Maximizing Your Life Settlement Payout: How to Get the Most Value for Your Policy
Selling your life insurance policy can be both an exciting and overwhelming concept for people, and the more educated you are the better off everyone is going to be.
First off, if you need the coverage and can afford it, you may want to hang onto the policy. People generally decide to sell their policy when they realize they don’t really need the coverage anymore, or they can’t afford it anymore, i.e. their needs have changed.
Life settlements are a great option for life insurance policyholders who no longer need them - or simply would like to exchange them for a fair monetary value. If you’re interested in receiving a settlement, it’s very likely that you’d like to receive the maximum payout possible for your policy. In this blog, we’ll define and explain multiple factors that may increase the value of your life settlement.
Maybe they bought the policy when their kids were younger, or they were recently married. Now everyone’s grown up and has a job, you’re retired or semi-retired, your debt is dwindling, and you’re wondering why you committed to this lifelong contract of paying premiums with no end in sight. A life settlement allows you the opportunity to get out and to get paid too. Maybe you’re better off taking a settlement now where you have more control over the money instead of having to wait for your passing.
So how much are you going to get paid? This is another pain point for people because they get married to the death benefit amount, but don’t consider how much it costs before that death benefit gets paid.
Consumers buy life insurance for the what-if scenarios. What if I get in a fatal car accident? What if I get cancer? And it’s good to have this protection because sometimes it’s needed. But investors don’t buy policies as a gamble for these what-if scenarios. If you’ve ever been to a casino you know the casino is designed to win most of the time, and since we’re talking about insurance, it’s fair to say that the insurance company is the casino in this case.
Instead, investors have underwriters review someone’s age and health and come up with a life expectancy report. This report tells the average amount of time someone is likely to live. It’s possible the insured lives less than the report, and they also will live longer than the report says, so investors have to factor this in. The life expectancy report is all about predicting how many future premiums they’re going to have to pay, and how long the investment is going to take.
If a policy costs $10k a year in premiums and the insured is predicted to live another 15 years, that means the policy will cost $150k in premiums before it’s likely to pay. If the death benefit on this policy is $200k, even though quick math suggests there’s a $50k profit, it is not a good investment.
The investor has to pay a settlement now plus closing costs, which they will need to make interest on each year over 15 years. In the beginning, this interest is very minimal, but over a 15-year period it can really add up. And same goes for that $10k premium that they’re paying this year. They need to make interest on that money for 15 years too, so it all adds up pretty quickly when you’re waiting 15 years to get your investment back. This is why someone with a predictably short life expectancy will receive a lot more than someone who probably has another 15 years.
The reason for explaining all of this information is that a lot of folks see their $200k death benefit and think they should be able to get $100k for it. And while it is possible to get 50% of your death benefit in a life settlement, this only happens when the insured has a 5-year life expectancy. The person with 15 years might be lucky to get a $10k offer.
If you think about it, life insurance is really not intended to be a highly profitable situation. Only when someone dies earlier than expected does this work out? Most of the time the insured is predicted to live to an old age, and the life insurance company never pays the death benefit because the owner of the policy decided in their 70s or 80s that they didn’t want to pay premiums anymore.
The only reason a life settlement can be profitable is because of certain circumstances aligning in a manner that suggests it will mostly likely work out. The premiums on the policy are reasonable, the insured has a predictable amount of years left, if the investor sees turning a profit they will want to buy it, but many cases do not look profitable and don’t get offers.
Let’s take a closer look at getting the most value out of your policy and who buys life insurance policies.
The life settlement market is a multi-billion dollar industry made up of both institutional investors and private capital. Think mutual funds, hedge funds, investment groups, private equity, and even individual investors. Some companies have several billion dollars to buy and manage policies while others may only pick up a couple policies for their personal portfolio. Most of these investors are not consumer facing and rely on a network of life settlement brokers to bring them cases. But when people hear the word broker, the first thing they think is that they don’t want to pay a broker commission and can save a little money, says the person with no idea what they’re doing.
The average person looking into a life settlement most likely saw a TV commercial that probably over-promised a bit to get you excited enough to call. There’s only a couple of these companies that advertise a lot, and they’re trying to go direct-to-consumer to buy their policy without any competition. For the average DIY type person, this sounds like the way to go. Cut out the middleman, and go straight to the source. The problem with this thinking is that the life settlement market is indeed a marketplace, so if we’re talking about a physical marketplace, you’ve just removed all the other vendors, removed all their competition, and allowed this 1 life settlement company to tell you how much your policy is worth. Not so smart. What do you think they’re going to do? Probably low-ball their offer because why wouldn’t they?
The equivalent might be trying to sell your used car. You had no frame of reference for what it was worth, but you let the first person who called tell you what it was worth. Sure you could decide not to accept the offer, but what reference do you have? When someone’s offering you money for something you don’t want anymore it can be pretty appealing, even if it’s not as much as you had hoped.
The answer to all of this nonsense is to have a broker work on your case. Every time I have a client who gets their own offer first, I’m always able to get them a better deal, even with my fee included. If it costs you $5k to make an extra $10k is it worth it? And if it cost you $40k to make an extra $200k would it be worth it? These aren’t exaggerations, they’re real scenarios.
So if I wasn’t clear enough, work with a broker. They’re experts on the life settlement market. They’re going to help you gather the materials needed to present your case, they’re going to give you the most exposure to receive the most offers, host an auction, and find the highest bidder. Their fee is going to be worth it. A broker is going to be especially helpful when you’re trying to sell term life insurance policy for cash.
FAQ
How is the payout amount for a life settlement determined?
Investors consider how many years someone has left to life to give them an idea for how many premiums they have to pay and how long the investment will take to mature. They’re generally solving for an annual interest rate they need to make back for the investment to be profitable. If there’s enough death benefit left, an investor will make an offer with usually some room to increase if they need to.
What factors can affect the value of my life insurance policy?
The insured’s life expectancy, the cost of future premiums, and the death benefit amount are the most significant factors in determining the value of a life insurance policy.
What steps can I take to maximize my life settlement payout?
Work with a life settlement broker who you like and who will give you the most exposure in the marketplace.
References:
(1) https://blog.lisa.org/consumer/what-factors-can-increase-the-value-of-your-life-settlement
4 years in life settlements
About the author:
I'm a life settlement advocate who became passionate about the industry when I helped my grandfather secure over 60% of his death benefit. Recently, I assisted an 81-year-old woman with $140k annual premiums by finding an investor to buy out her policy while still receiving most of her investment back.
I've also helped clients with expiring term policies receive payouts of $10k - $15k by converting to a new universal life policy. I enjoy educating both agents and clients on the potential benefits of life settlements and am always happy to provide feedback on potential cases.
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