As General Electric made headlines last year for a decision to take a $9.5 billion loss on mispriced long-term care insurance policies written in the ‘90s, many seniors have faced the heartbreaking choice between moving a family member into cheaper nursing home or selling the family home to pay for their care.
For many seniors, the skyrocketing cost of long-term care has reached a crisis level.
There may be help coming for them in a bill making its way through Congress. H.R. 7203, introduced by U.S. Rep. Kenny Marchant (R-TX) and U.S. Rep. Brian Higgins (D-NY). The bill would for the first time permit seniors, regardless of their health status, to use life insurance policies they already own to fund a wide range of health care costs, including long-term care expenses and long-term care insurance premiums, tax free.
It is called a Long-Term Care Account and it is being considered as a private pay solution to the public policy problem of sky-high post-retirement costs. The bill could reduce the financial burden on seniors and their loved ones while saving taxpayers as much as $2 billion in Medicaid funds that would have been used to pay for many of the services over next nine years, according to the Alliance for Senior Health Care Financing.
The accounts would be similar to the Health Savings Accounts millions of Americans use to pay for health care before they retire, but federal rules have prohibited anyone over the age of 65 from contributing to. The accounts would be funded by exchanging life insurance policies for tax-free funds seniors could use for health care costs in retirement, including long-term care costs.
Often, end-of-life decisions about care become a race to find assets to pay for what can be very expensive options. Fidelity Investments estimates the total cost of healthcare and long-term care costs in retirement will average $280,000 for the senior who retires this year. With these costs so prohibitively high, 62 percent of all nursing home residents rely on Medicaid funding to pay for their care, according to the Kaiser Family Foundation. Of that population, the Government Accounting Office estimates 38 percent own a life insurance policy that they will abandon to qualify for Medicaid.
For many seniors, a life insurance policy is one of their most valuable assets, but the policies may only pay out benefits when the holder dies, leaving untapped resources for many retirees. A secondary market has evolved to purchase the policies, but many seniors abandon the policies as the premiums rise or sell them back to the original insurer for pennies on the dollar.
The 2017 National Association of Insurance Commissioners white paper, “Private Market Options for Financing Long-Term Care,” identified life settlements as “one option seniors might use to generate resources to pay for their long-term care needs.”
“Policyowners 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,” the report found.
Lapsed or surrendered life insurance policies have totaled more than $2 trillion, according to industry analyst Conning & Co. Current law permits Americans with a terminal or chronic illness to sell their policies without incurring any federal income tax on the proceeds. The accounts would enable seniors to use the policies more effectively to plan for future health care expenses, rather than waiting until they are very sick to access them.
The need for tax-free accounts is clear: they are a simple, revenue-positive policy solution that would assist American seniors in planning and paying for increasing health care costs while easing the burden on taxpayers. This is an approach that seniors, caretakers and policymakers on both sides of the aisle can agree on and the families I have met who face these brutal decisions are clearly cheering them on.
Chris Orestis is Executive Vice President of GWG Life in Minneapolis
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