A buyer’s price is the death benefit discounted back from the date they expect to collect it, minus every premium they expect to pay in the meantime, minus their transaction costs — so the two numbers that matter most are the projected life expectancy and the annual cost of carrying the policy, not the face amount. Two policies with identical $500,000 death benefits can be worth $180,000 and $0 depending on those inputs.
You can approximate the calculation yourself in about ten minutes with four figures: the net death benefit after any loan, a rough life expectancy in years, the annual premium required to keep the policy in force, and a discount rate. The result will not be an offer, but it will tell you whether you are in the neighborhood or nowhere near it — which is worth knowing before you spend three months on medical records.
The published federal benchmark remains the Government Accountability Office’s study of the secondary market, GAO-10-775, which found that policyholders who sold typically received roughly 10% to 35% of face value, and on average several times what the same policies would have paid on surrender. Anything far outside that band deserves scrutiny in either direction.
In This Article
The Formula, Written Out
In its simplest form, a buyer’s maximum price looks like this:
Price ≈ (Net death benefit ÷ (1 + r)n) − (Present value of premiums over n years) − transaction costs and commissions
Where n is the projected years to the death benefit, r is the buyer’s required annual return, and the net death benefit is the face amount reduced by any outstanding policy loan and accrued interest.
Three things about the inputs.
r, the discount rate, reflects what institutional capital requires to hold an illiquid, mortality-linked asset. Rates commonly discussed in the market sit in the low-to-mid teens, and they move with the broader cost of capital. A higher required return means a lower price for the same policy.
n, the projected years, comes from a life expectancy report produced by an independent underwriting firm from the insured’s medical records. It is a median estimate, not a prediction about any individual.
The premium stream is not what you are currently billed. It is what the buyer must actually pay to keep the contract in force, which they determine from an in-force illustration. On a policy that has been overfunded for years, that figure can be far below your billed premium; on a universal life contract with rising cost-of-insurance charges, it climbs every year.
A Worked Example You Can Copy
Take a $500,000 universal life policy on a 79-year-old with several documented health conditions. There is no policy loan. The life expectancy report comes back at 96 months — eight years. The in-force illustration shows about $9,000 per year is needed to carry the policy. Use a 15% required return.
Step one: discount the death benefit. $500,000 ÷ 1.158 = $500,000 ÷ 3.059 = about $163,000.
Step two: value the premiums. Eight annual payments of $9,000 discounted at 15%, paid at the start of each year, is worth roughly $46,000 today.
Step three: subtract. $163,000 − $46,000 = about $117,000 of gross economic value.
Step four: subtract transaction costs and the broker’s commission, which come out of that figure. A realistic net offer to the seller lands somewhere around $95,000 to $105,000 — roughly 19% to 21% of face, squarely inside the GAO band.
Now change one input. If the life expectancy report had come back at 60 months instead of 96, the discounted death benefit rises to about $248,000 and the premium drag falls to roughly $31,000, producing more than $200,000 of gross value. That single change roughly doubles the offer. It is the clearest illustration of why the medical file, not the face amount, drives the price.
Why the Real Pricing Model Is More Complicated
The arithmetic above treats death as a single dated event. Actual buyers do not. They build a survival curve from the life expectancy underwriter’s mortality multiplier applied to a standard table — the Society of Actuaries Valuation Basic Table is the common reference — and then compute the expected value across every possible month of death, weighting the death benefit and the premium stream by the probability of the insured being alive in that month.
That matters in two directions. It means a policy is worth something even if the insured lives much longer than the median, and it means the price is sensitive to the shape of the curve, not just its midpoint. Two insureds with the same 96-month life expectancy but different mortality multipliers can price differently.
It also means premium optimization is a real lever. Buyers do not pay the billed premium; they pay the minimum required to keep the contract in force through each modeled month, which on many universal life policies is materially less. A competent broker submits an optimized premium schedule with the file. A careless one submits the billing statement, and the difference can be tens of thousands of dollars of offer.
The underwriting side is explained in more depth in life expectancy underwriting, and the buyer’s perspective in how buyers price a policy.
| Input | Effect on Price | Where It Comes From | Can You Change It? |
|---|---|---|---|
| Net death benefit | Direct; loans reduce it | Policy, minus loan and accrued interest | Yes, by repaying a loan |
| Projected life expectancy | Shorter raises price sharply | Independent underwriter, from medical records | Only by completing the medical file |
| Annual premium to carry | Higher lowers price | In-force illustration, optimized | Yes, request minimum-premium solves |
| Buyer’s required return | Higher lowers price | Capital markets | No |
| Number of buyers bidding | More competition raises price | Your broker’s reach | Yes |
| Insured’s age and health | Drives the life expectancy input | Medical records | No |
The Four Inputs You Can Actually Influence
Most of the pricing is set by facts you do not control. Four things are within reach.
1. Premium optimization. Request an in-force illustration solving for the minimum premium that keeps the policy in force to age 100, and a second solving to age 105. Provide these with the file. Lowering the modeled premium stream raises the offer dollar for dollar in present value terms.
2. Completeness of the medical file. Underwriters price what is documented. A missing attending physician statement from the cardiologist can lengthen a life expectancy estimate by a year or more. Gather records from every treating physician, not just the primary.
