Life Settlement Examples
The first thing people want to know when looking into a life settlement is how much their policy is worth. If you're interest in finding out how much your policy is worth to an investor, take 30 seconds to fill out the free appraisal form and we'll get back with you promptly with no obligations.
If you're not quite sure about getting an appraisal just yet, you can review some life settlements examples to help get a feel for life settlement values.
A common question when first considering selling your policy is whether or not it's worth it to get a broker instead of just getting your own offer. A recent client I had provides the perfect comparison. He had a $500k policy and was diagnosed with a type of cancer that underwriters projected he could live with for another 5 - 7 years. Initially he got his own offer, and after some negotiating received an offer for $48k. He wasn't quite satisfied with the offer, so he found me online, and I brought his case to a wide range of investors. The first offer I received was for $150k, and ultimately we bid the settlement up to $250k with multiple bidders. The buyer paid the broker commission beyond the $250k, and the seller received more than 5 times the amount he would have received if he accepted that direct offer he got on his own. There's no question this buyer was trying to buy the policy for as little as possible when they didn't have any competition, and it was absolutely worth it to hire a life settlement broker.
In other scenarios, oftentimes we have a case where nearly every buyer passes, but then suddenly we find that one group who's willing to make an offer. Recently I had a $200k policy where the only offer we had gotten was for $5k. Then, out of the blue, a buyer offered over $40k for it, and the seller happily accepted. Where most buyers had no interest, we were able to find one with strong interest.
Here's some more life settlement examples with specifics to different types of policies.
Universal Life Policies
Mr. S is a 75 year old male managing a few common ailments for his age. He has a $500k universal life policy with annual premiums of $20k a year. He receives an offer for $50k assuming he likely has another 10 years left. If he keeps the policy he will likely spend another $200k in premiums, or if he sells it he not only gets the $50k, but also can save $20k this year and all the following years, totaling $250k between the settlement and premiums saved. He decides his money will be better invested elsewhere and decides to accept the offer.
Dr. T is a 95 year old male with some health issues, but nothing significant that suggests he won't make to at least 100. He has a universal life policy with no cash value left, and a death benefit of $950,000. The cost of insurance is now $40k a year to keep it going, and he has decided to do a life settlement instead of paying the future premiums for years to come. Due to his age, he receives multiple offers and the highest offer is $570k, which he gladly accepts. The investor will likely pay at least $200k in premiums over the next 5 years.
Mrs. H is an 82 year old female with no major health issues and a $3MM universal life insurance policy. Her premiums are now $142k a year to keep the policy in force. Because she could easily live another 10 years, she has decided she can't afford to keep up the premiums at that level, and accepted a $300k settlement instead of losing everything, and got most of her money back that she'd paid in premiums. She is happy to invest the money elsewhere, and the investor will likely spend another $1.5MM in premiums over the next 10 years.
Mrs. V is 77 and has a $100k universal life policy with premiums increasing each year, averaging about $6k a year for the next 5 years. Despite having a heart attack in the past, her life expectancy is still 7-8 years, and because her premiums are fairly expensive, she receives an offer of $9K. If she keeps it she'll pay another $6k in premiums instead of receiving $9K, which ultimately makes it a $15k difference in her savings account this year, and will not have to pay the $6k again the years following. She decides she no longer wants to keep paying the premiums and sells it.
Mr. D is 97 with a $1.2MM universal life policy. The premiums are $125k a year, which he can't afford much longer. He currently has enough cash value to cover 1 more year of premiums. Because he has no health issues, the underwriter has to assume he'll live to 101 or longer. He receives offers up to $700k to purchase the policy, but instead takes $500k with a retained death benefit option which will pay his beneficiaries an additional death benefit depending on how much longer he lives. If he passes in the next year, they will get nearly the remainder of the death benefit, and each year it gets less as the investor pays more premiums. After 4 years there is no additional payout.
Mrs. M is a 75 year old female with stage 4 cancer and has been given a 2-3 years life expectancy. Her universal life policy has a death benefit of $750,000 and has no cash value left in it. The premiums are expensive, as are her medical bills. Due to her diagnosis she is able to get a lot of offers and receives an offer of $500k.
Mr. C is a healthy 75 year old male with a $500,000 universal life policy and very little cash value left in it. He has no significant health issues, but can no longer afford the premiums. He is able to get $30k for it, and is happy to get out from under the premium payments while he still has other assets to leave his children.
Mr. B is a healthy 82 year old male with a $250k convertible term policy that covers him to age 95. He looks into doing a life settlement, but learns that the conversion deadline was in 2007 and it's now 2019. Because he is not terminally ill, even though his term covers him to age 95, the rising cost of insurance is too expensive for any investors to consider. He is unable to do a life settlement.
Mrs. S is a fairly healthy 71 year old female with a $500k convertible term policy that expires in 6 months. The investor is able to convert the policy to a universal life policy that costs $24k a year, and due to her health and age she is able to receive a gross offer of $12,000. She does not intend on converting the policy herself, so while this is not a large amount, she is happy to get money back on something she thought was worthless. The investor will likely spend another $240k in premiums over the next 10 years.
Whole Life Policies
Mrs. H is 74, healthy, and has a whole life policy worth $150,000. Her cash value has accumulated to $130,000. She no longer has a need for the life insurance policy and looks into doing a life settlement. Because her cash value is so close to the death benefit, her best option is to simply take the surrender cash value amount and there is no need to do a life settlement.
As you can tell by these life settlement examples, some cases pay a high settlement while others may only get a small one, and some may not qualify. At the end of the day, the numbers have to work in order for an investment to make sense, and unfortunately in some cases life insurance policies become so expensive that the numbers simply don't make sense anymore to invest. People who want to sell life insurance policy should have a broker look at their case before getting any wild ideas about how much they should get.
