Life Settlement Valuation Basics

Written By: Kelly Ramirez on April 27, 2010 No Comment

Life settlements are becoming a much utilized tool of financial planning and source of retirement income. Inevitably, the first question asked by potential policy sellers is regarding the potential life settlement value of their life insurance. There are a number of things that contribute to the value of a life insurance policy on the secondary market.

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. 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.

An often overlooked factor in the life insurance policy valuation is the state of the life settlement market. Usually the purchasers of life insurance policies are large financial institutions. Their overall health, liquidity and disposition affect their ability to purchase policies on the secondary market. If these hedge funds, investment banks and retail investment funds are flush with investment capital the market usually sees policies carry a premium. Although, policy sellers may experience weak valuations if the life settlement market doesn’t have as many active buyers.

Deciding to sell one’s life insurance is an important decision. The most important part of that decision is understanding how much a policy is worth and taking the steps necessary to maximize its value.

Learn more about a life settlement. Stop by Kelly Ramirez’s site where you can find out the value of your life insurance policy with a life settlement appraisal.