Senior Health Planning Accounts: Using Life Settlements to Fund Senior Health Care Needs

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The Senior Health Care Financing Crisis

There is a crisis facing the growing population of American seniors who cannot adequately finance their health care needs.

For a couple retiring today, out-of-pocket health care expenses, including long-term care costs not covered by Medicare, can often exceed $500,000 over the rest of their lives. It’s no wonder the Congressional Budget Office acknowledged that the potential cost of long-term care can have “a catastrophic impact on an elderly person’s finances.”[1]

Rising health care costs often overwhelm middle-class Americans’ savings, forcing more seniors onto Medicaid earlier.

An increasing number of Americans, even those who had previously been viewed as financially secure, now require government assistance to pay for health care costs in their later years, particularly long-term care. A Department of Health and Human Services study found that nearly 40 percent of seniors with Medicaid-financed nursing home stays were middle-class or above, based on their lifetime earnings.[2]

The growing reliance on Medicaid adversely affects both seniors and taxpayers. Seniors who do not have adequate private resources often have fewer options and less control over their health care decisions. Taxpayers bear the financial burden when seniors must turn to Medicaid. In 2017, federal and state Medicaid distributions totaled $577 billion; $119 billion of those distributions paid for long-term care.[3]

New solutions are needed to help seniors make the most effective possible use of their existing resources to pay for their health care costs. That is why ASHCF strongly supports H.R. 7203.

Life Settlements: A Smart, Private Sector Solution to Senior Health Care Costs

A life settlement is the sale of a life insurance policy to a third party for a market value return.

Life insurance policies may be freely sold or transferred like any other asset. Selling a life insurance policy is a protected property right of all Americans, expressly recognized by the U.S. Supreme Court over a century ago.[4]

Life settlements can be a smart alternative for seniors to maximize the value of an asset that they otherwise might not keep.  Policyowners may opt for life settlements if they decide they no longer need those policies, or they cannot afford often-escalating premiums. 

Life settlements—which are regulated in 43 states that are home to over 90 percent of the U.S. population—provide many seniors critical resources to maintain their standard of living, to live independently, and to pay for housing, health care, and other essentials.   

Life settlements can enable seniors to use assets they already own to pay for home health, assisted living, skilled nursing, and nursing home care, while sparing their families major financial burdens.  Life settlement proceeds also can provide seniors with greater choice in where that care is received.

The National Association of Insurance Commissioners, in a 2017 report, identified life settlements as “one option seniors might use to generate resources to pay for their long-term care needs.”  The NAIC further stated, “Policyowners who sell their policies receive a lump sum payment that is generally four or more times greater than if they lapsed or surrendered their policy, according to government and university studies.”[5] 

Yet life settlements remain a vastly underutilized option, and policyowners often fail to realize the full value of their assets.  About 65 percent of seniors own life insurance,[6] yet they typically get little or no financial benefit from those policies.   

According to the American Council of Life Insurers, in 2017, over 7 million individual life insurance policies, with an aggregate face value of over $500 billion, lapsed, for which policyholders received nothing.  Over 1.5 million additional individual policies, with an aggregate face value of over $100 billion,[7] were transferred to the issuer for cash surrender value, a sum that, as the NAIC noted, often is a small fraction of what policyholders would receive in a life settlement  

Few life insurance policies are held to maturity—in  2017, the aggregate face value of individual policies that lapsed or were surrendered was more than 12 times the amounts paid in death benefits on individual policies.[8]  For the many policyholders who choose not to hold those assets until the death of the insured, life settlements are often a superior option.

What if seniors already owned a substantial asset—that might otherwise never be utilized—that they could use to help plan and pay for current and future health care expenses?

In many cases, they already do, if they own a life insurance policy.

H.R. 7203, introduced by House Ways and Means Committee members Rep. Kenny Marchant (R-TX) and Rep. Brian Higgins (D-NY), would help life insurance policyowners use the proceeds from the sale of their life policies to fund a wide range of health care costs, including long-term care expenses and long-term care insurance premiums.

H.R. 7203 would allow proceeds of a life settlement to be rolled over, tax-free, into accounts dedicated to funding permitted health care expenses.  Distributions from the accounts would not be taxed if used for permitted expenses.  Distributions used for unauthorized purposes would be subject to both income taxes and penalties.  Amounts kept in the accounts, including investment earnings, would not be taxed during the lifetime of the account holder or such person’s spouse.

