Structured & Insurance-Linked

How to Underwrite Life Settlements

Underwrite a life settlement by projecting the insured's mortality using independent life expectancy reports, then modeling premiums required to keep the policy in force against the death benefit. Discount expected cash flows at a target IRR. Life expectancy accuracy, premium optimization, carrier credit and policy legal validity drive value.

What makes life settlements underwriting different

A life settlement is the purchase of an existing life insurance policy from the policyholder for more than its cash surrender value but less than the death benefit. The investor pays ongoing premiums and receives the death benefit when the insured dies. What makes life settlements distinct is that returns depend on longevity: the longer the insured lives, the more premiums are paid and the lower the return. Value comes from buying policies at a discount to expected death benefit. Risk comes from life expectancy estimates that prove too short, premium increases, carrier credit and legal challenges to policy validity.

Investors focus on portfolio-level longevity risk, diversification across insureds and underwriters, and the cash needed to fund premiums. Lenders financing portfolios advance against a conservative valuation and require premium reserves, since a lapse destroys collateral value. Sellers are often seniors whose needs have changed, so regulation and consumer protection matter. Funds also consider insurable interest laws and contestability periods, since policies issued under questionable circumstances, such as stranger-originated life insurance, have faced litigation. Portfolio buyers also check whether life expectancy providers have revised their methods, since past revisions lengthened estimates across the market and cut realized returns for earlier buyers.

Key metrics

Life expectancy (LE)

Estimated remaining life drives timing of death benefits and total premiums paid.

Investors commonly obtain at least two independent life expectancy reports per insured.

Premium to death benefit ratio

Ongoing premiums relative to the benefit determine cost of carry and sensitivity to longer life.

Purchase price as % of death benefit

The discount to face value determines return potential.

Expected IRR

IRR combines purchase price, premiums and expected maturity timing.

Carrier credit rating

Death benefits are obligations of the insurer, so carrier strength matters.

Portfolio diversification

More insureds reduce volatility from individual longevity outcomes.

How to underwrite it, step by step

Review the policy, illustrations and carrier information.
Obtain medical records and independent life expectancy reports.
Model premium optimization to keep the policy in force at minimum cost.
Project cash flows using mortality curves and discount at a target IRR.
Verify insurable interest, contestability status and policy ownership history.
Confirm compliance with state life settlement regulations.
Close through escrow and transfer ownership and beneficiary designations to the buyer.

Due diligence checklist

Life insurance policy and riders
In-force illustrations
Medical records and HIPAA authorizations
Independent life expectancy reports
Verification of coverage from the carrier
Premium payment history
Ownership and beneficiary change forms
State regulatory disclosures and consents
Escrow agreement
Policy origination documents for insurable interest review

Key risks and mitigants

Insured lives longer than estimated

Use multiple life expectancy reports, blend estimates conservatively and diversify across insureds.

Premium increases by carriers

Model cost of insurance increases and reserve for premiums.

Policy rescission or insurable interest challenges

Verify origination history and favor policies beyond the contestability period.

Carrier credit risk

Diversify carriers and limit exposure to weaker insurers.

Liquidity needs for premiums

Maintain premium reserves or committed funding lines.

Typical financing and deal structure

Life settlements are purchased individually or as portfolios by funds, often through licensed providers. Funds may use leverage from specialty lenders secured by policies, with advance rates based on valuation and premium reserves. Some structures securitize policy portfolios or use longevity swaps to hedge risk. Premium financing lines fund ongoing payments. Buyers use escrow agents to manage purchase payments and policy transfers. Valuation is typically marked to model using updated life expectancies and discount rates. Lenders typically require a premium reserve covering a period of future payments and may sweep maturities to pay down the facility. Investors review the servicer that tracks insureds and files death claims, because missed tracking delays collections and can lead to lapses.

Red flags

Only one life expectancy report or outdated medical records
Policies within contestability period
Signs of stranger-originated life insurance
High premiums relative to death benefit
Concentration in a single carrier or insured

Frequently asked questions

How do life settlements work?

A policyholder sells their life insurance policy to an investor for a lump sum above cash surrender value. The investor becomes owner and beneficiary, pays future premiums and receives the death benefit when the insured dies. Returns depend on purchase price, premiums and how long the insured lives.

How are life settlements valued?

Investors use life expectancy estimates and mortality curves to project the probability of death in each period, then calculate expected premiums and death benefits. These cash flows are discounted at a target IRR. Changes in life expectancy, premiums or discount rates can significantly change value.

What is longevity risk in life settlements?

Longevity risk is the chance the insured lives longer than expected. Longer life means more premiums and delayed death benefits, lowering returns. Investors manage it through conservative life expectancy assumptions, multiple reports and diversification across many insureds. Portfolio size matters, since a small number of policies can produce widely varying outcomes even with accurate estimates.

Are life settlements regulated?

Many US states regulate life settlements, requiring licensing of providers and brokers, disclosures to sellers, rescission rights and anti-fraud measures. Investors should confirm compliance with applicable state rules and verify that policies were originated with valid insurable interest. Rules differ by state, so national buyers track each one.

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Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.