We recently encountered a producer who was selling a universal life policy to a 50-year-old male that was being purchased for estate planning purposes.
His illustration showed a premium level that would only fund the policy to age 90.
When asked what happens if the insured lives beyond age 90, his response was, "I tell the client not to worry; we can do a life settlement." This is very concerning advice, both from a life settlement standpoint and from an insurance planning perspective.
Planning for a life settlement at some remote future time is, generally, not a particularly good idea.
Why the Safety Net Is Not a Good Default Option
The ups and downs of the marketplace, as well as the unpredictability of one individual's future life expectancy, make it impossible to contemplate the future value of a policy with any degree of confidence.
Furthermore, the percentage of face amount likely to be obtained with a settlement will pale in comparison to receiving the full face amount of the policy upon death and will, therefore, undoubtedly, fail to achieve the estate planning objectives.
While the likelihood of obtaining a life settlement offer certainly increases with age, the cost to investors to continue the policy until the insured's death is a significant factor in determining the life settlement value.
Typically, the cost to carry a policy beyond age 90, that is underfunded or beyond its no-lapse guarantee, is prohibitive.
Policy Funding Math
For example, a competitive $1 million universal life policy issued on a 50-year-old male with guaranteed funding only to 90 could require additional premiums totaling over $900,000 to keep the policy going from age 91 to age 100, once the initial premium guarantee expires.
Alternatively, a competitive current assumption policy, funded only to age 90, could cost over $1.5 million to keep it in force from age 91 to age 100.
The high cost to carry such underfunded policies significantly limits the potential life settlement proceeds and, possibly, the ability to get a settlement offer at all! In a nutshell, thinking that a life settlement can bail out a poor funding decision is a fallacy.
But there is even a bigger picture problem than just life settlement value.
The overall funding of a life insurance policy intended for estate planning purposes needs to be viewed with due regard to life expectancy.
What most people don't realize is almost 1 in 3 healthy 50-year-old males live past age 90, so roughly one-third of these policies based on age 90 mortality will run out of funding prior to death.
Robin S. Weinberger, CLU, ChFC, CLTC, is the director of national accounts for Life Insurance Settlements Inc. She has been a general agent and director of national accounts for Connecticut Mutual and vice president of marketing for Sun Life of Canada. She can be reached at 