3. Number of buyers who see the case. Offers on the same policy routinely vary by a wide margin between funders because each has different capital costs and portfolio needs. A file shown to two buyers is priced by two buyers.
4. The loan balance. Any outstanding policy loan is repaid at closing and reduces the net death benefit a buyer is pricing. Repaying a loan before submission, if you have the liquidity, raises both the modeled value and your net proceeds.
What you cannot influence: the insured’s age, the underlying health, and the buyer’s cost of capital. Anyone promising to change those is selling something else.
Every Alternative, Priced the Same Way
Run the same discipline across the other options before concluding a sale is best.
Keep the policy. Its value is the death benefit, paid to beneficiaries generally free of income tax under Internal Revenue Code section 101(a), minus the present value of the premiums you will pay. For a household that needs the coverage, this number is usually the largest of any option on the list.
Reduced paid-up. The carrier converts existing cash value into a smaller guaranteed death benefit with no further premiums. Ask for the exact paid-up amount; on an old whole life policy it is frequently larger than people expect and it is generally not a taxable event.
Cash surrender. The net cash surrender value, in hand today, taxed as ordinary income above basis. This is the floor any offer must beat.
Accelerated death benefit rider. For a terminally or chronically ill insured, generally excluded from income under Internal Revenue Code section 101(g), with no commission. Often the highest after-tax value available when it applies.
1035 exchange. Converts the policy into a different contract without current tax. Produces no cash, so it is not comparable on this axis.
Life settlement. The calculation above, generally available for policies of roughly $100,000 or more in death benefit.
When the Math Says Do Not Sell
Run the formula honestly and it will sometimes tell you to stop.
When the premium drag swamps the discounted benefit. If the annual carrying cost is 4% or more of the face amount and the projected life expectancy is long, the two terms converge and the value goes to zero. This is common on older universal life contracts with steeply rising cost-of-insurance charges and on insureds in good health.
When the net death benefit after a loan falls below roughly $100,000. Pine Lake works with policies of roughly $100,000 or more, and the market broadly does the same, because the fixed costs of life expectancy underwriting, escrow, and legal review do not scale down.
When the reduced paid-up amount is worth more to your family. A $500,000 whole life policy might convert to a $190,000 paid-up death benefit at no further cost. Against a $95,000 taxable offer, the paid-up option often wins for a family that will eventually receive the benefit tax-free.
When the coverage is still needed. No discount rate makes a lump sum better than the protection a surviving spouse or a disabled adult child is counting on.
When the insured is healthy. A long projected life expectancy is exactly the input that pushes the calculation toward zero, regardless of how large the policy is.
To see the real numbers rather than an estimate, send the policy cover page and the most recent annual statement for a free, no-obligation review, or call (305) 209-7183. Pine Lake Life Solutions provides educational information only and does not provide legal, tax, or investment advice.
Frequently Asked Questions
Can I calculate what my policy is worth myself?
You can approximate it. Discount the net death benefit by roughly 15% per year for the projected years to death, subtract the present value of the premiums needed to carry the policy, then subtract transaction costs. The result tells you whether you are in range. It is not an offer, because the medical underwriting is what sets the timeline.
What percentage of face value do policies typically sell for?
The Government Accountability Office’s study GAO-10-775 found sellers typically received roughly 10% to 35% of face value, and on average several times the cash surrender value. Where a specific policy lands inside or outside that band depends almost entirely on projected life expectancy and the cost of keeping the contract in force.
Why does my face amount matter less than I expected?
Because the buyer discounts it by the time they expect to wait and subtracts the premiums they must pay in the meantime. A $1 million policy on a healthy 68-year-old with a $30,000 annual premium can be worth less than a $300,000 policy on an 84-year-old with significant impairment and a low carrying cost.
How much does the life expectancy report move the number?
More than any other single input. In a representative case, moving a projected life expectancy from 96 months to 60 months can roughly double the value, because the death benefit is discounted over fewer years and the buyer pays fewer years of premiums. That is why complete medical records matter so much.
What is premium optimization and why does it raise offers?
It is asking the carrier for an in-force illustration solving for the minimum premium required to keep the policy in force, rather than submitting the billed premium. Buyers price the premiums they will actually have to pay, so a lower optimized figure increases the present value available to be paid to you.
Does a policy loan reduce what I receive?
Yes, twice over. The loan reduces the net death benefit the buyer is pricing, and the loan balance is repaid out of the proceeds at closing. Ask for both the gross offer and the net-to-you figure early, because on a heavily loaned policy the second number can be much smaller than the first.
What is the floor any offer has to beat?
The net cash surrender value, after tax, plus the value of any alternative such as reduced paid-up. If a policy has a $60,000 surrender value and converts to a $190,000 paid-up death benefit at no cost, a $95,000 taxable offer is not automatically the best outcome for the family.
Find out what your policy is worth — free, confidential, no obligation.
A 15-minute educational review covers your eligibility, every alternative, and a realistic view of what each path would net you.
Related Reading
- How Much Is My Policy Worth
- How Much Can I Get For My Life Insurance Policy
- How Buyers Price A Policy
- How Life Settlement Buyers Price A Policy
- Life Settlement Payout Percentage Explained
- Percentage Of Death Benefit Typical
- What Affects A Life Settlement Offer
- Life Settlement Calculator Explained
- What Is Life Expectancy Underwriting
Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.