settlement Proposal
There are many reasons as to why you may be considering selling your life insurance policy. Perhaps you can no longer comfortably afford your premium payments, or maybe your designated beneficiaries no longer need the funds. Regardless of your reasoning for looking into a life settlement, one fact remains: there are many different life settlement buyers out there who are likely willing to make you an offer to buy your life insurance policy.
As you begin “shopping around” for life settlement proposals, there are a few specific things you should look for and ask questions about before selling your policy. From there, you can make the decision that’s right for your needs. Here are the important items:
- Offer Amount
- Other Terms and Conditions
- Closing Timeline
More detail on each of these items is discussed below.
The Actual Offer
Of course, one of the most important factors in any life settlement proposal will be the actual monetary offer. How much can you get for your life insurance policy? It’s hard to say, because so many factors can come into play, most life settlement transactions will range between a 5% and 50% payout of the death benefit—but about 15%-25% is the average. This means that if your policy benefit is worth $400,000, then your proposed payout will probably be in the range of $60,000 and $100,000.
Other Terms and Conditions
Aside from the monetary offer amount, you’ll also want to consider other terms and conditions included in your proposal. For starters, if you are using a life settlement broker or another third-party service to sell your life insurance policy, you will want to consider any commission fee that may be collected—as this will impact the total amount that ends up in your pocket.
Keep in mind that in most states, life settlement brokers are required to disclose how much their commission fee is. Check the closing documentation you receive when completing your life settlement transaction to check the broker fee, as it should be in one of the closing documents that you will have to sign. Be skeptical of any life settlement broker that is not willing to disclose the commission fee they are receiving.
Is the buyer an institutional investor? You may be more comfortable knowing your policy is part of a large life settlement portfolio that has significant diversification. Institutional investors own many, many life settlement policies, in aggregate, that constitute their life settlement investment portfolio, as opposed to an individual that may be invested in one or few life settlement policies.
And remember, for your own protection, it’s a good idea to make sure that your life settlement broker and life settlement provider are properly licensed in the state where your transaction will take place. The name of the life settlement provider is on the policy sale contract, listed as the policy buyer. You can check this information online with your state’s life insurance or financial services department website.
You can also check the website of the Life Insurance Settlement Association (LISA), the life settlement industry’s trade association, to see if the life settlement provider is a member of the association.
Time Until Closing
In most states, a life settlement is treated very similarly to a basic real estate transaction. After you have accepted an offer, you will need to submit specific documentation for review before a “closing” date can be decided upon. The life settlement provider will take this documentation and produce a set of closing documents that the policy owner and insured will need to sign.
At the time of the closing on your life settlement, the life settlement investor will deposit the offer amount into an escrow account, thereby securing your funds for when the policy transfer is completed. Even though the buyer is responsible for choosing an escrow agent (and paying all associated fees), it is still wise for sellers to check that a reputable escrow agent is being used.
Once the escrow account is funded, you will need to sign a change of ownership and beneficiary form that will instruct your life insurance carrier to complete the policy sale. This insurance company form, once approved by the carrier, will transfer ownership and beneficiary of your life insurance policy to the life settlement buyer.
The amount of time it can take to close on a life settlement can vary based on many factors, but the life settlement provider should be able to give you a general idea of how long it will take to complete the life settlement transaction and when you can expect to receive your money. In your closing documents, you will provide payment instructions (bank info and form of payment) to the life settlement provider for the sales proceeds.
Ready to Sell?
These are just a few of the most important things to look at when you are evaluating a life settlement proposal. At the end of the day, you want to make sure that you are selling your policy to a reputable institutional investor and that you are getting a fair offer for your life insurance policy. By working with a life settlement provider that gets multiple offers for your life policy, you will get a better idea of how much your policy is realistically worth.
Also, keep in mind that there are often time limits on life settlement offers. In many cases, you will have no more than 30 days to review your life settlement proposal and accept it. After that time period, the policy may need to go back to underwriting and be repriced for a new offer.
How Life Expectancy Impacts the Value of Your Life Insurance
Life insurance policies are a valuable asset. Like any asset, they can be sold when they no longer serve the needs of their policy owner. But have you ever considered that market conditions, like those influencing the insurance market itself, should factor into your decision-making when evaluating market value of your life insurance?
Term Life Insurance Policies and Life Settlements
Is there hidden value in term insurance policies? The vast majority of life insurance policies issued are term life insurance products. While term life insurance policies do not have an investment component (cash value or account value) like other life insurance products (universal life, variable life, whole life and indexed life being examples), that does not necessarily mean that term life insurance policies do not have value. It is important to point out a couple of key things about term life insurance policies:
- Term Policies Can Be Converted into Permanent Policies. Most term life insurance policies have a provision allowing the insurance policy to be converted into a “permanent” policy (whole life, universal life, variable life, and indexed life policies being examples) without the need for medical underwriting. The conversion option can run up until the end of the term period but usually ends at some point during the term (frequently half way through or until a certain age).
- Term Policies Continue Past the Term. Just because the initial term of the life insurance policy has passed does not mean that the policy expires. The initial term period ending just means that the guaranteed level premium no longer applies. The premiums on the policy will increase, but not higher than amounts listed in the policy. You can get the “current” future premiums that would be applicable on the term life insurance policy after the term expires by contacting the life insurance company and requesting this information. Converting a term life insurance policy into a permanent policy could vastly increase the value of your policy.
- Health Changes Impact Value. If your health has changed since your term life insurance policy was issued, your policy’s market value is impacted. Value of the policy is based on estimates of what is going to happen in the future, not what has happened in the past.
For these reasons and more, you should always explore the life settlement option with your term life policy before lapsing it. Whether it makes sense to convert the policy or sell as a term policy, term life can have value.
How Big is the Life Settlement Market?
According to Conning, the life settlement market enjoyed its fifth consecutive year of growth in 2020 (the most recent data available) with continued growth expected in the coming years. Conning estimates that the amount of death benefit outstanding owned by life settlement investors is approximately $35 billion. Annual secondary market value in 2020 was approximately $4.6 billion of death benefit.
Life settlement valuation is complicated and involves many different factors and methodologies. Q Life Settlements can help you determine the fair value of your life insurance policy. It’s easy to start with our easy-to-use life settlement calculator. And remember, you can always reach out to our knowledgeable and friendly team at any time for answers to all your questions about life settlements, click here to book an appointment with one of our life settlement geniuses, or call us directly at 866-679-9410.