Current law already provides that life settlement proceeds are not taxed if the insured person is chronically or terminally ill.[9]  H.R. 7203 would help seniors and others prudently generate resources for current and future health care costs—including planning for long-term care costs—without having to wait until they are very sick.

H.R. 7203 would help seniors use assets they already own—their life insurance policies—from which they otherwise often realize no benefit, to pay health care costs in retirement.  Doing so also would reduce dependence on government programs, and save taxpayers money.

Life insurance policies are often among a senior’s most valuable assets. The aggregate face value of individual life insurance policies currently in force is approximately $12 trillion [10]—but those policies remain a vastly underutilized financial asset.

For seniors who choose to discontinue their policies, the accounts created by H.R. 7203 would help pay for their health care costs, and would give them—rather than the government—more control over their health care.  Private resources provide seniors and their families greater choice over the level and type of health care that meets their needs.

Currently, seniors must “spend down” their financial assets to qualify for Medicaid benefits. As a result, some seniors terminate their life insurance policies in order to meet Medicaid eligibility requirements.  Using life settlement proceeds to fund accounts to pay for health care could provide a better option.

Health Planning AccountS Act Make Dollars and “Sense” for Seniors and the Treasury

H.R. 7203, would allow seniors to roll over some or all of the proceeds from a life settlement, tax-free, into accounts that may be used to fund a wide range of health care costs, including long-term care expenses and long-term care insurance premiums.

H.R. 7203 would provide seniors a big financial boost.  It also would benefit taxpayers by encouraging the use of private resources rather than public funds.

When seniors do not have private resources to meet health care needs, taxpayers have to foot the bill, largely through Medicaid, placing additional burdens on state and federal budgets.  

H.R. 7203 would empower seniors to make better use of private resources to pay for costly health care, reducing the need to rely on Medicaid, and saving taxpayer dollars.

Over the next decade, seniors are projected to lapse or surrender life insurance policies with face values totaling many hundreds of billions of dollars that readily could be sold in life settlements.  The accounts created by H.R. 7203 would provide many seniors the ability to use those life insurance assets far more effectively, benefiting both themselves and taxpayers.

In addition to reducing the need for government spending, H.R. 7203 is likely to increase taxable revenues by increasing the volume of life settlements. 

Because policyowners who sell their policies in life settlement transactions would, on average, receive far more than if those policies lapse or are surrendered, those greater life settlement proceeds also would result in significant additional taxable revenues.  Policyowners would roll over only a portion of the life settlement proceeds—the imposition of penalties and other adverse tax consequences taxes on undistributed amounts or distributions for unauthorized expenses would discourage excessive funding of the accounts, and amounts not rolled over would be taxed.

In addition, though most life insurance death benefits are excluded from taxable income, death benefits paid to a purchaser in a life settlement transaction are taxed, which would produce even more taxable revenue.

H.R. 7203 would empower seniors to plan and pay for increasing health care costs while easing the burden on taxpayers.  H.R. 7203 is a bipartisan approach that seniors, caretakers, and policymakers on both sides of the aisle can agree on.

Additional Resources

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[1] Congressional Budget Office, Rising Demand for Long-Term Services and Supports for Elderly People (June 2013)

[2]  Department of Health and Human Services, ASPE Research Brief: Long-Term Care Insurance (2012) at 7.

[3]  Kaiser Family Foundation. Distribution of Medicaid Spending by Service (Accessed 12.6.2018).

[4]  Grigsby v. Russell, 222 U.S. 149 (1911).

[5]  NAIC Long-Term Innovation (B) Subgroup, Private Market Options for Financing Long-Term Care Services (July 2017).

[6]  LIMRA, 2016 Insurance Barometer Study, at 14.

[7]  American Council of Life Insurers (ACLI) 2018 Life Insurers Fact Book, Tables 7.1, 7.4.

[8]   ACLI, 2018 Life Insurers Fact Book, Tables 5.2, 7.1, 7.4.

[9]   Internal Revenue Code section 101(g).

[10] ACLI, 2018 Life Insurers Fact Book, Tables 7.1.