Life settlements are becoming more and more common, as people realize the potential financial benefits that they can unlock from their unwanted or unneeded life insurance policies. In fact, Americans received almost $848 million in payouts last year from selling their life insurance policies into the life settlement market. That’s money that these policy owners would have lost entirely if they had let their policies lapse and is far greater than policy owners would have received if they had surrendered their policy back to their life insurance company. In fact, on average, policyholders average a payout of 4X more than the cash surrender value in a life settlement.
So what is yours worth? Calculating a life settlement value is an analysis of a combination of factors related to the individual insured, the type of insurance policy and the market conditions.
How Much Are Life Settlements Worth?
There are several important factors that impact the valuation of a life insurance policy. Below is a list of these key inputs:
- Age of Insured: Buyers need to estimate the length of time that it will take to receive a return on their investment. The insured’s age has a significant impact on this analysis. The older you are, the closer the buyer is to a payout, making the policy more valuable due to the time value of money (a dollar today is worth more than a dollar tomorrow since you can invest it). Most buyers focus on people 65 or older, unless the insured has a terminal or chronic illness.
- Health of Insured: Combined with the insured’s age, a review of the insured’s health profile determines life expectancy. Since life expectancy is a key factor in determining the value, an unhealthy person that is under 65 years old can also be eligible for a life settlement. This falls under the jurisdiction of a viatical settlement, which covers someone terminally ill with a life expectancy of under two years. Shorter life expectancies translate to more valuable policies.
- Policy Type: Term life insurance is generally not as valuable to buyers because it could expire before the payout. If a term policy is convertible to a whole or universal policy it could be an attractive policy for a life settlement. Universal policies are the most common policies sold, since they give the owner the option to draw down the cash account to lower their premiums, whereas whole life insurance has a fixed premium that does not allow for this flexibility.
- Premium Costs: As you might imagine, life insurance policies with lower premiums mean less expenses moving forward for the buyer, so they are more valuable. Often, life insurance policies are not properly funded because interest rates are lower than originally projected or the market performance lagged projections; premiums then increase to cover this deficit. Higher future premiums could reduce the life settlement value.
- Life Insurance Company: Life insurance companies are given financial strength ratings by ratings agencies (for example, Moody’s, S&P, AM Best, etc.). These ratings have an impact on the valuation of a policy, as most buyers have minimum ratings requirements. There are varying degrees of stability, in theory reflected by the ratings, among the life insurance companies. Potential buyers will take the stability of your life insurance company into consideration when making their offer. Some buyers will not purchase policies of lower rated companies, which would impact a life settlement offer.
What’s the Range for the Valuation of a Life Settlement?
Policyholders generally receive anywhere from 10-50% of the face value/death benefit when they sell their life insurance policy. On average, most people receive around 20% of the face value. The wide range is attributed to the factors listed above, which can vary substantially from policy to policy. As more investors recognize the potential of life settlements, policy values have been increasing. Remember to keep in mind that the older and sicker the insured on the policy is (particularly if there is a chronic or terminal illness), the higher the expected sale price will be.
Bottom line? If you have a life insurance policy and the premiums are increasingly harder to afford to pay, if you no longer have a beneficiary depending on your life insurance benefit, or if you could use funds to cover retirement costs, medical bills, debt settlements or other expenses, then selling your life insurance policy in a life settlement is an important option to explore as a way to bring in extra money. Check with a LISA member to see how much your life insurance policy is worth.
