Life settlement valuation is the process of appraising a life insurance policy for sale on the settlement market. This process determines how much you or your client’s life insurance policy is worth and what kind of payout you can expect in a life settlement.
But how do life settlement companies know what to offer — and how can you be sure you’re getting a fair price for your policy? Keep reading to learn about the life settlement valuation process and some key strategies to help you maximize your payout.
THE IMPORTANCE OF ACCURATE LIFE SETTLEMENT VALUATION
An accurate life settlement valuation helps you get a fair price when selling a life insurance policy. The policy valuation should reflect the policy’s fair market value on the life settlement market. Inaccurate valuations might value a policy too low, meaning you get less than what your policy is worth.
Accurate policy valuations help you by maximizing your financial return while also helping to maintain the trust and transparency of the settlement market.
THE LIFE SETTLEMENT APPRAISAL PROCESS EXPLAINED
The life settlement appraisal and valuation process is an important step in determining if you should sell your policy. This initial valuation gives you a better idea of what your policy might be worth on the settlement market.
There are five key steps in a life settlement appraisal:
- Policy overview: This initial review of a policy looks at policy type, face value, premiums and other key details to determine if it’s a good fit for the settlement market. You can use a life settlement calculator to get a better idea of whether a life settlement is right for you.
- Health evaluation: After reviewing your policy, underwriters will look at your medical history and current health to estimate life expectancy.
- Financial analysis: This step involves analyzing your current and future premiums against policy value such as death benefit and cash value to estimate the potential payout vs. the cost for investors.
- Market comparison: With a general cost analysis done, appraisers can compare your policy to those that were recently sold on the life settlement market.
- Final life settlement valuation: Appraisers take all the previous conditions into account to create an estimated settlement valuation for your policy. Remember that this isn’t an offer, but rather a starting point for your policy on the market. You and your broker can still negotiate with buyers to get the best settlement terms.
KEY FACTORS THAT IMPACT POLICY VALUE
The average life settlement payout is around 20% of the policy’s death benefit, although the typical range is between 10% to 25%. The exact percentage a buyer will pay for a policy will vary depending on several factors, meaning some sellers may qualify for even larger payouts.
For example, let’s say a policyholder has a policy worth $500,000. If they’re offered a life settlement at 25% of the policy’s face value, they would receive $125,000.
The most important criteria a settlement company uses to determine your policy’s value include:
- Life expectancy: The longer someone is expected to live, the longer a life settlement buyer will have to pay premiums on the policy. Generally, someone with a lower life expectancy will receive a higher payout than someone with a longer life expectancy.
- Premium requirements: The more expensive a policy is to maintain; the less buyers are willing to offer for it. Lower-cost premiums tend to attract higher settlement offers.
- Death benefit: A higher death benefit often leads to higher offers on the settlement market, as investors will receive more money when the policyholder passes away.
- Policy type: Permanent life insurance like whole life or universal life policies tend to be more attractive on the settlement market due to enhanced features like cash value or flexible premium payments.
- Accumulated cash value: Significant cash value in a policy can help increase its value on the settlement market, in some cases making it possible for buyers to decrease premium payments using accumulated cash value.
HOW TO MAXIMIZE THE VALUE OF YOUR LIFE SETTLEMENT
Although many factors in the life settlement valuation process are out of your control, that doesn’t mean you can’t optimize your policy for the market. Use these strategies to help you get the highest payout when selling your life insurance policy.
Reduce Premium Payments
Settlement buyers are looking to get the best value out of your policy. A policy with lower premium payments is attractive to buyers because they’ll have to invest less while they wait for the death benefit payout.
You can increase settlement offer amounts by lowering your premium payments. For instance, policyholders with universal life policies may be able to use their cash value to pay down premiums before listing their policy for sale.
Wait for a Favorable Life Settlement Market
Like any marketplace, the settlement market fluctuates with current economic trends. If you’re in no rush to sell your policy, you can maximize your payout simply by waiting for the most favorable market conditions to list your policy.
Negotiate for a Better Offer
Many policyholders and financial advisors make the mistake of thinking a life settlement buyer’s first offer is their last. This just isn’t true!
You can negotiate settlement offers to help you secure the payout and terms that work best for your situation. Much like buying and selling real estate, a good negotiator can help you get the most out of your sale.
Work With a Life Settlement Broker
One of the best and easiest ways to increase your life settlement payout is to work with a settlement broker. Unlike settlement providers, who buy policies directly, a settlement broker works on behalf of the policyholder to list their policy on the market.
Brokers work hard to entice multiple buyers to compete for a policy, giving you multiple offers for your policy. Then, your broker will go to work for you to help you negotiate the best price from those offers. Along the way, you can trust your broker to help you understand the current settlement market and give you expert advice on selling your policy.
SEE IF YOUR POLICY QUALIFIES FOR A LIFE SETTLEMENT
Understanding how life settlement valuation works and how you can maximize your policy’s value can help you get the best possible payout for your policy. It can also help you determine if a life settlement is right for your situation.
As you get ready to sell your policy, make sure you have a team of trusted settlement professionals to help you get the most out of your policy. At Life Settlement Advisors, we provide expert guidance as your life settlement broker. We work with you to optimize your policy’s valuation so you get the best settlement terms available.
Learn more about policy valuation and see if your policy qualifies by sending us your case today.
