Question: When discussing life settlements with clients, I am often asked, “What is my policy worth?” How do you suggest I respond? I want to give them an answer in a way that helps them develop suitable expectations.
Answer: This is a great question because it goes right to the heart of the life settlement process. The simple answer is your policy is worth what a buyer is willing to pay for it. The process, however, is not quite that simple.
You have to understand that a policy offer is the result of submitting a policy to multiple institutional buyers. The buyers utilize policy data and health information to calculate a “net present value” of the death benefit. This competitive bidding process assures fair value for the policy.
Since the same policy data and health information is provided to each potential buyer – it comes down to which buyer really wants to own your policy. Does your policy “fit” what a potential buyer is looking for? Factors affecting a policy’s “desirability” include the insured’s age, sex, policy size, policy type, the insurance carrier, carrier rating, future policy cost of insurance, cash value, specific health impairments, and whether the policy fits that buyer’s portfolio requirements.
A key determinant to policy valuation and desirability is the comfort level the buyer has with the life expectancy estimates provided. Even though each life expectancy provider utilizes the same medical records, different morbidity (disease) factors are weighted differently from provider to provider. Buyer comfort levels with these estimates will determine desired rate of return levels and pricing.
A successful life settlement transaction depends on the policy seller’s level of expectation within the context of improved mortality in today’s market. Like the real estate market, policy values are not what they were a couple of years ago. However, increasing investor interest in the form of hedge funds and institutional banks have returned to the industry and has increased the offers presented to sellers. It has also shortened the duration of these transactions, with some taking as little as 3-5 weeks. Today’s life settlement offers range between 10% and 50% of face value, averaging around 18%.