Let’s imagine you were trying to build a simple life settlement calculator. It would have a few inputs – preferably less than ten, hopefully, less than six -and it would produce an estimate of what a life insurance policy could be worth if sold in a settlement.
It would probably look a lot like financial calculators found everywhere on the internet. They usually help us find out how much mortgage we can afford, how much we can save by consolidating debt, or what our monthly car payment would be; all on the go.
These calculators tend to be broadly accurate because they deal with easily accessible and easily knowable features: the price of the car or the home you’re trying to buy, prevailing interest rates, and maybe even your credit score.
To estimate the potential value of a life settlement, you need to navigate two hard-to-access and hard-to-know features: the characteristics of the life policy and the health of the insured.
These two features are hard-to-access because a policy’s original certificate may be outdated or lost and the details of a policy may only lie with the carrier. On the health side, despite recent advances in medical records digitization, the key to understanding the insured’s health often still lives in paper records.
These two features are also hard-to-know. First, even with an in-force policy illustration in hand, a policy may have a few key details that could significantly affect the settlement price – for example, missed or misunderstood riders or conversion terms.
Next, even with a policyholder’s full medical records available, two medically trained underwriters may come up with two different prognoses.
This isn’t to say that the math behind a life settlement calculator is more complicated than the math behind comparable tools; it is the difficulty to access and then accurately describe inputs that make the output of a life settlement calculator more of a rough guess than a precise estimate.
Today, most online life settlement “calculators” usually rely on a handful of data points on the policy itself (size and type) and the health of the insured (age, gender, and comparative health descriptors). These are ultimately more like qualifying tests than calculators, they do a better job validating basic eligibility requirements than predicting policy value.
There are certainly ways to tackle these issues and improve the quality of online calculator estimates. In time, hard-to-access issues will erode with technology and hard-to-know one’s will disappear as standards emerge.
Focusing on a calculator’s precision may be missing the point. The main value of these calculators lies not in the accuracy of their estimate but rather in their power to build awareness. Fewer than 15% of US Seniors have heard of life settlements, tools like life settlement calculators help seniors realize that there is an alternative to lapsing or surrendering their policies.
If you have clients looking to better understand life settlements, tell them to take online calculator estimates with a grain of salt. They provide an incentive to seriously consider a life settlement, rather than present them with a promise of value.
— Read also, on ThinkAdvisor:
- Life Settlement Propsects Are All Around You
- IRS Postpones Life Settlement Tax Reporting Requirement
- More Universal Life Premium COI Hikes Are Coming: Analyst