senior health planning accounts
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.
Senior Health Planning Accounts (SHPAs), which would be established under proposed legislation in Congress, would help seniors make the most effective use of their existing life insurance assets. Seniors would be able to roll over, tax-free, some or all of the proceeds of life settlement transactions—that is, the sale of life insurance policies—into SHPAs. Earnings on assets in an SHPA also would be tax-free. Distributions from SHPAs would be permitted only to pay for qualified medical expenses, as defined under current law. Funds distributed for other purposes would be subject to immediate income tax, plus a substantial penalty.
While the proposed legislation is new, the policy has already been tested. Current law already permits Americans diagnosed with a chronic or terminal illness who sell their policies in a life settlement transaction to receive the proceeds tax-free. SHPAs simply would extend current law to all seniors so they can better plan for their health care needs before they become seriously ill.
Life insurance policies are often among a senior’s most valuable assets. The aggregate face value of life insurance policies currently in force exceeds $20 trillion – but those policies remain a vastly underutilized financial asset. About 65 percent of seniors own life insurance, yet they often get no financial benefit from those policies. That’s because about six percent of policies held by seniors lapse each year; in those cases, policyowners receive precisely nothing. Another one percent of outstanding policies are surrendered each year for cash value, which typically is far less than policy values determined by competing buyers in life settlement markets.
SHPAs would help seniors use assets they already own, life insurance, to help pay for their health care costs and would give seniors – rather than the government – more control over their health care. Private resources permit seniors and their families the ability to choose the level and type of senior health care that meets their needs.
SHPAs will help address an enormous public policy problem with a private sector solution. A 2017 report from the National Association of Insurance Commissioners (NAIC) Long-Term Care Innovations Subgroup identifies life settlements as a "Private Market Option for Financing Long-Term Care." Making the proceeds tax-free via SHPAs provides even more resources for seniors to dedicate towards these and other critical health care needs in the future.
One challenge with how we finance health care currently is that seniors are required to “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.
SHPAs could provide a better option for seniors who own life insurance policies. According to data compiled by the Government Accountability Office (GAO), policyowners are paid far more in life settlement transactions, where prices are determined by competitive bidding, than the policy cash value they may receive upon surrender, where prices are set by contract; policyowners are paid nothing at all for lapsed policies. Taxpayers also would benefit, because rolling over life settlement proceeds into an SHPA may help defer, or even eliminate, a senior’s need to seek Medicaid support, potentially saving the government billions.
Over the next decade, seniors are projected to surrender or lapse more than $2 trillion in death benefits on life policies that could potentially be sold as life settlements and converted into SHPAs. SHPAs can provide many seniors the ability to use those life insurance policies more effectively, by enabling them to put the proceeds of a life settlement transaction towards their future health care needs.