Key Points in This Section
- Senior settlement payouts are a significantly lower percentage of face value than viatical settlements because life expectancies are much longer — often 13 or more years
- Investors use present value calculations rather than the NAIC’s simplified viatical pricing schedule to determine what they will pay for senior settlement policies
- The present value formula: PV = Face Value ÷ (1 + rate of return)life expectancy in years
- Life expectancy is the single most important pricing factor — a 2-year life expectancy at 20% yield produces nearly 4× the payout of a 10-year life expectancy
- Additional pricing factors include policy size, premium structure, riders, insurer rating, and prevailing market discount rates
- Valuing a lifetime settlement is more art than science — viators should shop multiple buyers to find the best offer
Senior Settlements — Pricing
Why Senior Settlement Payouts Are Lower
Although the policies involved in senior settlements are generally larger than those in viatical settlements — the average settled policy face value has exceeded $1.5 million in recent years — the percentage of face value paid to the viator is considerably lower. The reason lies almost entirely in the disparity of life expectancies.
While life expectancy is 24 months or less for viatical settlements, senior settlement insureds may have life expectancies of 13 years or more. From the investor’s perspective, longer life expectancy means death benefits are further in the future, requiring deeper discounts from face value. The simplified NAIC minimum percentage schedule used for viatical settlements does not work well for these longer time horizons; instead, investors rely on present value calculations.
The Present Value Concept
The pricing of senior settlements rests on a foundational financial principle: a dollar in hand today is worth more than a dollar received in the future. How much more? That depends on the investor’s required rate of return, which reflects the risk and time involved in waiting for the death benefit to be paid.
The formula used to calculate the present value of a future death benefit is:
Present value interest factor tables simplify this calculation. The tables below show the factors for 16% and 20% annual rates of return across life expectancies of 1–15 years. To use these tables, multiply the policy’s face value by the factor for the investor’s required rate of return at the insured’s projected life expectancy.
| Years | @ 16% | @ 20% |
|---|---|---|
| 1 | 0.8621 | 0.8333 |
| 2 | 0.7432 | 0.6944 |
| 3 | 0.6407 | 0.5787 |
| 4 | 0.5523 | 0.4823 |
| 5 | 0.4761 | 0.4019 |
| 6 | 0.4104 | 0.3349 |
| 7 | 0.3538 | 0.2791 |
| 8 | 0.3050 | 0.2326 |
| 9 | 0.2630 | 0.1938 |
| 10 | 0.2267 | 0.1615 |
| 11 | 0.1954 | 0.1346 |
| 12 | 0.1685 | 0.1122 |
| 13 | 0.1452 | 0.0935 |
| 14 | 0.1252 | 0.0779 |
| 15 | 0.1079 | 0.0649 |
Example — Applying the Present Value Table
A $1,000,000 policy is offered for sale. The investor requires a 20% pretax return.
If life expectancy = 2 years:
PV factor = 0.6944 → investor pays $694,400 (69.44% of face value)
If life expectancy = 10 years:
PV factor = 0.1615 → investor pays $161,500 (16.15% of face value)
A two-year life expectancy produces a settlement nearly four times larger than a ten-year life expectancy at the same required return. If the investor’s required return drops to 16%, the two-year policy would command $743,200 and the ten-year policy $226,700.
Other Pricing Factors
While life expectancy is the primary determinant of settlement value, several other factors affect the price a policyowner can expect to receive:
- Policy size and cash value — larger policies are more marketable; policies with substantial cash values command higher prices, though investors prefer purchasing “pure insurance” rather than paying for accumulated cash value
- Premium structure — traditional whole life policies require premiums for life; limited-pay policies reduce the buyer’s future premium burden and therefore command higher prices; a waiver of premium rider eliminates premiums during disability, increasing the policy’s value to the buyer; universal life’s premium flexibility is preferred by settlement investors
- Death benefit riders — accidental death (double indemnity) riders and cost-of-living adjustment (COLA) riders increase potential death benefits and therefore increase settlement value
- Contestability and suicide clauses — most investors will only purchase “aged” policies in which these early-year limitations have expired (typically after two years); some investors will purchase younger policies at a deeper discount if returns are sufficient
- Insurer financial strength rating — policies issued by lower-rated insurers attract deeper discounts; investors require higher returns to compensate for greater counterparty risk
- Prevailing market discount rates — as with any investment, required returns on life settlements compete with returns available elsewhere; when market rates decline, present values rise and settlement proceeds increase
Ultimately, determining the “settlement value” of a life insurance policy is more art than science. Different investors will weight these factors differently — some use conservative life expectancy estimates, others more liberal ones; required rates of return vary by investor and market conditions. For this reason, viators should always obtain multiple competing offers before accepting any settlement.