Life Settlements from an Underwriting Perspective
Life Settlements have had a long and little understood history. Many factors come into play when determining if a Life Policy is a good candidate for a Life Settlement. I would like to focus on one of the primary factors that can impact the decision for both the policyholder and the investor or company considering the transaction… life expectancy.
Put simply, the older the insured is, the more valuable the life insurance settlement will be. Similarly, the lower the life expectancy, whether influenced by age or health, the more valuable the settlement will be. The reason for this is that the policy buyer will realize the death benefit sooner which will result in fewer premium payments.
The life expectancy of a policyholder is generally determined by a life expectancy underwriter. They use various mortality tables and the insured’s medical records to produce the life expectancy estimation. In the underwriting stage of the process, medical records may be reviewed to make sure that there are no gaps in the insured’s medical history, and to determine the health of the insured. Based on those findings, a life expectancy in months is determined. This determination is based on the number of deaths in a pool of 1000 lives that are of the same age and gender as the insured. A mortality table is then used to determine how healthy or unhealthy the insured is, relative to the other individuals in the same class. Someone who is extremely healthy could be rated at 85% mortality, whereas an individual with a terminal illness may have a mortality rating of something like 400%, regardless of age.
Life expectancy is just one of the factors used to determine the value of a Life Settlement, but it is an important one. The terms viatical settlement and a life settlement are frequently used interchangeably, but not always correctly. In general, a life expectancy of under two years is considered a viatical settlement, while those transactions dealing with a reasonably healthy insured with a life expectancy of more than two years are considered a life settlement.
Understanding when life settlement is a viable and appropriate option for your client is essential. Insurance Advisors will be happy to guide you through that determination process. For more information, contact us at (614) 471-7191 or view our life settlement resources here.