For many seniors, the desire to use life insurance to provide assets their heirs can use when they die is being outweighed by a more pressing need: selling the policy to pay for the rising cost of health care while they are still alive.
A secondary market for companies to buy life insurance policies has been growing to meet this new need, turning life insurance into a life settlement that can provide needed assets for costs before the policyholder dies.
While the need for assets has grown, selling a life insurance policy is not a new idea. The United States Supreme Court ruled in 1911 that life insurance is an asset and recognized it as the personal property of the owner. As a result of that ruling, the use of life insurance to pay for health care and long-term care has been an evolving practice for over a century.
As life expectancies have increased and the cost of long-term care has skyrocketed, sales of long-term care insurance policies haven’t kept up, creating a gap that, for many, only life insurance can fill. Currently, there are less than eight million long-term care insurance policies owned in the United States, but there are over 150 million life insurance policies currently in-force.
The tragedy of this is the percentage of seniors who abandon life insurance policies before they die, leaving nothing for themselves or their heirs. The American Council of Life Insurers found that 88 percent of universal life insurance policies are abandoned by the owner without paying a final death benefit.
The Government Account Office found that 38 percent alone abandon life insurance policies to become eligible for Medicaid, the only public program that pays for long-term care. This is a waste of assets that many are forced into after years of faithfully making payments.
Life insurance policies can be exchanged on the secondary market, converting a death benefit into a living benefit in the form of a tax-free long-term care benefit account, a guaranteed lifetime income annuity, a retained death benefit, or a lump sum cash payment.
Before the owner of a life insurance policy takes this step, they should look to the secondary market to find out what the actual resale value their policy holds. The secondary market can pay as much as 10 times any cash surrender value, making it a better option than lapsing a policy after years of premium payment for nothing in return.
As a strategy to preserve income, assets and estates, taking advantage of the secondary market value of a life insurance policy is a much better strategy than lapse or surrender. Once a policy has been exchanged, the value can be used to increase income, estate preservation, delay liquidating investments and assets, and it can protect a family from being financially ruined by the high costs of long-term care.