Among the most often discussed benefits a life settlement can provide is the opportunity to shed an older, underperforming policy and replace it with newer life insurance designed to meet current needs. In fact, many life settlements spring from a desire to update a policy while maximizing the value of the older one, according to one industry executive.
Frank Gencarelli, executive vice president of Hartford-based Phoenix Life Solutions, says that in conversations he’s had with brokers and agents, he’s heard that as many as 40% of settlements are undertaken following an insurance review for a client. Rather than simply doing a 1035 exchange, he says, agents are now “investigating the economic value” of a policy in order to determine if a better option exists.
Perhaps the most significant concern for agents, according to Norman Hood of Illinois-based PolicySettlement.com, is ensuring that a client can get the replacement coverage they are seeking.
Among the most important things to consider in seeking replacement coverage, however, he says, is the “capacity issue.”
A life insurance company, Hood says, is not going to provide unlimited coverage to any individual, and policyholders should consider if and how they will get the newer life insurance policy.
“If people reached the limit on how much coverage they can buy,” a replacement policy may be impossible to obtain, he says.
John Skar, managing director and chief actuary of Legacy Funding, and a former chief actuary for MassMutual, agrees that in planning replacement coverage, the “main concern that comes to mind is how much you qualify for.”
Generally, he says, coverage limits for individuals are “based on your financial position” and how much coverage you can afford. “Each person has a sort of finite limit” in terms of insurance coverage, he says, and a policy sold on the secondary market “is still considered part of that.”
There is no general rule of thumb that can provide an estimate of coverage limits, Gencarelli says. Limits will generally be in “kind of a cluster” for most companies, he says, but that does not exclude the prospects of companies making very different determinations from one another.
“It varies by company,” he says. “Every company has its ‘blood pressure limits’” for preferred status and coverage.