Can’t Qualify for LTC? Life Settlements Can Be the Answer

By Lisa Rehburg

Long term care insurance is important to protect a client’s family and assets should they need care. But what if they wait too late, and they cannot qualify for long term care insurance coverage? What if they need assisted living, memory care or in-home care now or in the near future? How are they going to fund those needs? Life insurance settlements can be the answer for you and your client.

Briefly, a life insurance settlement is the sale of a life insurance policy for a lump sum of cash. Similar to selling a car, the seller will receive a lump sum of cash and sign the ownership of the life insurance policy to the buyer. The buyer will pay the premiums and receive the death benefit when the client passes away. For the buyer, it is an investment.

All types of life insurance policies can be sold, including term policies. Here are some recent clients who sold their policies to fund long term care needs:

Recent Client Examples

Client #1 – $150,000 annual renewable term policy.

The policy is no longer convertible to a permanent policy. The premiums are $750 each month – $9,000 per year and are going to continue to go up each year. The client is in assisted living, and lives only on social security. The policy was sold for $20,000, which gave the client the liquidity needed to be more comfortable. In addition, the client saves $750 per month, giving him additional cash flow for care expenses. $3500 commission was paid to the insurance agent.

Client #2 – $450,000 universal life policy with no cash in it.

The premiums are $24,000 per year to continue the policy. The client is in assisted living. The family could no longer afford the premiums. They thought their only option was to let the policy lapse, walking away with zero. The opening offer for the policy was $10,000. By marketing the policy and leveraging the buyers, the final closing offer was $185,000, giving the client much needed funds for assisted living, plus an additional $24,000 in cash flow from no more premium payments. The advisor received $17,500 commission.

Client 3 – $750,000 universal life policy with little cash in the policy.

The client needed home care, and the premiums were getting expensive – $60,000 per year to continue the policy. The opening offer was $150,000, and by the time the policy was fully marketed, the closing offer was $370,000. This money allowed the client to pay off the balance of her home loan, which was very important to her, and have enough to receive the home care support that she and her family needed. In addition, they receive $60,000 per year in premium savings. The agent received $25,000 commission.

In each of these instances, the clients received much more money than lapsing or surrendering their policies, and gave them the resources they need to make life more comfortable.

“Life insurance settlements can be the answer for you and your client.”

Besides helping their client, the agents and advisor received another revenue source in the commission paid on the sale. Win for the client – win for the agent/advisor.

These scenarios are not unique, in that life insurance settlements are here to give clients more money than lapsing or surrendering their policies. The money clients receive can be used for anything. In these examples, it was used for health care needs. In reality, the money clients have received have been used for things to help keep them comfortable and improve quality of life, such as paying down debt, saving more for retirement, travelling, funding a grandchild’s college education, or purchasing an annuity.

The Life Settlement Process

Selling a life insurance policy does take awhile, on average 3 – 5 months, so planning ahead is essential. Life insurance settlements are not a short term solution for long term care funding, rather a longer term solution.

The process starts with an application (no application fee and no cost to find out how much a policy may be worth). It takes about 60 – 90 days to properly market a policy. Medical records need to be obtained, which can take a while, and the buyers need time for their review. Additional time is needed to leverage buyers to obtain the maximum amount for clients.

If a client receives no offer for some reason, or the offer is too low, and the client is not interested – they simply walk away, so there is no downside to looking at how much a policy may bring a client. Once an offer is received, and the client wishes to move forward, it takes about one month before they have their money.

Regulation and Client Protections

The life insurance settlement market has been legal since 1911 (in a Supreme Court decision for Grigsby v. Russell), and is highly regulated by the Departments of Insurance (DOI) across the country. Compliance is mandatory and stringent. The sale contracts contain mandated language by the DOI, and the contracts must be approved by the DOI before they can be used with clients.

In addition, beneficiaries must sign a release that they know the policy is being sold and they will not be receiving the policy benefit. A letter must also be signed by a client’s doctor that they are of sound mind to complete this transaction. If they do not have capacity, a client’s Power of Attorney can conclude the transaction on the client’s behalf. In other words, there are much compliance and many safeguards are in place to protect clients.

The policies we sell are only sold through DOI approved “Providers” in each state. These Providers are the legal entities that have undergone much scrutiny to be sure that they are financially sound and have HIPAA protections in place.

Providers purchase policies on behalf of their clients, which are mostly institutional money: hedge funds, mutual funds, college endowment funds, pension funds, banks, etc. These investors take a slice of their billions of dollars in their portfolios and invest them in life insurance policies for the returns, but also for diversification. Life insurance policies are not tied to the stock market, the bond market, or any other asset class, so they are truly a non-correlated asset, giving these investors the diversification that they need.

The Bottom Line

The bottom line is that in the end, everybody wins. The client wins with receiving more money than they would have by letting the policy go. The investor wins with an additional investment in their portfolio. And, the agent or advisor wins with additional revenue – commission from the sale and the potential for additional product sales for their client or client’s spouse.

For example, perhaps the client can no longer qualify for long term care insurance, but the healthier spouse can, and now there is funding to pay for the policy.

In conclusion, life insurance settlements can be a good financial solution for clients any time they are going to lapse or surrender a policy but can be an especially important solution if they cannot qualify for long term care insurance and need funding to help with long term care expenses.

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