When picking an investment, the amount of time (the term) before receiving a return on investment (ROI) is a major consideration. With the return remaining the same, the longer it takes, the lower the amount that can be invested.

This is the same with the purchase of a life insurance policy asset through a life settlement. Determining life expectancy is one way industry buyers find out how much they are willing to invest in a policy. In fairness, insured's who are in worse health (have lower life expectancy) will receive higher offers.

While policies with low life expectancy insureds may receive the highest offers, it is important to note that offers can still be found for policies with healthier insureds. The life settlement industry has matured and there are opportunities for policy owners to receive offers with insureds with even moderately impaired health.

Determining Life Expectancy

During the life settlement process, the medical records for the insured are retrieved. These medical records are then evaluated in order to determine a life expectancy. Third-party companies exist that are licensed to generate life expectancy reports, and these are often ordered by various funds. In most cases, a fund will require multiple life expectancy reports to make an offer.

These life expectancy providers will look for chronic health impairments, current medications being prescribed, lab results and existing treatments for insured health conditions. Upon full review, a rating is given and that rating is applied to tables which produce that companies life expectancy opinion.

Not all conditions are treated the same, and each case is considered independently even within the same condition. For example, two insureds with cancer could produce significantly different life expectancy opinions due to the stage, grade, type, reaction to treatment and existence of alternative treatments currently available.

Are Life Expectancy Reports The Same?

It may make sense that life expectancy reports from different companies would be similar in result, however, this is not always the case. Certain times one life expectancy report can be twice of that from another company. In situations like this, both life expectancy reports are used and an average is used to determine offers.

It can be advantageous then to have an understanding of how different conditions are viewed by the various life expectancy providers and to have insight into the best ones for each individual case. This insight can help return the most favorable life expectancy reports in order to maximize offers. While this is difficult for policy owners, Rapid Life Settlements has this experience.

Life Expectancy vs Premium

Purchasing a life insurance policy asset is greatly impacted by life expectancy, but also the amount of premium it takes to carry the policy. Policies with lower premiums (or no further premium due at all) will be more likely to receive an offer and the offer would reflect the lower premium level by being higher.

While lower or no future premiums is attractive, the time value of money is still a consideration. Having a life insurance policy that requires no further premium payments and has a face amount of $300,000 can often times be thought of as a "guaranteed return" by policy owners and should therefor fetch a high offer. However, considering life expectancy, we can see that even an offer of $100,000 over a 15 year life expectancy would provide a 7.60% internal rate of return (IRR).

In Summary

With life expectancy ultimately an unknown, buyers must remain vigilant at making offers that can provide stable returns. While this may not always meet the expectations of policy owners, many times we see policy owners receive more than they ever imagined their policy was worth. The process of determining life expectancy and how much a policy could be worth begins with a life settlement application which requires no obligation to sell a policy.

Stephen Jass is the Co-Founder and CEO at Rapid Life Settlements. He has spent years in the life insurance and life settlement industries and is now determined to make the life settlement process as fast, easy and simple as possible.