If you’ve spent some time on the www.LISA.org website, you understand by now that your life insurance policy is legally recognized as your personal property. That means it’s an asset you own and can hold for its originally intended purpose of paying out a death benefit to your heirs one day – or, if you decide that you no longer want, need or can afford that policy, one of the options available to you is to sell that asset to an investor in the form of a life settlement.
When you sell your insurance policy through a life settlement, you receive a cash payment. The buyer pays all future premiums and receives the death benefit when you pass away. That part is clear and simple.
But there is less clarity when it comes to precisely how much your life insurance policy is worth right now on this “secondary market” for life insurance. The reason for this uncertainty is that the value of life insurance policies – just like a lot of other personal property items you own -- is determined by factors such as age, condition, maintenance costs and market demand.
So to understand what your policy is worth, here is what you need to consider:
The Policy Value
What is the “death benefit” on your policy? That is the starting point because it’s the amount of money the potential buyers of the policy can expect to collect on their investment.
- The Maintenance Costs
What are the annual premiums on your policy? That tells the potential buyers how much it will cost them each year to keep the policy in force.
- Your Age and Health
These factors are important because they determine your “life expectancy” – which in turn allows potential buyers of your policy to project how long they’ll be paying those premiums before collecting on the benefit.
That’s it, there’s nothing mysterious involved.
In general, when life insurance policy owners enter into life settlements, they realize an average of seven times the amount of the policy’s cash surrender value, based on an analysis of a 2010 survey by the U.S. Government Accountability Office. A 2014 study by the London Business School found that Americans who sold their unwanted life insurance policies collectively received more than four times the amount they would have received had they surrendered them to their life insurance companies.
Finally, remember that you are the owner of the asset and you have all of the power in your hands for what to do with that asset. If the potential buyer decides to extend an offer for your policy, you can review that offer with your trusted advisors and determine whether it represents a good deal for you or needs to be raised in order for it to make sense. You may also choose to retain a life settlement broker, who will solicit competing offers from other potential buyers and help you compare the offers so you can choose the best one. Naturally, you’re always free to decline all offers and keep your policy for yourself, just like you can with any other form of personal property.
So while there may not be a printed menu for life settlement transactions where you can find the exact price that your policy is worth right now, it’s really not such a mystery after all. Like any property you might want to consider selling for a cash payment, you just need to know a few key pieces of information to determine its worth, then test the market and review the best offers.