Valuating a Policy

Appreciate that the value of a life insurance policy at any given time is simply the present value of future death benefits less the present value of the future premiums as of that time. These present values should be calculated on the basis of appropriate interest rates and mortality rates. Asset Life uses appropriate mortality rates in a life settlement pricing calculation on every policy being sold. An interest rate appropriate to the needs of the Investor is determined by Asset Life when setting the purchasing parameters.

However, Asset Life knows that not all life settlement policy purchasers determine a price using the same methods as Asset Life. Other purchases use methods that on the surface appear to have a sound technical footing, but in reality are rather vague. For example, one approach is to calculate a life settlement purchase price that provides an acceptable internal rate of return by discounting the following future cash flows using interest only:

• the death benefit payable at median life expectancy plus N years, where N is generally between 0 and 2; less
• agent commission and other relevant expenses paid at life settlement; less
• estimated ongoing premiums payable to the original life insurer each year during the period of median life expectancy plus N years.

In general, the life settlement purchase price would be calculated either on a trial and error process using an internal rate of return chosen to satisfy the purchasers expected hurdle rate or utilizing an equivalent method. However, the mortality assumption reflected in the median life expectancy used in the above calculation is a rather rudimentary approach to incorporating mortality risk. Although mortality is, clearly, an essential component of a life settlement’s value, Asset Life are reasonably certain that many in the life settlement industry do not use durational probability of death and/or survival (i.e., mortality rates that vary by policy year and age) in their calculations.

In addition, in the above calculation, the estimated premiums required to keep the original life insurance policy in force are typically obtained from illustration systems for example, Universal Life that show the level of premium required to support the policy up to median life expectancy plus N years. The naiveté of many current life settlement investors causes them to calculate this premium on the basis of current assumptions including the current declared net crediting rate. The declared net crediting rate is the current interest rare set by the insurer that issued the UL policy and is not guaranteed. In other words, other purchases make the same mistake many policyholders make in interpreting a current assumption illustration to be tantamount to a guarantee. Asset Life in formalizing its pricing is aware that the premium may need to be increased owing to future decline in crediting rates or a future increase in mortality rates or even because expenses have increased.