On average, a life settlement or viatical settlement candidate will receive an upfront cash settlement of 25% of the life insurance policy death benefit. However, life settlement and viatical settlement offers vary widely on a case-by-case basis – ranging from 10% to 80% of the death benefit depending on the individual insured, the life insurance policy and the market conditions. A life settlement offer is made on the basis of three key variables.
Factors of a Life Settlement Offer
- Life Expectancy
- Policy & Premium Size
- Buyer Discount Rate
Life expectancy is the most important variable in calculating a life settlement offer. In general, the shorter someone’s life expectancy, the more valuable the life settlement offer will be. This is because from the policy buyer’s perspective, the sooner they are able to realize the death benefit, the sooner the buyer is able to payout from their investment. This works because of a financial concept known as the time value of money. The time value of money can be boiled down to the concept of a dollar today being worth more than a dollar tomorrow. A dollar today is worth more to you than a dollar tomorrow because you are able to invest your dollar today and collect interest on it – theoretically, your dollar today will be worth more than a dollar tomorrow. On that same notion, a dollar tomorrow is worth more than a dollar in one week. Just as with life settlements: all else equal, a life expectancy of 5 years is more valuable than a life expectancy of 10 years. This generally correlates to both the insured’s age and health condition.
Policy & Premium Size
In general, the larger the life insurance policy size, the larger the life settlement offer. This is because the death benefit payout to the investor is larger. The smaller the premiums required to keep the policy in force, the larger the life settlement offer. This is because the buyer’s maintenance cost of the life insurance policy will be lower.
Buyer Discount Rate
The last and final factor in calculating the life settlement offer is the buyer’s discount rate. Often times, the buyers of life insurance are borrowing money from investment institutions. The buyers pay a certain rate of interest on those proceeds which are used to purchase policies. The life settlement offer can be affected by how much it costs the buyer to borrow that money.
From the Buyer’s Perspective
In summary, from the perspective of the investor purchasing a life insurance policy, the transaction is similar to purchasing a fixed-income security (i.e. a bond). The security pays no annual interest rate and would be classified as a zero-coupon interest rate security. The big difference is that the life insurance security has an annual maintenance cost to keep the policy in force – the annual premium payment.
As previously stated, life settlement offers vary on a case by case basis. You can utilize a life settlement calculator to estimate what your offer might be – based on your age and policy size.