Life Settlements
You own an asset that other people want. Do you know what it's worth?
When you're buying a new car, you need to understand how the price gets marked up. You can get that information from services such as the Consumer Reports New Car Price Report.
When you're selling a life insurance policy that you own, you need to understand how the price gets marked down.
Your life insurance policy may be a more valuable asset than you think. Before you sell it to someone else, make sure that you understand all of your options. Caveat vendor.
Q&A
What is a life settlement?
A life settlement is the sale of a life insurance policy to a third-party buyer for more than the cash surrender value. If your health is not as good now as when the policy was issued, or if the policy is underpriced, a third-party buyer may be willing to pay more for your policy than you can get by surrendering it to the life insurance company.
What will your review tell me?
We give you the information that you need to make these decisions:
Should I sell my policy, or should I keep it? Using several sets of assumptions, we give you (1) an estimate of the market value of your policy; (2) an estimate of the value of your policy to your beneficiaries if you keep it until you die; and (3) a comparison of the death benefit of the policy with the projected value of other investments.
Should I sell my policy now, or should I wait? For one selected set of assumptions, we give you an estimate of the future market value and the rate of return for waiting, and we explain the factors that you should take into account in deciding whether to sell now or wait.
If I decide to sell now, how can I obtain a fair price? We explain how the pricing process works. This puts you in a better position to negotiate a fair price.
In a sense, selling a life insurance policy is the opposite of buying a new car. However, both transactions require informed bargaining to get a good deal.
When you are buying a new car, you need to understand how the price gets marked up.
| Comments | ||
|---|---|---|
| Dealer's cost | What the dealer pays the manufacturer for the car. | |
| plus: | Dealer's markup | What the dealer charges for expenses and profit. This is negotiable. |
| equals: | Purchase price | What you pay. Buyers with better information can bargain for a lower price |
When you are selling a life insurance policy, you need to understand how the price gets marked down.
| Comments | ||
|---|---|---|
| Retention value | This is the value of the policy to your beneficiaries if you keep it until you die. It measures how much they would have to invest today in something else to match the death benefit of the life insurance policy, taking account of the probability of death each year and the projected return on other investments. | |
| minus: | Income taxes | A life settlement is not tax-efficient. It destroys value in two ways: (1) you pay income tax on the excess of the purchase price over the policy's cost basis and (2) in most cases, the buyer pays income tax on the excess of the death benefit over the purchase price. |
| minus: | Investor's profit | The investor wants to obtain a high rate of return (often at least 15%) to compensate for the risks of buying the policy. Some investors have lower targeted returns than others. |
| minus: | Life settlement provider's expenses and profit | The life settlement provider finds an investor to buy the policy and administers the policy after purchase. The provider incurs expenses to appraise the policy and manage an office. Some providers seek lower profits than others. |
| minus: | Broker's commission | The broker finds people who want to sell their policies and gets purchase offers from life settlement providers. The broker's commission can be up to 6% of the death benefit (and therefore a much larger percentage of the gross purchase price). This is negotiable. |
| equals: | Purchase price | What you receive. Sellers with better information can bargain for a higher price. |
How much does your service cost?
We usually proceed in steps to avoid wasting time if there is little chance of getting an acceptable offer. A preliminary assessment usually takes one to two hours. A What's My Policy Worth? report usually takes five to six hours to prepare and discuss.
What can I expect to receive?
Here's a sample report, without the appendices.
When we prepare a What's My Policy Worth? report for you, we do not just input data, push a button and print. We have to think about what we're doing. Inforce illustrations, annual statements and policy contracts do not have a standard format, so we have to inspect each document to find the information that we need. We may have to use our own judgment if some items of information are missing.
How do you obtain a life expectancy estimate?
If you are already working with an agent or a life settlement broker, you can ask for a copy of the life expectancy evaluation reports that have been obtained to get purchase offers. These reports are prepared by a small number of appraisal firms, including AVS, Fasano and 21st Services.
