Life Settlement Valuation

Colva serves as the life settlement valuation agent for over $130 million dollars worth of life settlement assets that need to be valued every month as part of calculating the net asset value (NAV) for the life settlement funds that own these assets.

In addition to this, Colva provides premium optimization and pricing for over $1 billion worth of life settlement assets every year. Colva’ life settlement services help life settlement investors maximize the value of their investment while minimizing the risk they take.

Colva helps life settlement investors understand the value of their life settlement portfolio for financial reporting purposes as part of monthly NAV reporting or for life settlement investors looking to buy or sell a portfolio.

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Determining the value of a large life settlement portfolio or individual life settlement policy is crucial to understanding whether a life settlement investor should look to buy or sell that portfolio or policy. The goal in performing a life settlement valuation is to determine the fair market price that an investor would be able to buy or sell a policy at.

Life settlement valuation involves a discounted cash flow model that accounts for the premiums that need to be paid on each policy, the death benefits that would be received on the policy and the probability of having to pay a premium versus the probability of receiving a death benefit.

Minimizing (optimizing) the Life Settlement Premiums on each Policy:

In order to achieve the maximum life settlement value of a policy, the investor first has to determine the minimum premiums that need to be paid on it. Remember that the premiums are an expense. The higher the premiums are the less value the policy has.

Many investors don’t check to ensure that the premiums they are paying on their life settlement policies are minimized. The way to do this is to check the account value of the policy after the premiums are paid. Ideally, you should leave as little in the account value as possible. If the account value is extremely high after the premium is paid, it is likely you are paying too much in premiums for the policy.

Most life settlement servicers that optimize premiums leave 1 to 2 months of premiums (if not more) as a buffer in case their calculations are incorrect. So if the monthly premium is $10,000, this means that the investor is paying $10,000 to $20,000 too much in premiums.

Another key area that life settlement servicers make is not properly utilizing shadow account features to minimize premiums. Properly taking into account the complicated features of the shadow account can save hundreds of thousands of dollars in premiums over the life expectancy of the insured as described here.

If you want to increase the life settlement valuation of your policy, one of the best things you can do is to ensure that the premiums on these policies are minimized. This is one of Colva’s key services. In fact, Colva guarantees that we will save you money on the optimization of your policy or we won’t charge you. Contact us here to learn more.

Are you paying too much in life insurance premiums on your life settlement policies?

If so, contact us here to learn how Colva can save you in premiums and learn about our premium optimization guarantee.

Determining the survival probabilities of the insured:

The premiums that the investor has to pay are an expense to the investor (i.e. outflows). The death benefits received are inflows. In order to determine the expected inflows and outflows, the investor has to determine the probabilities of each of these happening. This is done by utilizing a life expectancy on the insured and using an underlying mortality table to determine the probabilities of surviving each year. For example, if there is a 99% chance of the insured surviving one year then there is a 99% chance that the premium has to be paid and a 1% chance that the death benefit will be received. We then use these probabilities to determine the expected inflows and outflows.

Annuity Products
Annuity Products

Determining the current market discount rate:

Once the expected cashflows in the future are determined in the previous step, these cashflows need to be discounted to the present using the current market discount rate. In order to determine the current market discount rate it’s important to poll various life settlement service providers who are acquiring policies. Typically the market discount rate is determined annually and set for the current year based on the discount rate over the past year as well as an expectation of what discount rates will be in the upcoming year. The discount rate assumption is typically revisited annually and is an active discussion point between the actuarial valuation expert, the fund administrator, and the auditing team.

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Life Settlement Services FAQ

How is the life settlement discount rate determined?

A key element of the life settlement discounted cash flow model is the discount rate at which the cashflows are discounted back to the present value. The discount rate is typically determined once a year by the valuation agent and the auditing team that takes into account the current state of the market and the discount rates that policies have transacted at in the past year as well as expectations for the future.

Why is it important to use reputable life expectancy providers in the life settlement valuation process?

Another key input into the life settlement discounted cashflow models are the survival curves that are derived from the life expectancy reports on the insured. As such it is important that life expectancy reports from respected life expectancy providers are used—otherwise the market would not value the policy the same. In fact, the market would generally use a higher discount rate or add other risk adjustments to the policy if life expectancy reports were used from non-standard life expectancy providers.

Why is it important to make risk adjustments to certain policies?

Not all life settlement policies are the same. Some policies have certain characteristics that make buyers weary of them. In order for these investors to buy such policies, they have to acquire them at low prices so that they can get a larger return on their investment which compensates them for their risk. This needs to be accounted for in the valuation of these policies.

There are a number of characteristics that require risk adjustments to be made to the policy. These include, but are not limited to:  outdated life expectancy reports, maturity risk, issues with origination, potential future COI increases, and more.

Colva includes risk adjustments to the valuations of life settlement policies so that they more accurately reflect what these policies would trade at in the life settlement market place. All else being equal, the life settlement valuation of policies that have these risk characteristics will be lower than life settlement policies that do not have them.