How Much Is My Life Insurance Policy Worth?

Your life insurance policy is a valuable asset that can be sold just like any other personal property. In 1911, the U.S. Supreme Court ruled in a case known as Grigsby v. Russell that life insurance policies are personal property that can be sold and transferred to third-parties like any other personal property. Historically, if you no longer wanted or needed your life insurance policy, your only option was to lapse or surrender your life insurance policy back to the insurance company. Many policyholders don’t realize that a permanent life insurance policy (e.g., universal or whole life insurance) may have a market value that is greater than the cash value. Further, if you have a term life insurance policy that does not have any cash value, your life insurance policy may still have a market value. A sale of a life insurance policy in the secondary market to an unrelated third-party is known as a life settlement or a viatical settlement.

What is the Value of Your Life Insurance Policy?

It’s not as easy as you may think to determine what the value of your life insurance policy is. The key factors that are necessary to determine the value of your policy include four items: your age, health condition, the amount of coverage, and the type of life insurance policy you have. An estimate can be done based on the face value (net death benefit) of your policy, but to get a more precise value, the policy details are important. The policy details can be determined by reviewing an “in-force illustration” or the actual policy contract, which can be obtained either directly from the life insurance company or your life insurance agent. The value of the policy is driven by four primary factors:

Age

The older you are, the more your policy is worth, based on mortality data. For a life settlement, most companies required the insured to be at least 65 years old, with most policies purchased on people aged 75 and older. In a viatical settlement transaction, where the insured has either a chronic or terminal illness, the medical conditions and current treatments are more important factors than the insured’s age.

Amount of Coverage

What is the policy’s death benefit? The larger the policy’s face amount, the more value potential exists. It is also important to understand if the policy’s death benefit changes over time (either higher or lower) and if the policy has a maturity or expiration date.

Policy Design

What type of policy do you have? Permanent life insurance policies (universal, whole, variable, indexed, survivorship, as examples) and term life policies are valued differently. However, many term life policies have the option to be converted into a permanent policy. What riders, guarantees, or special provisions does the policy have? All of these items are relevant to the valuation process. Along with the type and design of the policy, the monthly premiums on the life insurance policy are an important factor in the valuation process. The lower the monthly premium, relative to the policy’s face value, the higher the potential market value of the policy.

Life Expectancy and Underwriting

Prospective policy buyers will underwrite your health status to determine the estimated period of time remaining before a potential payout. The insured’s life expectancy has a dramatic impact on the market value of a life insurance policy. It is important to understand that no medical exam is required like when you originally took out the life insurance policy.

Calculating How Much Your Policy is Worth

Life settlement investors take the information from the illustration to figure out what premiums are projected to be paid over your lifetime and combine that with your medical condition to estimate the timing of the payout of the death benefit on the policy. In the life settlement industry, this would be called a probabilistic discounted cash flow analysis. No medical exam is required, life settlement companies will do an underwriting of your health based on your medical records. A life settlement company may also ask you questions about your health and medical history on a phone call to get additional details.