Chapter 4: Life Settlement Valuation
How is the value of a life settlement calculated?
The market value of a life insurance policy depends upon many factors including, as discussed in the previous chapter, the amount of death benefit, premium level and life expectancies. However, pricing is more complicated than three simple metrics.
Today’s market standard employs asset specific probabilistic and deterministic pricing models. The models take into consideration the required cash flows, primarily premium and fee amounts, and the timing of those costs, along with policy contract features, the insured’s individual actuarial underwriting and discount rate assumptions to determine a net present value.
More simply, the primary factors influencing the value of a life insurance policy are the ongoing cost of the policy, the length of time payments will be made, which is estimated utilizing the insured’s underwriting, and the size of the policy benefit.
It stands to reason that if an insured had two policies, one with more expensive premium requirements than the other, the expensive policy would have a lower market value when comparing the two policies.
Similarly, if two different insureds both happened to own the same life insurance product and coverage, the policy insuring the individual with the shorter life expectancy would be the more valuable of the two.
So, generally, the greater your life expectancy and the more expensive your policy, the lower your policy’s life settlement value.
Get an estimate of what your policy is worth with our life settlement calculator.