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Life settlements industry tries a new spin: Health care funds
The life settlement industry is taking a new tack to lure seniors into selling their life insurance policies for cash: Convert your life insurance policies to pay for your long-term health care.
A life settlement is a transaction in which someone sells a life insurance policy to a third-party investor. The investor takes over the premiums payments and receives the death benefit when the seller dies. The amount paid is more than the surrender value of the policy and less than the face value; it's based on the seller's life expectancy.
A new Texas law allows seniors to make a life settlement transaction and use the proceeds to pay for long-term health care without impacting their eligibility for Medicaid.
Many see this as a coming trend in state Medicaid laws. Lawmakers in at least seven other states are crafting similar measures: California, Kentucky, Florida, Louisiana, Montana, North Carolina and New Jersey.
Texas wants its seniors with life insurance policies worth more than $10,000 to sell them to investors rather than let them lapse. Lapsed policies are not assets anyway, in terms of Medicaid eligibility, because life insurance companies pay no death benefits on lapsed life insurance policies.
Texas wants seniors to take the money they get from selling their life insurance policies, which could be up to 20 percent of their face value, and use it to pay their medical bills and long-term care expenses.
Because your named beneficiaries may not be happy about the transaction, some life settlement companies require your beneficiaries to sign off on the deal before it is complete.
Glenn Daily, a fee-only insurance consultant in Manhattan, says seniors should beware. Selling your life insurance policy for cash isn't as easy as it may seem, he says.
Proceeds may be taxable
"It's a tricky marketplace to navigate," Daily says. "And there is a lot of money that goes to commissions on life settlements that are not always disclosed." Commissions paid to brokers and other financial advisers for life settlements can be as high as 30 percent, according to the Financial Industry Regulatory Authority.
All of the proceeds might be taxable depending on your circumstances, says Daily. So once you sell your life insurance policy and pay commissions and taxes, you might not end up with as much money in your pocket as you expected.
"Life settlement brokers would like you to think it's a seller-friendly market. I don't think it is. The cases I've seen, the results have not been very impressive," says Daily, who has worked with the Consumer Federation of America, a consumer advocacy group.
Remember, Daily says, you bought life insurance to protect your family after you die.
"Before you sell it, you have to make sure you are not getting rid of something that might be very valuable to your family."
Under the Texas law, seniors who sell their life insurance to third-party investors still can set aside a limited amount of money for their burials.
Identity of sellers could be issue
Letha Sparks, a CPA and financial examiner in the enforcement division of the Texas State Securities Board, has concerns about privacy when people sell their policies to investors.
The investor group that buys your life insurance is not supposed to have enough information to know who you are, she says.
But with all the computer search engines today and the widespread use of social media, "if you had a really distinctive name that could be searched, it wouldn't be hard for them to figure out who you are," Sparks says. "Then there's someone who knows you and is waiting for you to die to collect on your life insurance policy. And it changes your whole perspective on your life when someone is betting you are going to die sooner rather than later."
Sparks says that the Health Insurance Portability and Accountability Act (HIPAA) is supposed to apply and protect policyholders from being identified. "But somehow the information gets out," she says.
Advantage of private pay vs. Medicaid
Sparks understands that some seniors have life insurance policies they no longer need -- their children are grown, their mortgages are paid off, their cars are paid off. If they have huge health care bills, it could be tempting to sell a life insurance policy and not continue to pay the premiums.
But by paying for their own care, they can choose the health care facilities and doctors they want and aren't limited to only providers who accept Medicaid.
According to the U.S. Government Accountability Office, nearly 40 percent of Medicaid applicants have a life insurance policy.
How you spend proceeds is your choice
However, Sparks says, brokers and lawmakers seem to forget that seniors who sell their policies can use the money for whatever they want. They don't have to use it to pay for medical care.
"You can sell your policy and use the money to travel the world," Daily notes.
More from Beth Orenstein here