Life Settlement Math
Primary factors in settlement value:
- Policy face amount
- Premiums
- Your age
- Your health
Buyers that bid on your policy view it as an investment, and they want to maximize their return. However, because they are in competition for your policy, they have to bid high enough to beat out other funders.
The funder is not only paying you an upfront cash settlement amount, but is also taking over the payment of the premiums. They want to make sure that they won't be spending more on the policy than they will receive when the policy pays the benefit.
Your health is a factor in the life settlement* application process. This does not require a medical exam. Depending on the size of your policy,a medical evaluation will be conducted via an analysis, similar to when you first obtained your life insurance policy. This analysis will help the investor determine the length of time for which they will pay the premiums. As a rule of thumb, the older you are, the higher your life settlement amount will be.
Here's an example:
| Policy Amount: | $500,000 |
| Cash Surrender Value: | $20,000 |
| Annual Premiums: | $31,000 |
| Age: | 81 |
| Health: | Moderate, witd some issues |
In this case, it is estimated that the life insurance premium payments would go on for another 7 years. Assuming that the investor requires a 5% rate of return on his investment, the calculation is computed as follows:
Settlement Amount = Policy Amount - (Annual Premium x 7)
The investor then factors in the rate of return that they need to receive. In this case, the investor offers $176,000 as the settlement amount.
The amounts offered by investors (bids) will vary widely, based on what rate of return they require and their analysis of the life expectancy.
