Understanding the Complex Nature of Insurance Products and the Value Add of Skilled Financial Engineering in Premium Optimization
In life settlement portfolio management, an effective premium optimization function is mostly science – with a little bit of art thrown in for good measure.
That does not mean that ‘good’ premium optimization is subjective. Moreso, there is a wisdom and perception – borne out of experience – that separates the wheat from the chaff. This article endeavours to explain how, and why.
The ability to read a policy illustration – and understand it
First off, premium optimization is one of the least understood and one of the most important functions of effective life settlement portfolio management. It needs to ensure that policies are kept in-force, with flexibility in place to act as a reserve against future draw-downs, whilst not over-committing, which can impact investor returns.
Consequently, one of the most valuable skills in this function is the ability to read a policy illustration and extract everything needed to decide whether to make a contingent bid on a case, even without a copy of the actual policy or carrier-related documents.”
Why does this matter?
Because annual statements are backward-looking: they show what has already happened to the cash value, credited interest, and charges. Illustrations, by contrast, are forward-looking: they project how costs of insurance, administrative charges, and cash value balances will evolve over time under different funding scenarios.
A professional who can interpret these projections knows how to anticipate risks such as yearly cost of insurance (COI) changes, declining cash value, or lapse points years in advance. It shortens the decision-making cycle, reduces reliance on carrier reporting, and builds confidence that the portfolio is managed proactively rather than reactively.
The ability to communicate with carriers effectively (they are not all the same)
An often-overlooked aspect of premium optimization in life settlement portfolios is the role of the carrier. Each life insurance company has its own way of structuring and communicating policy information, and understanding these differences can be just as important as interpreting the numbers themselves.
Carrier statements, coverage verifications, and illustrations are not standardized across the life insurance industry. Some are highly transparent, while others omit key details or use assumptions that can give a misleading sense of security. It’s not only about differences between carriers – even within one carrier, products can vary significantly in structure and features. Recognizing these distinctions is key to identifying which documents are needed from the carrier in order to optimize funding and maximize policy value. For example, certain carrier projections may only show when cash value is depleted, without reflecting behind-the-scenes mechanics (e.g., shadow accounts), which can create misleading signals. A skilled premium optimization professional knows how to read through these nuances and adjust premium optimization strategy accordingly.
But it is not only the structural nuances around policy construction that matter.
Communication practices also vary. Some carriers provide timely and detailed responses, while others can take weeks to deliver basic information. Believe it or not, there is still a lot of faxing. Quite a few carriers still don’t like emails and online platforms and some won’t provide details over the phone, requiring all requests in writing. Knowing this in advance helps ensure timely responses and avoids delays. Knowing which carriers like what method, and what they want from you, helps life settlement portfolio managers plan cash flow, avoid missed deadlines, and reduces the operational risk of a policy unexpectedly falling into the grace period.
The ability to understand and interpret different pricing models
The third leg of the premium optimization stool is the ability to understand how different carriers design their pricing models. Universal life policies – the most common policy type seen in the life settlement market – may appear similar on the surface, but the way charges are structured under the hood can lead to very different outcomes for investors.
For example, some carriers backload their cost of insurance (COI) charges – keeping them relatively low in the early years but escalating (often sharply) later on. Others distribute charges more evenly across the life of the policy. If a portfolio manager funds only at the minimum level, a backloaded policy may face an unexpected spike in costs just as the insured approaches advanced age. A skilled professional must not only recognize these differences but also align the specific product and its illustration with the appropriate pricing model to minimize ongoing premiums and optimize long-term sustainability
Interest crediting assumptions also vary. Carriers differ in the rates, caps, and participation factors they use, which can create overly optimistic projections of cash value growth if not interpreted carefully. Administrative charges, riders, and the presence (or absence) of secondary guarantees like no-lapse provisions further influence whether a policy can sustain itself under a given funding strategy.
The bottom line
Ultimately, premium optimization is not only about running the math on charges, cash value, and COI schedules. It is about understanding the quirks of each carrier, identifying where the blind spots are, and navigating those differences to make a more effective premium calculation.
Tedd Mirgliotta is Managing Director at Corry Capital Advisors
