By PAULA SPAN
I was visiting an assisted living facility recently with my sister, whose disability made that a prudent choice, when the marketing manager handed us a brochure. It asked, “Did you know a life insurance policy can pay for long-term care expenses?”
We did not know, actually, except that some policies have cash value. But this was a different model: A company called Life Care Funding — and there are others — was offering to buy her insurance policy (if she qualified), pay the premiums to keep it in force, and give her a chunk of the face value.
She would have money now to help pay the daunting $6,000 a month that assisted living costs in this part of New Jersey; the company would make its profit later by collecting on the policy after her death.
In the interim, when she applied for Medicaid, her life insurance wouldn’t be considered an asset she had to turn over; nor would Medicaid try to collect the proceeds following her death as part of its “asset recovery” effort. The policy wouldn’t be her asset any more — it would belong to the company that bought it from her.
The life settlement industry, as it calls itself, points out that older people who bought life insurance policies decades earlier often allow them to lapse. “People get to a liquidity crunch and paying the premiums doesn’t make sense, so they just walk away,” said Lauren H. Cohen, a finance professor at Harvard Business School who has written about life settlement.
The problem with that? “This asset is valuable,” Mr. Cohen said. “You’ve paid for it.”
Except by dying, it’s hard to unlock that value. Some policies have no cash surrender value. When they do, it can be a small amount compared to the face value. “This is a more sensible solution,” Mr. Cohen said.
How much your policy can fetch depends on a calculation — based on your age, your medical history and your policy — of how long you’re likely to live and therefore how much the company can eventually pocket.
Life Care Funding, said Chris Orestis, the chief executive, pays older adults an average 40 to 45 percent of a policy’s face value. At the Lifeline Program, a rival company, a 75-year-old with a couple of chronic conditions will probably get 20 to 30 percent, said the chief executive Scott Page. But conversion values are all over the map and could be somewhat higher or much lower.
The form of payment varies, too. Most life settlement companies just send a check, to use for any purpose. But Life Care Funding puts the money in an F.D.I.C.-insured account used to send monthly payments directly to a long-term care provider: a nursing home or assisted living facility, an adult day program, a home care agency, a hospice, an individual hired privately for home care. You can switch from one provider to another as your needs change, but you can’t use the money for a vacation (or blow it at a casino).
Is this a good move for seniors holding onto life insurance insurance policies? The life settlement industry is still so tiny (Life Care Funding converted roughly 100 policies last year, and the Lifeline Program, 350 to 400) that the usual consumer watchdogs don’t seem to have a fix on it yet. “It’s a niche product,” said Ryan Wilson, senior strategic policy adviser at AARP. “We have more questions than answers at this point.”
Settlement companies talk as though seniors abandon their life insurance in droves, but data from LIMRA, a research company, shows that young people are much more likely to drop policies. Among those over age 65, the annual lapse rate is 2 percent for whole life and 4 percent for universal life policies (some of which results from people switching to different policies). Over the years, small percentages will add up, but the idea that most seniors walk away from their policies empty-handed appears exaggerated.
Meanwhile, Texas has enacted legislation to protect consumers; similar laws have been introduced in several other states. Among other things, Texas requires settlement companies to pay a $5,000 funeral benefit to the former policyholder’s family. And if the company is still directly paying a long-term care provider when an individual dies, the remainder of the converted amount will be paid to a designated beneficiary. But with life settlement companies involved in drafting these laws, it’s hard to feel entirely reassured.
For now, whether to pursue this option depends on the situation. An older person who needs to provide for a spouse or a dependent child after his death will want to hold onto a policy if at all possible. Someone in very poor health who probably only needs a few months of long-term care might strike an arrangement with family members: They scrape together enough for a few months’ care, then get the full face value of the policy after the elder’s death. It may make more sense to borrow the cash value rather than let the policy lapse. Alternatively, if a senior can’t afford the premiums, maybe family members will pay them for a year or two, thus protecting their death benefits.
Meanwhile, insurance companies are busily inventing new products that might allow future buyers to access some death benefits while they’re alive, rather like reverse mortgages.
It probably won’t hurt to apply (no charge) and find out what a couple of life settlement companies will pay for your policy, but then, “you have to get beyond the hype and look at your needs and goals,” said the LIMRA spokeswoman Catherine Theroux.
My sister doesn’t need to decide yet. Life settlements are meant for people in immediate financial need; she can afford to hold off for a few years. It’s good to know that she has the option to convert her two policies to cash if she needs it. It’s hard, at this point, to know if she should.
Paula Span is the author of “When the Time Comes: Families With Aging Parents Share Their Struggles and Solutions.”