Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Sep 15, 2020

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You’ll be offered only a fraction of the face value of your life insurance policy to sell the policy, but you’ll get that fraction now, rather than have your beneficiaries get the face value after your death.

The percentage of that face value you’ll receive now – in other words the price that you’ll be offered for your life insurance policy as a life settlement or viatical settlement — is determined by business people and actuaries who calculate what they are willing to pay for it and yet make a large profit knowing that they have to lay out money now, and also keep on paying premiums for some indefinite period until the insured dies. The price a policy owner receives is based a combination of factors:

The face amount of the policy.

The anticipated life expectancy of the insured person. The shorter the anticipated longevity, the higher the price you are likely to receive when selling your life insurance policy. Using actuarial and medical data, professionals at the broker or life settlement company estimate the life expectancy of the person whose life is insured. Life expectancy is estimated based on the following factors:

t The age of the insured. An average 65 year old has a much longer life expectancy than the average 85-year old. The older you are, the higher the price you are likely to receive.

tThe health and medical condition of the insured. Some conditions (such as pancreatic cancer) normally lead to death within a very short period of time (although there are rare exceptions. Some conditions (such as certain heart conditions and cancers) are known to generally result in death over a period of from 2-6 years. Yet other conditions (such as diabetes, extreme high blood pressure) are known to shorten average life expectancy considerably but with far greater variability.

Prospects for “cures.”Discovery of the “AIDS cocktail” dramatically changed the life expectancy of those with AIDS and HIV infections. The more likely it is that a “cure” for the insured’s medical condition, as a result of new medicines or surgical procedures, or that the insured will engage in dramatic changes in lifestyle – such as exercise and lose 200 pounds –impacts the risk the buyer prices for.

The sex of the insured. As women live longer than men on average, a male is likely to receive more for a policy than a woman of the same age with identical medical conditions.

The estimated cost of keeping the policy in force until the anticipated date of death. That in turn depends on:

The expected annual premium for the policy, assuming the policy is not “paid-up.” The higher the future premium, the lower you’ll likely be paid.

The amount of cash value in the policy, and the rate of interest that is guaranteed or projected to be credited on cash values.

Any anticipated dividends that may help offset the premium.

The guarantees in the policy, such as whether the premium and amount of coverage is guaranteed or subject to change.

The exact terms of the policy. There are numerous different elements that often depend upon the type of policy involved (whole life vs. universal life vs. term). These factors include:

(1) Whether the policy will or could expire by its own terms at any point in time even if premium is paid. For example, term life insurance policies often cease providing coverage at a certain age, such as 75 or 80.

(2) Policies sponsored by an employer, association or other group often permit the group or insurance carrier to terminate the plan or reduce the amount of coverage or change premium rates for all persons covered. That may leave policyholders stranded.

(3) Waiver of premium provisions — a policy that contains a waiver of premium provision – so that the owner need not continue to pay premiums if the insured becomes “disabled” as defined in the policy — is worth more than the same policy without such a provision. The definition of disability often varies from policy to policy and company to company.

(4) The age at which the policy matures or endows, such as age 90 or 95 or 100, so that benefits would be paid even if the insured is still alive.

(5) The existence of an accidental death benefit.

(6) The ease of working with the insurance company to transfer ownership.

(7) The financial strength and stability of the insurance company that issued the policy. Unless the insurance company has strong financial ratings, the potential buyer of a life settlement would pay less or decline to bid.

(8) One huge factor that is calculated into the mix is the total amount of compensation that will have to be paid to the many folks involved in each step of purchasing the policies. They often include the life insurance agent who may have approached you and suggested you consider selling the policy, to the regional life settlement firm that may have trained the agent or handles the paperwork on your end, the national wholesaler that conducts the underwriting and medical evaluations and then packages the policies and matches selling policyholders with the investors who provide the cash to buy the policy.

(9) Prevailing interest rates and anticipated changes in the economy. If general interest rates are low, the rate of return the buyers will demand is likely to be lower than if the rates are high.

Based on this information, the prospective buyer determines how much it is willing to pay the insured for the policy. Not all prospective buyers come to the same conclusion. In any event, the seller gets a fraction of the face amount, and has to cover all its costs and risks until the insured person eventually dies and the buyer collects the full death claim value.