Colorado has been reported in surveys to have some of the steepest nursing home costs in the country, at $85,000 to $100,000 or more per year. Skilled nursing facilities ring in at $5,000 to $6,000 per month. Assisted living facilities hit an average cost of $4,750 per month.
Paying such costs inevitably poses a challenge for many older Coloradans. A large number of them do not have their own liquid assets in adequate amounts and may not have (or be able to afford) long-term care insurance. Medicare doesn’t pay for long-term care expenses. Medicaid has strict eligibility requirements. Some Colorado seniors consider options of selling significant assets, such as a home, or using reverse mortgages or tapping into hybrid insurance plans or annuities that have provisions to help cover long-term care expenses.
On the insurance front is another occasionally used funding source known as a life settlement. This option, also sometimes called a senior settlement, involves selling existing life insurance to a third party for cash. This third party is a person or entity other than the company that originally issued the policy. The settlement amount to be gained is typically more than the policy’s cash surrender value but less than the death benefit.
Cautions to think about when using a Life Settlement
This can work in certain circumstances as a source of cash, but the Financial Industry Regulatory Authority (FINRA) urges caution. FINRA is a private American corporation that devotes its attention to monitoring financial entities such as brokerage firms. FINRA says life settlements “are not for everyone [and] can have high transaction costs and unintended consequences. And even if you decide a life settlement is generally right for you, it can be hard to tell whether you are getting a fair price.”
The purchasers of life settlements are typically institutions that either hold the policies to maturity and collect the death benefits or resell policies—or sell interests in multiple, bundled policies—to hedge funds or other investors. Not to sound too stark, but if or when you choose a life settlement, these investors are acquiring a financial interest in your death. If you are considering doing a life settlement, FINRA advises you to familiarize yourself with your existing policy so that you fully understand your options, then shop around for the best offer and deal only with licensed buyers and brokers.
FINRA offers these additional facts about Life Settlements:
A short history item. A life settlement is somewhat similar to the “viatical settlements” that arose in the 1980s as a source of funds for AIDS patients and other terminally ill policyholders with life expectancies of less than two years. What’s different is that life settlements involve policyholders who are not necessarily terminally ill, and the insurance policies involved tend to have higher death benefits than viaticals.
All about the numbers. When you do a life settlement, you receive a lump sum payment from the purchaser. The amount you will receive depends on a range of factors, including your age, health and the terms and conditions of your policy. The buyer also agrees to pay any additional premiums that might be required to support the cost of the policy for as long as you live, which makes your life expectancy a factor in the accounting.
Sales strategies. Life settlements are a profit-driven industry. FINRA says competition in the business is intense and can be prone to aggressive sales tactics. The industry is also relatively new. With profits in mind, settlement buyers may target seniors who are in poor health—meaning those who have policies likely to pay out death benefits sooner. Also, FINRA adds that some marketing strategies pitched to brokers emphasize how additional revenues can be generated from the seller’s purchase of other investment products using the proceeds from the life settlement. This can include even purchasing new life insurance, which happens more often than one might think. As with any sales-oriented encounter, if you feel you are being subjected to high-pressure tactics, be wary. A legitimate investment professional will provide clear answers to your questions and will give you the time you need to make an informed decision.
How to make your decision an informed one
FINRA says the circumstances surrounding life settlements do not mean you should never consider one. “A life settlement might make sense for you if you no longer want or need your current policy,” says FINRA, “or if you can no longer afford the expense of paying insurance premiums and are willing to give up or replace the coverage.” Following are several key questions to get answers to if considering a life settlement.
Will you still need some insurance?
If yes, see what it will cost to get a new policy, at your older age, and what risks will still be covered. If you want to retain the coverage you have but at a lower cost with different features, you might look into a “1035 exchange,” which could also potentially avoid having to pay taxes if the life settlement amount you would get exceeds the premiums you’ve paid. FINRA explains that the Internal Revenue Service allows you to exchange an insurance policy that you own for a new one insuring the same person without paying tax on the investment gains earned on your original contract.
Can your existing policy help you without surrendering it?
In some instances, yes. You can see if you are eligible for “accelerated death benefits,” which allow an individual with a long-term, catastrophic, or terminal illness to receive benefits on his or her policy prior to dying. (This is somewhat similar to the viaticals of a few decades ago as mentioned earlier in this article.) Check with the company that issued your policy.
How can you ensure you get a fair price in your settlement?
This isn’t easy. The best way is to shop around. You might directly contact several settlement companies or you might use a licensed life settlement broker who will “market” your policy on your behalf. If you are using a life settlement broker, ask what bids were received, and what steps the broker used to make sure you are being offered the most competitive price available. If you are approached by someone soliciting you to sell your life insurance policy, ask if he or she is a life settlement broker who represents you, or is the person affiliated with a particular life settlement company who may obtain an offer only from that company. (Also see last item in this article regarding broker licensure.)
Are there other financial considerations when using a Life Settlement?
What will transaction costs be?
Commissions paid by life settlement companies to life settlement brokers and other financial professionals involved in the transaction can be as high as 30%. Ask your broker or other financial adviser how they are compensated and how the amount is arrived at.
Will this impact your finances in other ways?
A life settlement payout might have unintended consequences. For instance, if you currently receive state or federal public assistance, such as Medicaid, a life settlement might affect your continuing eligibility for that assistance. Also the lump sum payment you receive may be taxable, depending on your circumstances. Here it would be wise to consult your attorney, accountant, or other legal or financial professional.
How might this impact your survivors?
Even if it appears they don’t need the proceeds from your insurance policy at this time, might that change?
What information will you have to provide when using a life settlement? To whom?
When you sell your life insurance policy, you will have to sign a release for your medical and other personal information so the buyer can determine how much to offer for your policy. You may also have to agree to provide periodic updates about your health status. Once the buyer obtains that information, it may be shared with other parties, including lenders or third-party investors. Which leads to a related question: What will the life settlement buyer do with your policy? Will they hold it, sell it, package it with others? This may affect who gets what access to your personal information.
How can you protect your privacy?
Before accepting any offer from a life settlement company, carefully read the application, and make sure that the company has procedures in place to protect the confidentiality of your information. If it will be sold, ask to whom, and whether the end buyers will have access to your personal information. If you use a life settlement broker, find out the names of the life settlement companies from whom the broker solicits bids, and ask about the privacy policies of all parties or potential parties to the transaction. Note that in July of 2021 the Colorado legislature passed the Colorado Privacy Act, with its provisions set to take effect in July 2023. See https://coag.gov/resources/colorado-privacy-act/ for more details, including the full text of the applicable rules.
Is your life settlement broker or provider licensed in Colorado?
In Colorado visit https://doi.colorado.gov/for-consumers/consumer-protection to check on licensures. The Colorado Department of Regulatory Agencies (DORA) states that a list of approved registered “viatical settlement producers” is available by emailing LicensingAndCE@dora.state.co.us. Any number of companies will be displayed if you do an online search for “Colorado life settlement companies.” If you are working with a securities broker, FINRA BrokerCheck can inform you about brokers’ professional backgrounds, registration/license status and disciplinary history.
