With the members of the baby boomer generation now entering their senior years, one of the stresses we’re going to have to deal with as a nation is the fiscal challenge created by the costs of long-term health care. Studies indicate that about 12 million older Americans are currently in need of long-term support services and approximately 70 percent of people age 65 and older will need intense long-term care at some point in their lives.
These costs are not cheap. According to the Bipartisan Policy Center, the average monthly cost to be in a nursing facility is approximately $7,300, for a home health aide it’s roughly $3,800 per month and a community-based adult day care center will run about $1,600 per month. When you combine the mathematical realities of our aging population with the costs to provide elderly people with long-term health care, you get this staggering result: spending on long-term care is expected to skyrocket from 1.3 percent of the GDP in 2010 to 3 percent of GDP in 2050.
Of course, insurance industry participants and some elected officials have been working hard to come up with creative solutions to this emerging social challenge. Long-term care insurance, which has historically been overlooked by the vast majority of Americans, is becoming more accepted as one component of a family’s financial plan.
Some states have begun offering cash benefits to informal caregivers if the person they are caring for is eligible for Medicaid, which creates an important new option for families.
In addition to these and other emerging strategies, advisors need to be aware of another potential tool available to seniors who need to free up cash to help defray long-term care expenses: a traditional life insurance policy. Life insurance policies can be used to fund long-term care costs in two simple ways.
First, if the policy has a cash value, your client may be able to access this money through withdrawals or policy loans. This can generate immediate cash to help pay for those sudden long-term care expenses.
Second, the policy could be sold through a life settlement. A life insurance policy, like any other asset in an individual’s financial portfolio, is personal property that belongs to that individual – as such, it can be sold at any time to an outside buyer who may be willing to pay good money for the rights to take over the ownership of that policy. When a senior sells an insurance policy through a life settlement, they receive a cash payment; the buyer pays all future premiums and receives the death benefit when the insured passes away.
In general, when life insurance policy owners enter into life settlements, they would receive an average of seven times the amount of the policy’s cash surrender value, based on an analysis of a 2010 survey by the U.S. Government Accountability Office. A 2014 study by the London Business School found that Americans who sold their unwanted life insurance policies collectively received more than four times the amount they would have received had they surrendered them to their life insurance companies.
The emerging long-term crisis in America is a serious one and the challenges are real, but a senior’s life insurance policy may be a valuable asset that can be utilized in order to free up the cash needed to help pay for long-term care expenses.
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