Life, as they say, is for the living, and the same principle applies for life settlements. But advisors can help clients selling their policy to live a little longer by ensuring their long term care needs will be met. Depending on personal circumstances, a client may decide that ensuring adequate LTC is more important than providing a benefit for loved ones after death. In that case, a life settlement can play a role in paying for that care.
A number of older insureds are considering just such an option, says Robert Sweeney, a partner with Life Asset Advisors in Buffalo, New York. “At a certain age, it’s more important to have LTC insurance than to have life insurance,” he says.
Many policyholders reach an age where their house has been paid for and their children have grown and no longer rely on them, Sweeney continues, citing himself as an example. “A lot of people feel that way,” he says. A “core element” of the concept, according to Mark Goldstein, director of advanced markets for Great West Growth Life, is that many individuals who would consider selling a life policy are the same ones who are facing LTC needs. “There’s a tremendous intersection between those who can benefit from a life settlement and those concerned about LTC,” he says. Conducting a life settlement and obtaining LTC coverage are two separate transactions, and one should not be affected by the other, Goldstein points out. A desire to fund LTC, which would be expected to extend the insured’s lifespan, will not affect the settlement process, or the price offered for a policy, Sweeney notes. “They (the funders) don’t care what you do with the funds.” Sweeney says he often makes presentations to insurance agents and advisors regarding the benefits of life settlements, and he includes information regarding the LTC option in that presentation. For the agent, using a settlement to fund LTC can provide an opportunity to receive a “double commission,” he notes. Not only would the agent receive a referral commission for the life settlement, he explains, but the agent would also be compensated for placing the LTC policy for the client. Given the nature of LTC policies, in particular their pricing, policyholders would be best served by shedding unwanted life policies as soon as possible, Sweeney says. In purchasing LTC insurance, he explains, “the younger, the better. LTC insurance is cheaper the younger you are, unless you’re seriously ill.” Once the funds from a settlement are in hand, Goldstein says, the individual has 2 general options. The first, according to Goldstein, is to purchase coverage using a single lump sum payment. There are not a lot of companies that offer that right now, but the number is growing,” he says. Some of these policies offer a degree of flexibility, serving initially as an annuity that can be accelerated to cover LTC costs or even with an added life insurance element. As laws governing annuities with LTC features change, Goldstein predicts, “you’re likely going to see more of these.” Currently, money taken out of an annuity to pay for LTC coverage is taxable, he explains, but under the Pension Protection Act, that will no longer be the case starting in 2010. A second option, Goldstein says, would be simply to take the funds obtained in a settlement, invest it, and use the interest payments or dividends to pay the premiums for LTC coverage on an ongoing basis. This option would create greater flexibility and choice for the individual, who would face a wider array of coverage and pricing options that could be tailored to meet their specific needs, he says. As with any financial move, there are inherent risks about which policyholders should be aware and potential alternatives that might be a better fit. “As with any financial transaction, individuals have to look at what is best for them,” Goldstein points out, and they should consult with an expert to evaluate needs and opportunities. Brad Feldman, a vice-president at Birmingham, Mich.-based Schechter Wealth Strategies, says the decision to sell a policy in a life settlement should be based upon a client’s unique circumstances and objectives. “That’s personal choice,” he says, noting that selling a policy may carry unintended consequences that would not occur under other options. “There are some risks that go along with selling a policy,” Feldman says, specifically noting that income gained in the transaction could reduce the client’s government entitlements or benefits which may have been contributing to their LTC funding in the first place. In addition, Feldman points out that proceeds from a settlement may be subject to taxation. However, he adds, if the life policy, and the eventual death benefit, is truly unneeded, then a settlement may be the right solution for a client. “Depending on the client’s health and need for life insurance, it could be a win-win,” he says, noting a client may receive the liquidity from the life settlement to fund LTC needs as well as obtain a replacement life policy that is competitively priced. But other options also exist. For example Feldman points to extra-contractual loans. These are lent based on the life policy’s secondary market value, rather than cash value of a policy. These loans offer many of the same benefits of a settlement, such as immediate funds and elimination of the insured’s needs to pay premiums, while leaving the policyholder at least some portion of the death benefit. At least one notable insurer is starting to offer these extra-contractual loans, Feldman notes, and at least one lending firm has signaled its intent to enter the market.
“The thought is that this will be a competitor for traditional life settlements,” he says, but he cautions that which choice is best for an individual will always differ from one person to the next.