Life settlement companies determined the fair market value of the policies based upon the insured’s life expectancy and other factors, including the solvency of the underlying life insurance carrier and the rates of return required by investors. The life settlement companies pay the insured individual in these transactions a percentage of the face value of the policy. Today, most transactions offer 2 to 3 percent of the face value, depending upon when the payment is made. Upfront payments are typically smaller, while those made later on tend to be higher.

Some people find it unsettling to know that another party will benefit from their death. However, their concerns are unfounded. Life settlement companies do not know the names or identities of the insureds, and the life settlement market is not concerned about the lifespan of any single individual; investors base their decisions on the overall expected mortality of the general public. Policyholders can also take comfort from the fact that life insurance companies will not pay a claim if there is any foul play, or even suspected foul play, by the beneficiary. Also, life settlement companies are large, established institutions that would not risk losing their entire investment by participating in any illegal activities.

Broader Appeal
In the past, only those who met strict criteria could take advantage of insurability monetizations. They were required to be wealthy, 75 years of age or older, with some health impairment and a life expectancy of fewer than 10 years. Such requirements allowed investors to estimate the size and timetable of their returns. As a result, only a small group of qualified candidates were able to convert their insurability into cash. This caused many financial planners to dismiss life settlements as only a niche product, not applicable to large numbers of clients.