When an investor reviews a case there are two really important factors that they need to consider if the investment will even be remotely profitable. They need to understand how many years the insured is likely to live, and how much their future premiums are going to cost. Understanding how many premiums they're likely to pay along with understanding how long their investment is likely going to take to mature, that also factor in the time value of money to determine whether or not a policy is worth it.
The life expectancy is done by comparing the insured's medical records with mortality tables for that persons age. There is no interview or health exam, so only what your doctors have noted in your records are what is considered. Using this information along with your age, the underwriter is able to come up with a number of years and months that you're likely to live. This number is only an educated guess, and of course some people will live less than predicted while others will live longer, but the investor has to have a good idea for how long they will pay premiums before the death benefit will be paid and their investment returned. In some cases, if the insured lives just a couple years longer than predicted it can make an investment go from profitable to a loss, or at least perform below benchmarks.
When an investor has hundreds or even thousands of policies they are managing, some will end up being more profitable than predicted while others will end up a loss, and the two balance each other out for an overall portfolio performance that is on par with the stock market long term.
So now that the underwriter has determined how long the insured is likely to live, they will compare that with the future premiums detailed in the in-force illustration provided by the insurance carrier. Oftentimes policy owners look at their annual statement, which might tell them the minimum amount required to keep the policy in-force for another year. Because universal life policies typically have an increasing cost of insurance, the minimum premium will go up over time. Perhaps this year it's $8k for another year of coverage, but next year it's $10k. The following year is $12k, etc. The investor wants to see the premiums leveled out so that they can see how much the policy is really going to cost over the remainder of the insured's lifetime, not just this next year.
So when we level out the premiums, staying with this same example, the premiums are actually $14k a year to carry the policy to age 100. If the life expectancy was determined to be 10 years, then right away the investor knows they're likely going to have to spend $140k in premiums over the next 10 years.
If the death benefit on this policy is $200k, with some simply math you can figure out that there's $60k left over, but they haven't paid your settlement yet. Let's say they paid a $20k settlement, which now leaves $40k for profit, which sounds pretty fair, but when you take into account the time value of money, it's actually not a very good investment.
If an investment group paid out $160k and made back $40k, this would be a good investment if the term was only 1 - 2 years, but with a strong probability we've determined that it is likely to be a 10 year investment, meaning the investor will not get back 1 dollar for 10 years. In order for that to make sense from an investment standpoint, they would need to solve for about 10% interest a year on the money spent.
Based on these numbers with a $20k settlement paid upfront, plus $140k in premiums over 10 years, the policy death benefit would actually need to be closer to $260k to make this deal work.
When policy owners are reviewing their life settlement offers, in some cases they're happy to get anything, especially if they're in danger of lapsing. But more often when someone gets an offer for $20k and they think about how much less that is than $260k, they get a bit frustrated and even offended at this amount.
How could an investor pay so little and get so much? Certainly they are getting rich off of them! Well, in reality this is not the case. In the rare situation that someone sells a policy and a few months later they get hit by a bus, then yes the investor would get rich off of buying your policy. But in the more realistic scenario when the insured is living another 10 years, paying $140k in premiums plus another $20k in the settlement upfront, while they are making a profit, it is not as significant as it may seem.
If the life expectancy on the insured was only 5 years instead of 10, well that changes things significantly, and the investor might pay $100k instead of $20k. Much of that increase has to do with the amount of time the money is invested before it matures. Or in other words, the initial $100k doesn't accrue as much interest because it is not loaned out for as long. On top of that, their cost for premiums gets cut in half.
When considering life settlement offers it's important to keep that premium payment in mind. Sticking with the same example, the premiums are $14k a year, and the settlement offer is $20k. If you decide to keep the policy you will have $14k less in your savings this year, and again the following years. If you accept the $20k, you will actually have $34k more in savings than if you had kept it and paid the premiums. Add in next year's premium and you're up to $49k more that you have in savings than if you had kept it. No, you don't have the coverage anymore, but we've already determined that there is a very low probability that it will pay out in the next few years.
It's easy to get married to the death benefit number and not think about how much it costs to get there. Another way of looking at life settlement offers is comparing it to buying and then selling a house. Let's say you buy a house for $500k. You put $100k as a down payment, and borrow the remaining $400k with a mortgage. You live in the house for a couple years, and decide to sell it. The market is flat, so you sell it for $500k, same as you bought it. When the deal closes you don't get $500k in your savings account, but rather what's left over after the mortgage has been paid off and closing costs. So really, maybe you only end up with $100k back in your savings; same as you had spent to buy the house. With a life insurance policy, it's not uncommon to see someone in their 80s or 90s has paid almost as much as the policy is worth in premiums since they've owned it. Of course they were also paying for the insurance coverage, but if you spent $300k in premiums on a $500k policy before it paid the death benefit, your family's profit is not $500k, but rather $200k.
Life insurance premiums can tie up a lot of capital that could be invested elsewhere. If you have deep pockets and can afford the coverage, the investment might work better to keep it, but then again you might be better offer taking less money now and investing the settlement and future premiums into something where you have more control. Real estate has proven to be a good investment as are vacation homes. Or perhaps you simply need extra cash to fund your retirement. Life insurance premiums can become a significant financial burden, and while it's hard to let the policy go, getting some cash for it while getting rid of those premium payments may put you in a much more comfortable situation.
At the end of the day, if you need the coverage and can afford the policy, go ahead and keep it. If you find that your premiums are tying up too much of your cash flow, or that the coverage is not as necessary as it once was, then it would be wise to at least get an appraisal on your policy and test the market for offers. There is no cost to get life settlement offers, and working with a broker can get your case in front of a wide variety of investors and capital.