One of the first and most important questions that any potential seller of a life insurance policy has is “what is my life insurance policy worth?”

It’s understandable – a life settlement is all about the numbers, and it’s important to crunch the numbers to find out if a life settlement is right for you or a loved one.

While each life settlement is unique due to the highly specific circumstances of every individual, the average life insurance policy sale can result in a payment of anywhere from 20%-85% of the policy’s death benefit. If a death benefit of a policy is $800,000, for example, you could receive from $160,000-$650,000 for it. As mentioned, however, each case is unique. In general, the following factors will determine the amount you receive.

Age and Life Expectancy

The older the insured seller is, the more valuable their life insurance policy will be. Seniors who are 75 will find offers to be much higher for their life insurance policies than 65-year-olds, on average. Life expectancy, as predicted by a life expectancy underwriting company, also comes into play here. The simple reason for this is that the buyer can expect to receive the death benefit sooner and make fewer premium payments the older the insured seller is.

Policy Size

The larger the policy and the death benefit, the more you can receive from the life settlement. As mentioned before, the minimum death benefit for a policy to be eligible for a life settlement is $100,000.

Premium Costs

The annual premium costs – which the buyer will have to cover – are also a factor in how much you might be offered in a life settlement. The lower the costs, the higher the offer will be.

Market Rate of Return

If the market is such that a buyer (an investor) can raise capital more easily, with lower interest rates all around,

Sample Calculation

The formula used to calculate the value of a life insurance policy is called a “discounted cash flow analysis”. With a person with a life expectancy of 10 years, an annual premium of $4,000 and a death benefit value of $100,000, we can assume a discount rate of 8%.

Using the calculation, we can determine that the estimated value of the policy is $19,479. The policy is sellable because the present value of the death benefit is higher than the present value of the premium payments (that is, the discounted cash inflows and outflows were positive each year.) But if the same example is used, but with a life expectancy of 15 years, the premium payments increase, and the net premium value (or NPV) of the death benefit is reduced. The extra five years mean that the premium payments exceed the present value of the death benefit. Therefore, the policy won’t be sellable.

Just three extra years added on to the life expectancy changed the policy’s value from positive to negative. Obviously, the judgment passed by life expectancy underwriters can make or break your hope to sell a life insurance policy. The two main factors that determine life expectancy are your age and the state of health you’re in. While the methods used by underwriters aren’t made public, you can use free tools such as the LivingTo100 calculator to receive a ballpark estimate on your life expectancy and whether you’d be able to engage in a profitable life settlement.

What About Cash Value?

In the above examples, the assumption was that the policies had no cash value. That is because cash value can be tricky – it can, on the one hand, increase your policy’s value, as the investor can use the cash value to pay premiums in the early years of holding the policy when the discount rate is high. But cash value doesn’t increase your policy’s value in a linear way – in fact, the rate of increase of the overall value decreases the higher the cash value is. That is because investors are wary of “buying cash”, especially illiquid cash that cannot be used for several years. This is due to additional interest rate risk, so you should be aware that policies with a cash value of 25% and higher of the death benefit might be less valuable than policies with a lower cash value percentage of the overall policy value.

Furthermore, a high cash value can be more lucrative than a life settlement after fees and commissions, so consult with your financial advisor to find out what is right for you in such a situation.