There are many factors that go into a life settlement offer. On average, a life settlement candidate will receive an upfront cash settlement of 20% of the life insurance policy death benefit*. Viatical settlements can generally receive even higher percentages of the death benefit.
However, life settlement and viatical settlement offers vary widely on a case-by-case basis - ranging from 5% to 80% of the death benefit depending on the individual insured, the life insurance policy and the market conditions. Here are the key variables that affect a life settlement offer.
• Age of the Insured
• Health of the Insured
• Policy Type
• Policy Size
• Premium Costs
• Investor Discount Rate
• The Life Insurance Issuer
• The Buyer's Risk Profile
Your age (combined with your health) translates to your life expectancy - and life expectancy is the most important variable in calculating a life settlement offer. In general, the shorter someone's life expectancy, the more valuable the life settlement offer will be. This means that the older you are, the more valuable your offer will be. If you're healthy, you generally have to be a minimum of 65 years old to sell your policy.
But there still is a huge difference in the offer value of a policy tied to a 65 year old versus an 85 year old. This is because from the policy buyer's perspective, the sooner they are able to realize the death benefit, the sooner they are able to get paid out from their investment.
This works because of a financial concept known as the time value of money. It can be boiled down to the concept that a dollar today is worth more than a dollar tomorrow. This is because you can invest your dollar today and collect interest on it - theoretically, your dollar today will be worth more than a dollar tomorrow. On that same notion, a dollar tomorrow is worth more than a dollar in one week. Just as with life settlements: all else equal, a life expectancy of 5 years is more valuable than a life expectancy of 10 years because the buyer could get paid out sooner.
While the minimum age to qualify for a life settlement is around 65 years old, an unhealthy person can be eligible for a life settlement anytime. You can read more about specific eligibility here. This is much the same concept as we discussed with age in the previous paragraph. The more unhealthy you are, the shorter your life expectancy.
Remember, a life expectancy of 5 years is more valuable than a life expectancy of 10 years. This generally correlates to both the insured's age and health condition. When someone is terminally ill with a life expectancy of under 2 years, a settlement transaction is formally called a Viatical Settlement (instead of a Life Settlement). Here is helpful information on Viatical Settlements.
The type of life insurance you own can often affect your policy offer. Not necessarily because one type is more valuable than the other, but because these different kinds of life insurance all have different characteristics that can affect the financial outcome for yourself or the buyer.
Term life insurance expires at a certain specified time. It may be renewable at a higher cost and it may be convertible to permanent life insurance. But there are several potential things that affect the offer. For example, if a policy isn't convertible, the term coverage might expire while you are still alive - leaving the buyer with no payout in exchange for their cost of the settlement offer and the cost to pay the premiums. Because of this, investors will almost never buy term life that could likely expire while you are still alive if there is no option to renew the term or convert it to permanent life insurance. On the flip side, even if a policy is convertible to permanent life insurance or renewable, it is generally at a cost: the premiums tend to rise when that takes place. This rise in cost may be factored into your offer (it may lower your offer).
Depending on the licensed provider's requirements, whole life insurance can be better to purchase than term life insurance, but can be less desirable to purchase than universal life insurance. This is because whole life insurance premiums are completely fixed. The fixed premiums don't allow a buyer to optimize their cost of carrying the policy going forward. Universal life insurance however DOES allow the buyer to potentially lower their premium cost by drawing down any cash value built up in the policy. This makes the policy more economical for them on a pound-for-pound basis.
In general, the larger the life insurance policy size, the larger the life settlement offer. This is because the death benefit payout to the investor is larger. So an average life settlement offer on a $100,000 policy may be around $20,000 and an average offer on a $1,000,000 may be around $200,000.
The smaller the premiums required to keep the policy in force, the larger the life settlement offer. This is because the buyer's maintenance cost of the life insurance policy will be lower. This is more complicated to calculate for policies with changing premium costs.
For instance, if not properly funded, universal life policies tend to drastically increase in cost as the insured becomes a senior. While this increasing cost may be a reason for someone to consider a life settlement offer, it's a reason for a buyer to not consider an offer because it's more expensive to maintain. In order for a licensed provider to review your case and make an offer, they must review your life insurance policy illustration: a document which shows the estimated cost and cash value of the policy until maturity.
There are other factors that are out of your control as a policyholder. One of these is the investor's discount rate - which has to do with the capital markets at the time you're looking to sell your policy. Often times, the buyers of life insurance are borrowing money from investment institutions. The investors pay a certain rate of interest on those proceeds which are used to purchase policies.
The rate that investors pay is dependent on the amount of capital that is going into alternative assets such as life settlements, the quality of the investor, the general market conditions and many other things. The life settlement offer can be affected by how much it costs the investor to borrow that money. All else equal, investors with lower discount rates may be able to give you a larger life settlement offer than those with higher discount rates.
Life insurance companies are managers of risk. Because they all take different risks with different policy holders, they're all in different financial situations of their own. In fact, the risk that they will be able to pay a claim when the policy matures may not be the same - one might be a safer bet than the other.
Because of this, the financial security of your life insurance company may affect your policy offer. If your policy is issued by a life insurance company with a low or high rating by a rating agency, an investor may give you a lower or higher offer for your policy because they have to assume that risk of the insurer defaulting on their obligations.
From the buyer's perspective, a life settlement transaction gives them a lump sum payout preceded by an annual maintenance cost to keep the policy in force - the annual premium payment.
There are all of these different factors involved that change the risk/return profile from the investor's perspective. In fact, different life settlement investors like different kinds of risk. Some prefer to purchase policies from younger, healthier people - and pay a much lower offer for the added cost of keeping the policies on their books. Some investors like to pay higher offers for a policy where the insured is older and unhealthier. Ovid has a very strong understanding of what kinds of risk the various major life settlement investors are looking to take on.
You can get an instant estimate of your policy's value with this life settlement calculator based on a few initial factors that we covered on this page.