Once a determination has been made to sell a policy because it is no longer wanted, needed or affordable, a second decision frequently arises. Should the policy be sold immediately or at some future time?
This question often comes up when a policy still has cash surrender value and is capable of staying in force for a period of time without additional premium outlays.
A typical scenario might be a $1 million UL policy with $40,000 of cash surrender value and, according to an in force ledger, the policy would not lapse for about two years if no additional premium payments are made.
Unfortunately, in this scenario the wrong conclusion, to wait two years, is often reached by focusing on the projection that there is no additional outlay required. This analysis, unfortunately, treats the two-year delay as “free” insurance. While the policy doesn’t require further premium outlays to stay in force those two years, the coverage is anything but free. Consider if a life settlement were not available and the policy could only be surrendered. By waiting two years the cash surrender value will likely go from $40,000 to near zero — this is hardly free insurance.
A similar thing happens when a life settlement is an option. A very significant factor in the pricing of a life settlement offer is the cost to carry the policy going forward. When a policy has some cash surrender value, those funds reduce the life settlement buyer’s cost to carry. So a life settlement offer of $100,000 for a policy with $40,000 of cash surrender value could turn into a $60,000 offer on the same policy if there were no cash surrender value.
Though significant, the reduction of the cash surrender value, however, is not the only factor that might impact a life settlement offer in the future. Some of these factors may increase the offer and others may decrease it. Life expectancy, for example, is another major factor in life settlement pricing.
While an individual’s life expectancy is, of course, expected to decline over time, without a change in health, the life expectancy does not decrease at the same rate as the time that has passed. For example, a person with a current life expectancy of 10 years, may still have a life expectancy of eight years, even after the passage of three years.