If you have not yet begun the process of selling your policy, you will have to obtain your own life expectancy estimate. This requires getting an Attending Physician Statement (APS) from each of your doctors and submitting the package to one or more of the appraisal firms.
Doctors typically charge from $50 to $150 for an APS, but some doctors charge much more. You can avoid excessive charges by calling each doctor’s office and explaining that you — not an insurance company or a life settlement broker— are paying for the APS.
Life expectancy evaluation services typically charge from $250 to $400 for a report.
Some brokers are willing to obtain life expectancy estimates on a fee basis, and this can be a time-saving option to consider.
How likely is it that I will benefit from your service?
Most life settlement transactions involve a lot of money, and the other participants have a financial interest in convincing you to do the deal. They won't make money unless you sell your policy. The information that I provide will help you make informed decisions that are in your best interest.
The life settlement market is inefficient, and better information can easily pay for itself. Suppose you have a policy that has an $800,000 death benefit. A typical gross purchase price might be 10% to 20% of the death benefit ($80,000 to $160,000). A typical broker’s commission would be up to 6% of the death benefit ($48,000), shared with a referring agent. This leaves a lot of opportunity to recover our fee by obtaining a higher gross purchase offer or a lower broker’s commission.
It can also make sense to pay for underwriting costs yourself, instead of letting a life settlement broker do it “for free.” Unless brokers and providers are inept businesspeople, they are taking account of their expenses when they make a purchase offer. Some brokers and providers have not-taken rates of over 50%; that is, they incur underwriting costs without completing a transaction in more than half of their cases. Suppose a typical underwriting cost is $1,500. That means that each successful transaction has to bear a cost of more than $3,000 — and that shows up in lower purchase offers.
Unfortunately, some brokers and providers have fostered a something-for-nothing atmosphere in the life settlement market by using “free appraisals” as a sales pitch to entice policyowners. They are damaging the marketplace by driving up transaction costs.
This may provide an opportunity for well-informed policyowners to obtain higher purchase offers. The combination of a fee-based life expectancy appraisal service and our What's My Policy Worth? report lets you deal with the life settlement market on your terms. You don’t have to contact a broker or provider until you already have a good understanding of how the life settlement process works and what your negotiating position will be.
You probably will not be able to sell your policy in the life settlement market if your life expectancy exceeds 15 years, or if your policy is less than two years old, or if the death benefit is less than $100,000 (although a few providers may buy smaller policies).
If I get multiple bids for my policy, that will tell me the market value. Why do I need your service?
The life settlement market lacks efficiency and disclosure. Our independent appraisal will help you decide if the bidding process really has worked to produce a fair value for your policy. Recent lawsuits in several states against life settlement providers and brokers raise serious questions about the fairness of life settlement offers. Many buyers also ignore potentially valuable features, such return-of-premium riders and secondary guarantees.
And there are additional benefits to having more information in your hands:
Brokers claim that they can coax higher purchase offers from providers. Who is in a better negotiating position with brokers and providers: someone who is well informed, or someone who is just relying on a textbook idea of market efficiency?
Getting a fair purchase offer is just one step. Negotiating a reasonable broker's commission is also important. Our review lets you be more creative in crafting a compensation agreement. For example, you can specify a minimum acceptable bid and an incentive fee for higher offers. Again, who is in a better bargaining position: someone who is well informed, or someone who is not?
A bidding process cannot tell you what your policy might be worth to your family if you keep it instead of selling it.
A bidding process cannot tell you if it might make sense to wait to sell your policy.
Where can I get more information about life settlements?
Here are some websites that present different perspectives on life settlements:
- Financial Industry Regulatory Authority (FINRA)
- www.finra.org
- Institutional Life Markets Association
- www.lifemarketsassociation.org
- Life Insurance Settlement Association
- www.lisassociation.org
- National Association of Insurance Commissioners
- www.naic.org/state_web_map.htm (links to state insurance departments)