Variable Life Settlement

In the most traditional life settlement, typically the seller will accept a lump sum cash offer, but there is more than one way to sell your life insurance policy, and perhaps you've heard the term variable life settlement.  

A more common term in the industry is Retained Death Benefit.  In this arrangement the buyer offers a smaller cash offer up-front with the ability to participate in some of the future death benefit depending on how long the insured lives.  With the investor taking over the premium payments, the more money they spend on the policy the less they're willing to share some of the death benefit.  In the agreement there will be a schedule of declining death benefit payouts that are in additional to the initial settlement. 

 

Here's an example of what this might look like:  The seller has a $1MM policy, they accept $200k upfront.  Then, if the insured lives less than 1 year, the investor will pay another $700k upon death, totaling $900k.   That is more than any full buyout option will receive.  If the insured lives less than 2 year, the additional payout goes down from $700k to $600k, 3 years is $450k, 4 years is $275k, 5 years is $100k, and 6 years is $0.  So if the insured lives 6 years or more, then the initial $200k will be the total settlement.

What's challenging about this decision is that other offers may have been as high as $500k.  So the seller could take more upfront and be done with it, or still get some cash now while being bound to potentially more money in the future but also potentially less depending on how long the insured eventually lives.  

This type of variable life settlement is typically considered in cases where the life expectancy is on the shorter side, approximately 5 years or less.  When doing a life settlement, it's not unusual for the insured to feel as though they have less time than the investor's underwriting.  The investor has to project conservative numbers in case the insured lives longer than expected.  How many times have we heard a story where the doctor gave someone 9 months to live, and the ended up living 6 more years?  If investors always went with the 9 month projection they'd probably be underwater on their investments.  

When the seller of a policy feels the underwriting is too long, they stand to make significantly more with a retained death benefit, or variable life settlement offer.  This can put them at risk for getting less too if the insured lives longer than expected, but that choice is up to the seller.  

Aside from retained death benefits, there's another scenario where the settlement is structured as a loan with the policy as collateral.  They are essentially loaning you money that does not need to be paid back, but rather the death benefit will cover your balance.  Depending on how long the insured lives will also determine how much is paid out upon death, which will eventually be $0 if the insured lives past the contractual payout schedule.  Payout scenarios are very similar to the retained death benefit scenario, but the contract is structured as a loan.  

If your case qualifies for variable life settlement offers, we can inform investors to provide both retained death benefit and full buyout offers so you can compare and decide what's best for you.  Get started by filling out the free appraisal form or by giving us a call at 213.784.1481