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Life settlements and Life Expectancy Certificates
A life settlement seems pretty straightforward to the outsider looking in. Someone has a life insurance policy they want to sell and a financial institution wants to buy it. A price is agreed upon, the transaction is completed and the sale is made. Easy enough, right?
Well unfortunately or fortunately, depending upon your perspective the transaction is far more involved. One aspect that is often misunderstood is the life expectancy certificate aspect of the life settlement transaction. Once a policy seller decides to sell a policy and the insured's medical records are submitted to a life settlement broker or intermediary such as Amrita Financial, the insured's health is thoroughly evaluated by a life expectancy certificate provider. The reason being, an insured's projected life expectancy is the basis for prospective buyers' future financial obligations to keep the policy in force. Meaning gauging how long an insured will live allows a life settlement provider to budget how much they will need to spend in insurance premiums before having the policy pay off. It is important to understand for 3 reasons:
1) The insured's life expectancy provides a budgetary number to potential buyers of how much they will need to FURTHER invest in a life insurance policy.
2) The insured's life expectancy also provides a forecast for the life settlement providers of when and how much of a return they may see on their investment in someone else's life insurance in a life settlement.
3) #1 & #2 are two very big pieces of information used to calculate a prospective life settlement offer to policy sellers.
If a life settlement provider misunderstands, miscalculates or in any way is off in their assessment of an insured's life expectancy it could lead to a money losing life settlement investment in a policy. So the question of an insured's life expectancy is probably the most scrutinized portion of a life settlement buyer's due diligence when evaluating opportunities to buy a policy.
As a way to bring objectivity and standardization to the practice of evaluating an insured's life expectancy, a handful of 3rd party actuarial companies now provide life expectancy certificates. The "LE Certs" as they are called are end result after they have evaluated an insured's medical condition, family history and a host of other factors that generally contribute to someone's longevity. The LE Cert then provides a life expectancy %. Meaning, what is the likelihood people similar to the insured will be dead within certain time frames. For example, an LE Cert might say that the actuaries predict 50% of people similar to the insured will die within 70 months, while 85% will die within 90 months. From this life settlement providers (also known as life settlement buyers) can better estimate the value of a life insurance policy.
Life settlements have often been compared to a real estate transaction. Due to a life insurance policy's nature, they are sold on the secondary market in a much more deliberate and illiquid manner than other assets such as stocks or bonds. Keeping with the real estate analogy, life settlements require appraisals as do real estate when being bought or sold. LE Certs are the life settlement equivalent. In my next post, I will talk about how LE Certs turned the life settlement industry on its head and almost single handedly brought the industry down.