Life Settlement Expert Witness: Life Expectancy, Valuation and Policy Challenges

How a life settlement works

In a life settlement, the owner of a life insurance policy, usually an older person whose cover is no longer needed or affordable, sells it to an investor for more than the cash surrender value but less than the death benefit. The investor then pays the premiums and receives the benefit when the insured person dies. The market is most developed in the United States, where it is regulated mainly at state level; the UK had a related market in traded endowment policies, which worked differently.

The price depends on the death benefit, the premiums that will need to be paid and, above all, the expected remaining lifetime of the insured. That makes life expectancy estimates the centre of most valuation disputes.

Life expectancy evidence

Life expectancy reports are prepared by specialist underwriters and medical directors who review the insured's medical records and apply mortality tables and debits or credits for health conditions. Different providers can produce noticeably different estimates for the same person, and small changes in life expectancy can move the value of a policy substantially.

An expert witness may be asked whether a particular estimate was prepared competently, whether medical records were complete, and whether investors or brokers relied on estimates they knew to be optimistic. Actuaries and medical underwriting experts often work together on these questions.

Disputes where policy owners need help

Policy owners and their families sometimes later believe they sold too cheaply or were not told about alternatives such as reduced paid-up cover, accelerated benefits or simply lapsing a term policy. Questions arise about whether competing bids were obtained, what fees the broker took and whether disclosures required by state law were made.

A valuation expert can reconstruct what a fair market price would have been at the time, using the policy illustration, the life expectancy data available and prevailing discount rates, so that the decision-maker can see whether the transaction was within a reasonable range.

• Fair market value at the date of sale
• Broker compensation and conflicts of interest
• Quality and number of competing offers
• Adequacy of disclosures and suitability assessment
• Alternatives available under the original policy

Insurable interest and STOLI challenges

Some policies were taken out from the start with the intention of selling them to investors, a practice known as stranger-originated life insurance. Insurers have challenged such policies on the basis that they lacked insurable interest at inception or were obtained through misrepresentation, and courts in different states have reached different conclusions depending on local law.

Expert evidence in these cases may cover industry practice at the time the policy was sold, the premium financing arrangements, application and underwriting procedures, and whether red flags should have been noticed. Investors who hold such policies and families of the insured both have a stake in the outcome.

Contestability, lapses and cost of insurance

Most US life policies have a contestability period, commonly two years, during which the insurer may challenge the policy for material misrepresentation; afterwards, challenges are more restricted, although insurable interest arguments may still be raised in some states. Disputes also arise over lapses, grace period notices and increases in cost-of-insurance charges on universal life policies, which affect both original owners and investors.

Actuarial experts examine whether rate increases were consistent with the policy terms and the insurer's stated pricing factors, while administration experts look at whether notices were sent correctly.

Choosing the right specialist

Life settlement disputes may need actuaries, medical underwriters, valuation specialists, compliance experts familiar with state regulation, or experienced market participants. Ask for evidence of experience on both buy and sell sides and check that the expert has no current financial interest in the policies concerned. Fees are generally hourly, and complex valuation models can require significant time, so request an estimate tied to clearly defined questions.

Records to gather before instructing an expert

Collect the original application, policy and riders, annual statements, illustrations, premium payment history, sale documents, broker agreements, offers received and life expectancy reports. Where the insured has died, the date of death and correspondence with the insurer are also relevant. A complete file allows the expert to test assumptions rather than guess at them.

Investors as policyholders

Investors and funds that acquire policies also face disputes with insurers, for example when a death claim is challenged years after purchase, when the insurer refuses to recognise a change of ownership or beneficiary, or when cost-of-insurance increases erode returns. From their perspective, expert evidence on underwriting practice, the chain of title and the actuarial basis of charges is central. Investors should keep complete records of acquisition, servicing, premium payments and tracking of the insured, as gaps in that history are frequently exploited in litigation.

Families of insured persons can also be drawn into these disputes, for example where the insurer claims the original application was misleading. Independent evidence helps clarify what each party knew and when.

Life settlement disputes are numerical at heart but shaped by conduct and disclosure. Independent actuarial, medical and market evidence helps each party see whether a transaction was fair when it was made.