We often receive inquiries from policy owners or their family members asking much they can get for selling their policy. Without a pre-qualification analysis involving the specific individual’s policy, the short answer is that policy sellers, on average, receive three to four times the policy’s cash surrender value.
Another gauge often used in the life settlement industry to show value to the seller is a comparison of the cash offer to the face amount of the policy. According to an article published by BankRate.com, “life settlements can offer 10 percent to 50 percent more cash than surrendering policies back to the insurer, with payment ranging from 10 percent to 80 percent of the policy’s face value.” But according to most industry professionals, the average cash offer is approximately 25 percent of the policy face amount.
So what are the factors that go into calculating how much the policy seller will receive?
Before discussing how life settlement offers are calculated, it’s important for the seller first to understand the motivation of the buyer.
The purchasers of life insurance policies are known as providers. Providers acquire life insurance policies on behalf of their institutional investors. The investors consist of financial entities such as hedge funds, banks, pension funds, and many other financial institutions. Once the provider acquires a policy, they or the investors to whom they re-sold the policy assume all future premium payments. Once the seller dies, the institutional investor receives the death benefit.
As you might guess, providers are therefore interested in acquiring policies that make prudent investment choices that will provide them with the greatest rate of return on their initial cash outlay.
The economic factors that weigh into a provider’s decision to purchase a policy include the following:
- The face value (death benefit) of the policy. Smaller policies (less than 100K) may not qualify.
- The type of policy (whole, term, universal life, etc.)
- What is the life expectancy of the insured? How long will the provider be expected to make the annual premiums?
- Are there loans on the policy that the provider will be responsible for?
- Is there a cash build-up in the policy that will help offset future premium payments?
- What’s the rating and financial stability of the life insurance company that issued the policy?
When it comes to accepting a cash settlement for a policy, versus allowing it to lapse, the best option for the policy owner will always be to sell the policy. Why allow a policy to lapse if you could receive a cash settlement that would help offset the loss of your investment in annual premiums?
According to a 2012 report published by LIMRA involving a study of the lapse rates for whole life, term, universal life, and variable universal life, policies purchased between 1910 and 2009, the overall policy lapse rate was 4.5% annually. When considering the amount of in-force life insurance coverage, this means that approximately $900 billion of life insurance death benefits lapse every year.
Universal life policies make up the majority of the policies sold in the secondary market. Regarding the lapse rate for those policies, a study by Wharton’s Business Economics and Public Policy department found that 88 percent of all universal life policies never materialize into a claim. Furthermore, they found that 76 percent of the universal life policies purchased by seniors 65 years or older do not pay a death benefit claim.
If you would like more information about how life settlements are calculated, or if you want to discuss whether you qualify, we encourage you to call Trust Life Settlements at 800-216-2513. We’ll work with our strategic brokerage partners to shop your policy in the secondary market to obtain the highest possible cash settlement.