One of the major factors in trading or selling of your insurance policy is it’s worth, and the most common query among policyholders is, “how much is my life insurance policy worth?”; through this article, we will help you find the same.
On an average, the sale of a policy in the industry through cash settlement can get you 20% of your total policy’s death benefit; if you have $1,000,000 policy, then you will get an almost of $200,000. However, the following factors play an important role in fixing your worth.
- Policy size: The size of the policy is directly proportional to the value of the life settlement; this means that the bigger your policy is, the higher the value.
- Age and life expectancy: Due to the logic that the buyer will be able to realize the benefit faster on account of your death, the value of the settlement increases on the decreasing value of your life expectancy.
- Premium amount: On account that the requirement to maintain the policy is low in comparison to the less requirement of keeping the same in force, usually, many buyers prefer policies with annual premium cost; low maintenance requirements increase the value of the life settlement.
- The market rate of return: Generally, the targeted investment returns of investors are affected by the rate in which the capital is being raised; thus, investors prefer policies with a low-interest rate.
- Cash value: This is the most important factor, and this section will help you in calculating the same through an example.
Your premium is $4,000 for the death benefit of $100,000. The discount rate is 8% while your life expectancy is 10 years.
On account of such values, it can be understood that you will be paying $4,000 for the expected value of 10 years; the cash flow when multiplied with discount factor values like 0.926, 0.857, 0.794, 0.735, 0.681, 0.630, 0.583, 0.540, 0.500 as well as 0.463, gives the discounted cash value which would be taken for accurate calculation.
Note: You can refer the discount values through the intercept of the total years and the discount rate of policy in the value chart.
On calculating the given values, here the policy value is approximately $19,479 and thus, will be the approximate current value of your policy.
In the above-mentioned example, the cash flow which is used to pay premiums is taken to be zero; this means that an investor pays off premiums through cash value in early years and thus, cash value tentatively increases the worth of your policy. However, usually buyers prefer policies with low cash values; this is because investors will not prefer to “buy cash,” especially in cases where cash is liquid and cannot be used for long periods. Also, many buyers prefer low cash value for reasons like no additional risks as well as interest rate risks. Thus, as a result, investors can discount the cash value or purchase the policy altogether depending on their idea of further use.
It’s important to note that if your policy has a high cash value, you can withdraw the cash value before undergoing life settlement; this decreases your death benefit but makes your policy easily sellable.
FOR NEW POLICY PURCHASERS:
If you’re a first-timer in purchasing policies and you’re wondering the approximate worth of policies you can invest in, then this section will help you with a few important parameters.
There are two popular methods to calculate; the human life value method and the income replacement value method.
In the former, according to experts, the policy you’re buying should be directly related to the economic value. This means that if your age is 40 and you earn $500,000 per annum where your expenses are $130,000 while the residual amount is $370,000, the following will be the calculation.
- Your retirement age: 60
- Gross total income: $500,000
- Personal expenses: $100,000
- Tax payable: $15,000
- Insurance premium: $15,000
- Surplus income for a family: $370,000
- The expected rate of return: 8%
- Working span: 20 years
And thus, your human life value will be $390,000.
The latter method is an application of a simple formula; you need to multiply your annual income and the number of years remaining for your retirement.
It’s important to note that there are numerous methods available to find the value of policy you need to invest in; you can check accordingly by applying the suitable factors for more efficient investment.