The COVID-19 pandemic has had significant impacts across most of society, and the life insurance industry is no exception. The most immediate effect has been increased cost and difficulty in arranging coverage, particularly after testing the virus positively.
But there are consequences for existing policyholders too, especially when it comes to cashing in a policy by performing a life settlement.
What is Life Settlement?
As well as providing coverage, some kinds of life insurance can work as an investment. As you pay your premiums, the value of the policy grows, and this can later be cashed in for a lump sum known as the surrender value.
But in most cases, the surrender value is less than the payout benefit would be. With a life settlement, a company buys your policy from you, paying you more than the surrender value but less than the expected payout benefit. You'll enjoy the benefits of a larger lump sum, and the buyer will be responsible for future premiums until the policy pays out on your death.
How Could a Positive COVID-19 Test Affect a Life Settlement?
If you've been considering using a life settlement to realize the value in your policy, testing positive for COVID-19 could impact your situation by adding it as a longevity predictors. These predictors are called biomarkers. There are no oracles laying out our destiny and predicting our inevitable demise. But even if we can’t know the precise date of our death, we can use certain biomarkers, measurements, and characteristics to make predictions—with a reasonable amount of accuracy—about a person’s propensity to kick the bucket.
A common form of settlement is a viatical settlement and is mainly used by people with a chronic or terminal illness. In the vast majority of cases, a COVID-19 positive test won't take a policyholder into that category.
Nonetheless, it's become clear that older people are most at risk from the coronavirus, and it's precisely this age group who are likely to have valuable life policies built up over many years. And while your positive test hopefully doesn't lead to any further health complications, it will affect your policy's value to buyers in the settlement marketplace.
Insurance By Numbers
At its heart, insurance is a numbers game, relying on statistics, probabilities, averages, and trends. A life settlement is no different. The amount a buyer is willing to pay for your policy depends partly on how long they'll need to cover the premiums. The longer you live after settlement, the more the value of the eventual payout will be eroded by premium payments, and the less profit they'll make.
Statistically, older people with a positive COVID-19 test will have a shorter remaining life expectancy than those who haven't encountered the virus. This averaging effect applies for insurance purposes whether you've been taken seriously sick after your test.
The shorter average timescale between settlement and payout can make your life policy more valuable on the open market. It's likely to attract more willing buyers, and could, therefore, command a higher price. If you've had a positive COVID-19 test, your life policy is likely to be worth more even if you're in perfect health and fully expect to remain so.
Should You Consider Life Settlement Right Now?
If you've previously looked into life settlement, now could be an ideal time to go ahead, especially if you've had a positive test. The potential boost in value provided by the pandemic won't last forever.
Everyone's hoping for a vaccine or effective cure sooner rather than later. After that day comes, COVID-19 will start to have less impact on life insurance in general and settlement in particular.
The potential increase in cash value isn't on its own a good reason to rush into settling your policy. But if you've already given the idea careful thought and decided it makes financial sense, the pandemic may increase the money you'll receive through settlement.