How Much is My Life Insurance Policy Worth?

The image shows an older couple on the couch signing papers.

How much cash is your policy worth?

If you own any kind of permanent life insurance policy, you probably already know the amount of the death benefit that it will pay upon the death of the insured. But you may also be wondering, how much is my life insurance policy worth right now?  

Life insurance policy valuation factors

The value of your life insurance is determined by several factors: death benefit, type of policy, cash value, policy age, health condition, and outstanding loans or withdrawals.

Death benefit 

Of course, the amount of coverage you have is one of the most important considerations. The larger the policy’s death benefit, the greater the value of the policy in the present. Therefore it is critical for you to know how much life insurance you are carrying at all times. 

Policy type 

The type of life insurance coverage that you own also has an impact on its value, as a universal life insurance policy will generally be more valuable than a whole life insurance policy due to its greater flexibility and more competitive rates of interest.

Cash value 

The amount of the policy’s cash value also plays a substantial role in determining a policy’s true worth. Cash value refers to the portion of a life insurance policy that accrues interest. A policy with more cash value will obviously be worth more than a policy with less cash value

Premiums paid 

And another key factor is the amount of annual premiums that have been paid into the policy. A policy that has been collecting premium payments for many years shows that the policy owner is financially reliable. 

Policy age 

The number of years that the policy has been in force is another element that affects the value of a policy. Cash value policies that have been in force for less than 10 years will generally have very low cash surrender values (which is the amount of money you would get for surrendering your policy back to the insurer), while older policies have cash values that are closer to the total amount of annual premium payments that have been paid.

Health condition of the insured 

The health condition and life expectancy of the insured also come into play when determining the value of a policy, as someone with several health conditions is more likely to die sooner, thus making the policy more valuable. It is also more valuable to the insured because he or she could not likely qualify for the policy at the rate that was dictated when he or she initially applied for it.

Outstanding loans or withdrawals

Finally, the amounts of any outstanding loans or withdrawals against the policy will decrease the value of the policy accordingly. For example, a universal life policy with a death benefit of $250,000 will reduce that benefit to $225,000 if a withdrawal for $25,000 is taken out of it. The death benefit will rise accordingly if the withdrawal is eventually repaid.

The value of term life insurance 

Term insurance doesn’t have cash value, so the death benefit for a term policy is basically the only factor that counts other than the amount of time left in the term. Convertible term life insurance can be converted into a smaller amount of paid-up cash value life insurance, so this type of term life may have a greater value than other types of term policies. 

An older couple enjoying time with their grandchild in the park, carefree after discovering how much their life insurance policy is worth.

If you buy term insurance, then you can count on the face value being the primary determinant of its value. But many financial planners consider a term life policy to be the best life insurance for the money. 

The value of whole life insurance 

If you are looking for a guaranteed rate of return, then a whole life insurance policy is most likely the policy type to fit your investment objective. However, whole life policies usually generate the lowest overall rates of return compared to other types of cash value policies. The dividends that they pay are essentially a partial return of the premiums that are paid into the policy by the policy owner.

The cash value of life insurance 

The amount of cash value in your life insurance policy is a major factor when it comes to answering the question of, “How much is my life insurance policy worth?” If you have accumulated a substantial amount of cash value inside your policy, then your policy will be worth more than it would be otherwise. But the amount of cash value in your policy will always be substantially less than the death benefit. (It has to be according to state laws.)

Traditionally, there have been three ways that you could access the cash value in your life insurance policy

  • Let the policy lapse: One way is to simply let the policy lapse and then collect the remaining cash value component after all fees and penalties have been paid.
  • Make a cash withdrawal: Another method is to simply take a cash out withdrawal from the cash value but let the policy remain in force. As mentioned previously, this method will reduce the death benefit payout accordingly.
  • Take out a loan against the cash value: You can also take out a loan against the cash value in your policy, but you will have to pay interest on the loan. However, if you need to get your hands on some cash quickly, this may be your best option, especially if your credit is bad. You don’t have to satisfy any type of underwriting requirements to take out a loan against your cash value, because it is your money to begin with. Again, the death benefit will be reduced by the amount of any outstanding loans against your policy when you die, but you are not required to repay this type of loan if you are comfortable with receiving a reduced death benefit.

It may seem like your policy is only worth the amount of cash value that is in it, but that is not accurate. It is possible for you to sell your policy with a life insurance settlement to a life settlement company for a much larger sum of money. Not the full face value, but still a substantial sum. 

