Two clients could each own a $1 million life insurance policy but receive very different life settlement offers.
Why? Because a policy’s potential value in the secondary market depends on much more than its death benefit.
Factors such as the insured’s age, health, life expectancy, policy type, and future premium obligations all play a role in determining what a buyer may be willing to pay.
At Abacus Life Solutions, we believe understanding these factors can help financial advisors identify opportunities and make more informed recommendations for clients who no longer need their coverage.
1. The Insured’s Age
Age is one of the primary factors considered when evaluating a life insurance policy for a potential settlement.
Generally, older insured individuals are more likely to qualify for a life settlement because their projected life expectancy may be shorter.
However, age alone does not determine whether a policy qualifies or how much it may be worth. Other factors, including health and policy characteristics, also play an important role.
2. Health and Life Expectancy
An insured individual’s health is another important factor in determining a policy’s potential settlement value.
Life settlement buyers evaluate medical information to estimate life expectancy, which helps determine how long they may need to maintain the policy before receiving the death benefit.
A shorter projected life expectancy may increase a policy’s potential value because the buyer may expect to pay premiums for a shorter period.
Changes in health since the policy was originally purchased can also affect its secondary-market value.
3. Policy Type and Death Benefit
Not all life insurance policies are structured the same way, and certain types may be better suited for life settlements.
Policies commonly evaluated include:
- Universal Life (UL): Often considered because of flexible premium structures.
- Guaranteed Universal Life (GUL): May be attractive due to more predictable coverage guarantees.
- Variable Universal Life (VUL): May qualify depending on policy performance and other characteristics.
- Survivorship Universal Life (SUL): May qualify depending on the ages and health of both insured individuals, policy structure, and coverage terms.
- Convertible Term Life: Certain policies may qualify if conversion rights are still available.
The policy’s death benefit also matters. Larger policies may attract more interest, but the face amount alone does not determine the settlement offer.
4. Future Premium Obligations
When a life insurance policy is sold through a life settlement, the buyer generally assumes responsibility for future premiums.
As a result, the cost of maintaining the coverage is an important part of the valuation process.
A policy requiring substantial future premium payments may receive a lower offer than a similar policy with more manageable premium obligations.
Buyers evaluate these projected costs alongside the policy’s death benefit and the insured’s estimated life expectancy.
5. Policy Performance and Other Factors
Additional policy characteristics can also influence potential settlement value.
These may include:
- Current cash surrender value
- Outstanding policy loans
- Policy guarantees and coverage provisions
- Premium payment history
- Current and projected policy performance
Because every policy is different, two clients with similar coverage may receive significantly different offers.
Why a Policy Valuation Matters
When clients no longer need their life insurance coverage, surrendering the policy or allowing it to lapse may seem like the simplest option.
However, for eligible policies, a life settlement may provide a lump-sum payment greater than the policy’s cash surrender value.
A valuation can help advisors determine whether the policy has potential value in the secondary market before their client makes a final decision.
Discover What Your Client’s Policy Could Be Worth
Every life insurance policy is different, and its potential settlement value depends on several factors.
If your client has coverage they no longer need, a policy valuation can help determine whether a life settlement may be an option.
