By Chris Orestis
November is National Long-Term Care (LTC) Awareness Month, and over the last 15 years LTC life settlements have become recognized as a unique financial option specifically designed for seniors who still own a life insurance policy to pay for long-term care costs.
Assisted living communities, homecare providers and nursing homes have all embraced this tax-free vehicle as a funding source that gives seniors increasing value for an unneeded life insurance policy the older or sicker they are. In the growing area of LTC life settlements, these tax and underwriting advantages give seniors the ability to maximize the value of a life settlement to pay for any form of senior living and long-term care a person wants.
People buy insurance to protect their family or business from financial hardship if they were to die. But life insurance policies can also prevent financial hardship while still alive through a life settlement to pay for the high costs of health and long-term care.
Policy owners taking advantage of a LTC life settlement use their life insurance policy to fund a long-term care benefit account. This unique benefit account is an irrevocable bank account that holds the money from a settlement to make monthly payments for senior living and long-term care. Think of it like a LTC health savings account (HSA) exclusively funded by a policy settlement, which then makes monthly payments to any form of care the owner wants at whatever amount is required, for as long as there are funds in the account. Any form of medical and long-term care is covered including home care, assisted living, skilled nursing care, memory care, and hospice.
What is a LTC Benefit Account?
The LTC benefit account is not long-term care insurance or an annuity, and an insurance company does not issue a policy. It is a bank trust account similar to a health savings account (HSA). There are no waiting periods and no claims to file, and the account is ready to start making payments towards care as soon it is funded by the LTC life settlement. The federally insured bank trust account is no-cost, non-interest bearing, and it is designed to be flexible so payments can start at a designated amount then adjusted to meet changing care needs.
The funds realized through the LTC life settlement are tax-free as defined by the HIPAA rules for a policy owner diagnosed as chronic or terminal (two activities of daily living or more). If the insured passes away before the funds in the account are spent down, any remaining balance will transfer to the named account beneficiary tax-free (if they are below the estate tax limits). The use of the funds in the account paid towards medical expenses and long-term care are recognized as a Medicaid qualified spend down. This means that the person benefiting from the account will be private pay for as long as there are funds in the account but once the account has been depleted, they can make an immediate transition to Medicaid.
Government leaders support life settlements as a way to pay for long-term care. The National Association of Insurance Commissioners (NAIC) supports the use of life settlements to pay for long-term care and have specifically cited the use of a LTC benefit account as an innovative consumer option. Congress introduced a bi-partisan bill into the House of Representatives to create a Senior Health Planning Account (SHPA) based on the LTC benefit account, which would allow anyone who executes a life settlement to then shelter the proceeds tax-free in the SHPA exclusively to pay for health and long-term care-related expenses at any point in their future.
What you need to know about life settlements
First, remember this is an age and health-driven financial option that primarily benefits seniors. In fact, think of the process as “reverse underwriting” where the older and sicker the insured is, the better they will do with a life settlement. The minimum age is 65, with the ideal age range being between 75 and 92. Settlements particularly benefit people with an impaired, chronic, or even terminal health diagnosis with a measurable life expectancy range of 2-10 years. Any form of life insurance will qualify, with universal, term, and whole life the most common for life settlements. The minimum death benefit to make a life settlement work is $100,000 for any one policy to be considered. The average settlement payout is 22.5% of the death benefit with a range between 5% and 50% for life settlements and above 50% for viatical settlements.
Since 1911, life insurance policies have been legally recognized as an asset of the policy owner. This means the owner has the same personal property rights as the owner of a home. The owner can sell their policy if they want for its highest market value. A person wouldn’t abandon their house after years of mortgage payments, and the owner of a life insurance policy shouldn’t abandon their policy after years of premium payments.
According to industry studies, seniors on an annual basis own over $200 billion worth of life insurance policy death benefits that could potentially qualify for a life settlement. For these seniors, 9 out of 10 polices are in danger of being lapsed or surrendered before ever paying out a death benefit. It’s important for life insurance policy owners to understand that their policy may have considerable life settlement value before it would needlessly be lapsed or surrendered.
Life insurance policy evaluations are a quick and easy process that starts with a no-cost, no-obligation policy review. The analysis includes policy owner information and a copy of the policy to get started. Because a life settlement is an age and mortality-based valuation, underwriting review of medical records is usually necessary. And depending on the settlement solution, the entire process can take anywhere from 30-90 days. Life settlements can help the owner of a life insurance policy struggling with the effects of aging or failing health to get the highest value from their policy instead of allowing it to lapse or surrender. When thinking about who would qualify, remember the older and sicker a person is, the higher value they will receive from their policy settlement.
The funds from a life settlement can be tax-free. If the policy owner is diagnosed with chronic health conditions (two activities of daily living or more) or terminal conditions (2 years or less of life expectancy), the funds received from the settlement of their policy are HIPAA-exempt from federal income taxes. Also, any funds received at or below the basis that the policy owner has in their policy is exempt from taxation. Basis in a policy is the equivalent of how much in premium payments have been made over the life of the policy. Anything received above basis in the policy that does not meet the HIPAA exemption is taxed as capital gain.
Rescuing Life Insurance Policies
Today’s life settlement is a well-regulated financial transaction providing a number of consumer benefits that in particular can help seniors struggling with the costs of retirement and long-term care. In 2019, there was $4.5 billion of life settlements completed.
There are less than 8 million long-term care insurance policies owned in the United States today. By comparison, there are over 150 million life insurance policies currently in-force. On an annual basis, seniors own $230 billion of life insurance death benefit that could be sold through a life settlement instead of lapsed or surrender. Their policy is actually an asset that has secondary market value. Life settlements can pay as much as 10x any cash surrender value and it is certainly a better option than lapsing a policy after years of premium payments.
Life insurance policies are one of the most valuable assets a person can own. They are also one of the most misunderstood and wasted. The majority of people don’t realize that their policy can provide a number of benefits while they are alive, and too often abandon the policy as seniors—unfortunately after making premium payments for years!
It is critical that the owner of a life insurance policy understand they can use their policy while still alive to help cover the costs of retirement and long-term care.
About the author: Chris Orestis
Chris Orestis, known as the “Retirement Genius,” is president of LifeCare Xchange and a nationally recognized healthcare expert and senior advocate. He has 25 years of experience in the insurance and long-term care industries, and is credited with pioneering the Long-Term Care Life Settlement over a decade ago. A political insider, Orestis is a former Washington, D.C., lobbyist who has worked in both the White House and for the Senate Majority Leader on Capitol Hill.
Orestis is author of the books Help on the Way and A Survival Guide to Aging, and has been speaking for over a decade across the country about senior finance and the secrets to aging with physical and financial health. He is a frequent columnist for Broker World, ThinkAdvisor, IRIS, and NewsMax Finance, has been a featured guest on over 50 radio programs, and has appeared in The New York Times, The Wall Street Journal, CNBC, NBC News, Fox News, USA Today, Kiplinger’s, Investor’s Business Daily, PBS, and numerous other media outlets.