August 1, 2021
Time to Sell? How Life Expectancy Impacts the Value of Life Insurance
Life insurance policies are a valuable asset. The U.S. Supreme Court decided in 1911, in a case called Grigsby v. Russell, that life insurance policies are personal property. Like any personal property asset, life insurance policies can be sold when they no longer serve the needs or retirement plans of their policyholder.
Reasons for selling a policy are numerous and varied – the policy premiums may have become too expensive, the death benefit may no longer be necessary to cover anticipated expenses, or perhaps the policyholder may simply have current needs that outweigh the future worth of their policy’s death benefit.
What is Life Expectancy?
The life expectancy is considered the point in time that there is a 50% probability (based on the mortality rates) that the person will have died. Life expectancy is either provided as the average number of years or months expected (average) remaining in a person’s life. The actuaries calculate the mortality rates based on historical experience for the population set.
How is Life Expectancy Calculated?
Life expectancy is actually a combination of two factors – a medical review and underwriting of a person’s health applied to a mortality table. In the context of life insurance, the population is defined as the “insured population.” In life settlement transactions, the underwriters and actuaries base their actuarial tables on the “life settlement population.” That means that the number of years in a person’s life expectancy may depend on the population set, as mortality experience depends on the data set.
Life Expectancy Drives Policy Value
A person’s life expectancy is a major factor in life insurance – it will determine whether you are eligible to purchase a new policy and what your policy’s value is should you choose to sell your policy. The same is true for annuities – your payout rate will depend on your life expectancy.
Health Factors that Impact Life Expectancy
Numerous factors are important in the calculation of your life expectancy. A life insurance company, as well as a life settlement company, will review your medical history and medical records as part of any underwriting process. Other important factors include your current age and family history (eg, does your family have a history of heart disease). Underwriters will also likely consider your body mass index in life expectancy.
Lifestyle factors also play into a life expectancy calculator. For example, if you have any dependency, that will have a negative impact on life expectancy. Underwriters consider the factors of independent living, also referred to as activities of daily living (ADLs). On the other end of the spectrum, if a person is active (playing a sport, consistent exercise, etc.) the life expectancy would be increased.
Other non-health factors can impact life expectancy. Some underwriters take into account socio-economic factors when determining life expectancy. The concept is that access to healthcare may be impacted by wealth and/or geographic location.
Current Life Expectancy Trends
In recent years, even before the COVID-19 pandemic, life expectancy was trending downward. There is more evidence of the downward trend in life expectancy driven by the singular market force of the COVID-19 pandemic: The National Center for Health Statistics, National Vital Statistics System, recently reported the 2020 “Provisional expectations of life, by age, race, and sex.”
The report concluded that overall life expectancy dropped in the U.S. by about 1.5 years, with the major negative impact resulting in the decrease being attributed to COVID-19. The report has many details about the impacts, positive and negative, on life expectancy by gender and race and for various age groups. The complete article is available at the Center for Disease Control (CDC) website.
Here are some other important statistics relevant to the senior and retirement market. As outlined in the CDC’s table in the article referred to above, the average life expectancy in the U.S. (regardless of gender) at age 70 is 15.3 years; age 75 is 12.0 years; age 80 is 9.1 years; and age 85 is 6.7 years.
There have been a number of recent articles published about the recent impact of COVID-19 on life expectancy, The New York Times and The Washington Post being good examples. It is important to understand, as these changes and trends can have an impact on the value of your own life insurance policy.
Life Insurance Policies Have a Market Value
A life settlement transaction allows life insurance policyholders to realize the market value of their life insurance policy. In a life settlement, the life insurance policyholder receives a cash payout of an amount less than the policy face value, but more than the cash value. The new owner then pays all future premium payments on the policy.
After you sell your life insurance policy, your beneficiaries will no longer be eligible to receive the policy payout. Life settlements are a regulated transaction, so make sure you are working with a life settlement provider or broker who is licensed in your state.
What Type of Insurance Products Qualify?
All types of life insurance policies qualify for a life settlement, including term life insurance. The most typical policies sold in life settlement transactions are universal life, convertible term life insurance, and variable life insurance. Other policy types, including whole life, group life, indexed life, are also potentially eligible for a life settlement.
Life Expectancy Calculators
You can find life expectancy calculators on numerous websites. As an example, the social security administration (www.ssa.gov) has a life expectancy calculator based upon U.S. population data. That means, these life expectancy tables do not take into account your specific situation – health status, medical history, family history, or any other underwriting factor.
There are other life expectancy calculators available on the internet that do take into account underwriting factors. This type of calculator is more likely to coincide with how a life insurance company or life settlement company would calculate your life expectancy.
You can also view the federal government’s period life table to see the mortality experience of a population during a relatively short period of time.
Bottom Line on Life Expectancy and Life Insurance
The bottom line is that if you are considering selling your life insurance policy now, or in the near future, it could be worth more than it might have been in pre-COVID years – an essential consideration as you evaluate your personal financial situation. If you’re interested in receiving a quick and easy estimate on the potential value of your policy, get an ‘instant’ quote directly from our online calculator page!
Author: Steven Shapiro
Steven Shapiro is the founder of the Company and also the President and CEO of Q Capital Strategies, LLC and Life Settlement Solutions LLC. Steven has been active in the life settlement industry for the last 18 years. In addition to his life settlement experience, Steven has expertise in strategic consulting, investment banking advisory services, and private equity investing. Steven holds a B.A. degree in economics from the University of Pennsylvania and an M.B.A. in finance and entrepreneurial management from The Wharton School of the University of Pennsylvania. Steven is also the immediate past Chair of LISA (having previously served as Chair), the Life Insurance Settlement Association, the oldest and largest trade organization in the life settlement industry.