The coronavirus pandemic has hit seniors particularly hard, threatening their health and straining their finances. Seniors, most of whom manage on fixed incomes at a time when the value of their retirement savings has fallen, are especially in need of resources to pay for spiraling health care costs.
Seniors — and their financial and insurance advisors — are searching for innovative ways to use existing assets to help pay for their costs of living in retirement, including their health care cost, in this down economy. The absence of solutions often means that these costs will be borne by taxpayers.
One measure that encourages seniors to use their own resources to help themselves is the “Senior Health Planning Account Act”, H.R. 5958, a bipartisan bill introduced in Congress earlier this year. If adopted, the Senior Health Planning Account Act would enable hundreds of thousands of seniors to generate billions of dollars of wealth using their own asset — their life insurance policy — to pay for immediate health care and plan for long-term care needs.
The bipartisan bill, introduced by Rep. Brian Higgins, D-N.Y., and Rep. Greg Stube, R-Fla., would permit the proceeds of the sale of life insurance policies to be rolled over, tax-free, into Senior Health Planning Accounts, which may be used to pay for a wide range of qualified health care costs. Non-qualified distributions would be subject to immediate tax at ordinary income tax rates, as well as a substantial excise tax penalty.
Life settlements — the sale of life insurance policies for its fair market value determined by competing third party purchasers — are a highly regulated financial planning tool that often present a far better option than lapse or surrender. The National Association of Insurance Commissioners recommended life settlements as a way for seniors to finance their long-term care needs and, according to a 2017 report that “[p]olicyowners 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.”
Over 90% of life policies terminate without paying a death benefit, according to the ACLI’s 2019 Life Insurers Fact Book. In 2018, 7.7 million policies, with an aggregate face amount of $570 billion, lapsed, for which policyowners received nothing. An additional 1.5 million policies, with face amounts totaling over $130 billion, were turned over to the issuing insurer for a contractual cash surrender value. By contrast, just $57 billion was paid in death benefits on individual life insurance policies in 2018.
Studies show that retirees, faced with limited incomes and escalating premiums, are 25%more likely to have policies lapse than the general population. Especially for seniors, selling a policy often makes the most sense as an alternative to getting nothing or next to nothing when a policy is lapsed or surrendered.
Long-standing law already provides that no federal tax is imposed on the proceeds from the sale of life insurance policies, but only if insured chronically or terminally ill at the time of the sale (known commonly as a “viatical settlement”). But, many seniors terminate their life policies before they are very sick and in need of long-term care, making the current law unusable for most seniors. The Senior Health Care Planning Act would enable seniors to use their life insurance to plan and pay for their own healthcare and medical expenses while they still own their policies, without having to wait until after they are seriously ill.
The Senior Health Planning Account Act helps seniors determine where and how they receive care by using assets that they already own, but otherwise likely would be unused, to pay for long-term care or other major medical expenses. Without their own resources — including from a life settlement — seniors most rely on taxpayer-funded programs, and largely forfeit control of certain aspects of their health care.
The Senior Health Planning Account Act isn’t a government handout. It actually gets government out of the way and would help seniors plan and pay for health care expenses using assets they already own but are at higher risk of losing.
The Senior Health Planning Account Act is a sensible, bipartisan measure that builds on current law to benefit seniors and taxpayers alike. The legislation is particularly needed to help seniors deal with the medical and financial impact of COVID-19, and should be part of any legislative response to the pandemic.
Michael Freedman is chief executive officer at Lighthouse Life Solutions and chairman of the Life Insurance Settlement Association public policy council.
Reprinted with permission from the June 18, 2020 edition of ThinkAdvisor.com © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.