H.R. 7203

The Alliance for Senior Health Care Financing applauds efforts by members of Congress to develop innovative options for seniors to meet their health care expenses. The Alliance is pleased that those efforts have led to introduction of H.R. 7203, legislation that would allow seniors to roll over some or all of the proceeds from a life settlement tax-free into SHPAs, which could then be used to cover the costs of qualified medical expenses.

Overview of Legislation

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—known as a life settlement—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 (Internal Revenue Code sec. 101(g)).  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.  

Background on Life Settlements

Americans own their life insurance policies, which they have a right to sell like any other asset at a market price determined by competitive bidders.  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, and their families, critical resources to help seniors maintain their standard of living, live independently, and pay for housing, health care, and other essentials.

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.” 

Life settlements enable seniors to use assets they already own for home health, assisted living, skilled nursing, and nursing home care, with greater choice in where care is received. 

Yet life settlements remain a vastly underutilized option, and policyowners often fail to realize the full value of their assets.  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 policies, with an aggregate face value of over $100 billion, were transferred to the issuer for cash surrender value.