Fundamentals Of Life Settlement Valuation

Here at the Life Settlement Monitor, we frequently refer to policy value trends. We've received a number of emails asking about how life insurance policies are valued. What makes one more attractive than the other in a life settlement? We are republishing an article below that gives an excellent foundation.

As life settlements become a more popular tool for retirement income and financial planning, the question always boils down to how much is my life insurance policy worth? A life settlement appraisal is the first step in understanding if selling an existing life insurance policy makes sense. There are several factors that contribute to a life insurance policy's value as a life settlement.

A significant component to establishing the life settlement value of a policy is the insured's life expectancy. This is probably the most important factor aside from the policy's face value itself in determining a life settlement value. The insured's age, health, medical conditions, family history and gender are all evaluated to determine a life expectancy by buyers and outside medical appraisers. These third party vendors known as, Life Expectancy Providers, review medical records, personal information and proprietary actuarial tables to estimate an insured's life expectancy. The life expectancy reports, known as life expectancy certificates, project insured life expectancies down the number of months. As you can imagine, a policy insuring someone with a short life expectancy is more valuable than one insuring someone with a longer life expectancy.

The type of life insurance policy also plays into the valuation. While, non convertible term policies are not typically sold on the secondary market, Whole Life, Universal and convertible term policies are actively being purchased. Usually the Universal Life policies are the most sought after as they offer flexible payments and sometimes have accumulated cash value which can be used to pay premiums in the future.

Policy owners are also a component to the valuation of a life settlement. If a policy owner has previously declared bankruptcy or been divorced, buyers may devalue a policy. Some potential buyers are concerned that a former spouse or creditor will attempt to claim the life insurance policy. In addition, the value of a policy can be affected by the state of residence of the policy seller. Depending upon the type of life settlement transactional environment a state's laws create, a policy can be given a premium or receive a discount by buyers.

The life settlement market itself has an impact on the value of life insurance policies. The buyers of life insurance policies are typically large financial institutions such as retail banks, hedge funds and investment funds. When these institutions have capital to deploy the life settlement market becomes more competitive and policies carry a premium. However, the financial institutions don't have as much money to invest in policies, the life settlement market may see discounting of policies.

Policy owners that understand the factors contributing the value of their life insurance policy are more apt to maximize their asset's value. By recognizing what makes a policy attractive and valuable they can better plan if and when to sell their life insurance.