Life Settlement Terminology

Offer Terms:

  • Cash Offer - There are two types of offers, the most common is a cash offer. This offer represents a lump sum of cash that an investor is willing to pay for a life insurance policy. 

  • Retained Death Benefit (RDB) Offer - The second type of offer involves allowing the policy owner to retain an irrevocable beneficiary designation on a portion of the life insurance policy. For example, a policy owner selling a $1 million dollar policy can designate an irrevocable beneficiary for $100k of the death benefit. 

  • Hybrid Offer - In some cases a mix of a Cash Offer and a RDB Offer can be used. 

  • Premium Reimbursement - While not always included, sometimes an investor may reimburse the policy owner for any unused premiums paid during closing. For example, a policy owner pays $3,500 of premium to the life insurance carrier during closing, only $1,200 is used to cover the policy up until when the closing is completed, the investor may provide a premium reimbursement of $2,300. 

  • Cash Surrender Value (CSV) - The CSV is the amount of value in a life insurance policy that a life insurance carrier will pay a policy owner if they lapse their life insurance policy. A life settlement offer must always exceed the CSV amount, because otherwise it would be better for the policy owner to surrender the policy to the life insurance carrier. 

  • Cash/Account Value - The Cash Value is the amount of value in a life insurance policy without Surrender Charges applied. During the initial years of a life insurance policy (typically first 14 years) there is a Surrender Charge that is applied to the Cash Value to determine the CSV. A life settlement offer must exceed the CSV amount, not the Cash Value amount. 

  • Acceptance - A policy owner can agree to the offer terms and provide an acceptance. This initiates the closing process.

  • Counter - A policy owner can not accept offer terms and provide a counter offer. 

  • Decline - A policy owner can not accept offer terms and decline. 

Underwriting Terms:

  • Attending Physician Statement (APS) - These are the doctor / medical records that are ordered to evaluate an insured's health.

  • Medical Questionnaire - A medical questionnaire is a short form that allows an insured to answer a series of questions that can be used to provide a pre-assessment of their health.

  • In-Force Illustration - These are illustrations requested from the life insurance carrier that will represent how the policy will perform based on current policy values. Standard requested illustrations are: "level to age 100" and "level to age 90".

  • Conversion Illustration - These are illustrations for term policies being sold that illustrate the permanent products that a term may be converted into.

  • Life Expectancy Report - APS records are provided to life expectancy providers who will evaluate and provide an estimated life expectancy based on insured health and mortality tables. 

  • Cost of Insurance (COI) - The minimum amount of premium, or account value, needed to keep a life insurance policy in-force every month is known as the Cost of Insurance. Often times an illustration will provide a level premium that is higher than the current monthly COI. However, COI increased over time, so eventually the average COI charges will represent closely what the illustrated level premium is. For life settlement cases with insured's that have shorter a Life Expectancy, the COI can be used to improve offers. 

  • Premium Stream - Life settlement investors may use illustrations and COI figures to generate an estimated minimum premium stream that will be required to keep a life insurance policy in-force. This optimizes the premium outlay expectations which can improve offers. 

  • Pricing Report - There are life settlement service providers who will evaluate medical records, life expectancy reports, illustrations, policy values and generate pricing reports. These reports will help investors determine how much they can offer. 

  • Verification of Coverage (VOC) - A VOC is used to verify policy information and values. The information and values that are known are sent to the life insurance carrier who will verify, and, if incorrect, provide corrected information and values. 

Intermediary Terms:

  • Life Settlement Broker - A life settlement broker is a licensed party that assists policy owners sell their life insurance. They will manage and cover the costs of ordering all underwriting requirements, distribute cases to a wide network of buyers and negotiate the best offer. Life Settlement Broker's provide value by creating competition among investors and ensuring the transaction moves smoothly. 

  • Life Settlement Provider - A life settlement provider is similar to a life settlement broker, they will order underwriting requirements and provide an offer. The primary difference is a provider is a buying entity and if they like a policy that is submitted to them they can try to buy the policy without sending it to a wide network of buyers. True maximization of potential offers comes from working with a life settlement broker. 

  • Referral Professional - A referral professional can be anyone who refers a policy owner who is interested in pursuing a life settlement. They can be paid a referral fee and not be considered a life settlement broker or be required to hold any licenses. 

  • Accredited Investor - An investor must be accredited to purchase life settlement policies. 

  • Policy Owner - The policy owner is the individual or entity that owns the life insurance policy. 

  • Insured - The insured is the individual who's life is being protected by a life insurance policy. 

  • Beneficiary - The beneficiary is the individual or entity that receives a life insurance policy death benefit when the policy matures. 

  • Service Provider - Life expectancy reports, pricing reports, and medical record retrieval are examples of life settlement industry service providers.