Types of cash value life insurance policies 

There are several different types of cash value life insurance policies. The three main types are whole, universal, and variable. Here is a breakdown of how they work:

Whole and universal life policies

Whole and universal life policies differ in how they credit interest to the policy. Whole life insurance pays interest that is based upon the dividends paid by the life insurance company. If the company declares a 4% dividend, then the whole life insurance policy will be credited with 4% of interest. Universal life policies will credit interest to a policy based upon the prevailing interest rates in the markets at that time.

Indexed universal life policies 

An indexed universal life insurance policy will pay interest that is based upon the performance of the underlying financial benchmark index that is linked to the policy. But while indexed universal life policies guarantee the principal that is initially deposited into the policy, it will pay no interest if the underlying benchmark index posts a negative return for that crediting period. 

What's your life insurance policy worth?

There are also usually limits on how much interest can be paid in these policies, even if the underlying benchmark index performs exceptionally well. There can be a cap, which limits the amount of growth that the policy will pay. Or there can be a participation rate, which dictates the percentage of all gains that will be paid. Or there could be a spread, which is an amount that the insurance company takes from the returns generated by the index right off the top. Many indexed life insurance policies feature a combination of these limitations.

Variable life policies 

A variable life policy will pay interest according to the performance of the mutual fund subaccounts in which the cash value in the policy is invested. The performance of these subaccounts can make this type of policy either more or less valuable than a whole or universal life policy, depending upon the direction that the markets are taking. 

If interest rates are high and the markets are posting tepid returns, then a universal life policy may be the superior product. But in a strong bull market with low interest rates, the variable life insurance policy is probably a better bet. 

These types of life insurance diminished in popularity in the wake of the market crash of 2008, when many policyholders were forced to either add a substantial sum to their policies to keep them in force or else just let them lapse. 

How selling life insurance works, then and now 

During the AIDS epidemic in the 1980s, a new type of life insurance transaction was born, called viatical settlements. These unwieldy arrangements allowed terminally ill AIDS patients policyholders to sell their cash value life insurance policies to a buyer, called a viator, for considerably more than the amount of cash value in their policies. They could then use the sales proceeds to pay for current medical bills. But there were virtually no laws regulating the sales of these policies, and this sector of the life insurance business was fraught with uncertainty and corruption.

Since then, the life settlement industry has become considerably more regulated, and the process for selling a life insurance policy has become much more efficient and streamlined. Now anyone generally over the age of 60 who has a cash value or convertible term life insurance policy can sell their policy to a life settlement company and usually receive at least two to three times the amount of cash value in the policy. 

This can provide funds for the seller to live on, pay medical bills or fund other necessary expenses. The life settlement company will perform a complex series of calculations to determine the true financial worth of your policy and will then make you an offer of a certain dollar amount to buy your policy.

If you accept, then the life settlement company will assume ownership of the policy and continue to pay the life insurance premiums on the policy until you pass away. They will also become the beneficiary on the policy so that they can collect the death benefit and recoup the money that they paid you and also make a profit. 

So life settlements can still be a good way for terminally ill patients to collect a substantial amount of money upfront to pay for medical expenses or the costs associated with long-term care. But the money collected can be used for any purpose, such as buying a second vacation home or indulging in a hobby such as model trains. Just be sure that your loved ones or other beneficiaries will be able to carry on without inheriting the tax-free face value of the policy. 

How much is my life insurance worth?

Ultimately, it is usually beyond the policy owner’s ability to truly determine the actual current monetary value of their life insurance policy. In most cases, the policy owner will need to enlist the help of a qualified accountant who is experienced in this area to get an accurate read on the value of their policy.

There are several complex calculations that must be done based on the policy’s face amount, cash value, and amount of premium received along with the insured’s health condition.

If you want to sell your policy to a life settlement company, it would be wise to get an independent appraisal done by a qualified accountant or another appraiser first so that you can see whether the life settlement company is offering you a sufficient amount of compensation for your policy.

The life settlement company will also conduct its own appraisal of the value of your policy, but their methodology may be somewhat different than that of an unbiased, independent appraiser.

Get a free policy valuation 

Should you sell your life insurance policy? It all depends on your life insurance needs. If you can no longer afford premiums, your beneficiaries don’t need your death benefit, or you need a cash lump sum immediately, a life settlement may be the answer.

Of course, as with most insurance products, it’s always a good idea to consult your financial advisor or insurance agent for more information. For an instant estimate on how much your life insurance policy could be worth, take advantage of our free life settlement calculator.

Chris Granwehr is the Founder of Dawn Life Settlements and a former senior manager with Mason Finance, an industry-leading life settlement provider in California. He's a member of the Life Insurance Settlement Association, and he has a passion for empowering customers financially through a faster, easier life settlement system.