by Derek W. » Mon Oct 06, 2008 05:58 pm
Here is an article I wrote regarding Long Term Care and Life Settlements.
Long-Term Care & Life Settlements
Life Settlements serve as a practical option for those burdened with the high costs of long-term care.
By Derek Wilsey
JUNE 2008
As the number of baby boomers heading towards retirement begins to increase subsequently so will the need for long-term care. Long-term care provides services that act as an essential support system for many senior citizens who require assistance with daily living activities. While long-term care is most definitely a benefit to families who need assistance caring for the elderly, it can also pose as a severe financial burden as it is generally not covered by Medicare.
Long-term care includes of both medical and non medical services. Majority of long-term care involves assisting senior citizen with daily living activities. These daily living activities can include anything from using the restroom to shopping for groceries. The care provided in daily activities such as these are considered non skilled or “custodial” care and are not paid for by Medicare. According to a study conducted by Genworth Financial in 2006, long-term care costs over $70,000 a year on average. The similar study conducted by Genworth in 2007 showed little difference in pricing for a single bedroom in a nursing home. The average annual cost for a private room in a nursing home was $74,806. With the current cost of living accumulating as it is, the expenses of long-term care for elderly family members often places a financial burden on loved ones. Majority of individuals do not possess the means for funding this care and have limited options to explore, forcing them to take out loans and obtain debt in order to take care of the family member needing the long-term care.
A solution to this problem has emerged in recent years in the form of the life settlement market. For those unfamiliar with life settlements, a life settlement is the sale of an existing life insurance policy to a third party for an amount exceeding the cash surrender value offered by the life insurance company. Once this transaction is complete, the individual is able to spend the cash received any way they see fit. The institutional investor that purchased the policy will continue to pay the premiums until the death of the insured, at which time they will receive the death benefit from the policy. There are only two other options for disposing of a life insurance policy. The individual can either stop paying the premiums and let the policy lapse, in this case they would receive nothing; or, the individual can sell the policy back to the insurance company for the cash surrender value. Offers provided in life settlements typically exceed the cash surrender value by three to four times the monetary amount.
For those who require long-term care, but cannot afford the increasing expenses that entail, a life settlement is the perfect solution. An individual is able to sell his or her existing policy and use the money received through the life settlement transaction to purchase long-term care insurance. If the individual does not qualify for long-term care insurance, he or she is able to use the cash received to pay for their long-term care needs. A life settlement can lift the financial burden off the shoulders of a policyholder and their family.
There are numerous reasons an individual would consider the life settlement option. Maybe your insurance needs have changed, the premiums have simply become too costly, or maybe you have come across some unexpected expenses. Whatever the reason, a life settlement may serve as the best possible option for any and all individuals considering selling a life insurance policy.
Long-Term Care & Life Settlements
Life Settlements serve as a practical option for those burdened with the high costs of long-term care.
By Derek Wilsey
JUNE 2008
As the number of baby boomers heading towards retirement begins to increase subsequently so will the need for long-term care. Long-term care provides services that act as an essential support system for many senior citizens who require assistance with daily living activities. While long-term care is most definitely a benefit to families who need assistance caring for the elderly, it can also pose as a severe financial burden as it is generally not covered by Medicare.
Long-term care includes of both medical and non medical services. Majority of long-term care involves assisting senior citizen with daily living activities. These daily living activities can include anything from using the restroom to shopping for groceries. The care provided in daily activities such as these are considered non skilled or “custodial” care and are not paid for by Medicare. According to a study conducted by Genworth Financial in 2006, long-term care costs over $70,000 a year on average. The similar study conducted by Genworth in 2007 showed little difference in pricing for a single bedroom in a nursing home. The average annual cost for a private room in a nursing home was $74,806. With the current cost of living accumulating as it is, the expenses of long-term care for elderly family members often places a financial burden on loved ones. Majority of individuals do not possess the means for funding this care and have limited options to explore, forcing them to take out loans and obtain debt in order to take care of the family member needing the long-term care.
A solution to this problem has emerged in recent years in the form of the life settlement market. For those unfamiliar with life settlements, a life settlement is the sale of an existing life insurance policy to a third party for an amount exceeding the cash surrender value offered by the life insurance company. Once this transaction is complete, the individual is able to spend the cash received any way they see fit. The institutional investor that purchased the policy will continue to pay the premiums until the death of the insured, at which time they will receive the death benefit from the policy. There are only two other options for disposing of a life insurance policy. The individual can either stop paying the premiums and let the policy lapse, in this case they would receive nothing; or, the individual can sell the policy back to the insurance company for the cash surrender value. Offers provided in life settlements typically exceed the cash surrender value by three to four times the monetary amount.
For those who require long-term care, but cannot afford the increasing expenses that entail, a life settlement is the perfect solution. An individual is able to sell his or her existing policy and use the money received through the life settlement transaction to purchase long-term care insurance. If the individual does not qualify for long-term care insurance, he or she is able to use the cash received to pay for their long-term care needs. A life settlement can lift the financial burden off the shoulders of a policyholder and their family.
There are numerous reasons an individual would consider the life settlement option. Maybe your insurance needs have changed, the premiums have simply become too costly, or maybe you have come across some unexpected expenses. Whatever the reason, a life settlement may serve as the best possible option for any and all individuals considering selling a life insurance policy.
Posted: Tue Oct 07, 2008 11:24 am Post Subject:
Ok wait a second this has the same ring as the whole 'reverse mortgage' deal...are you saying (as an example) Mr. Jones 90years old has a 200k policy, you give him 50k for it and begin making his premium payments he dies two years later and you collect the 200k death benefit?
Posted: Fri Oct 10, 2008 12:52 pm Post Subject:
Lori,
I sense that you are skeptical of Life Settlements. I do not try to push the idea onto everyone. Simply because, it is not the best option for everyone. However, at times it often is. There are many different reasons an Individual would seek a life settlements. Maybe...
* The beneficiary of the policy has deceased
* The original need for life insurance no longer exists
* The policy owner needs money for Medical expenses now.
* The policy owner can no longer afford the monthly premiums. This
scenario leaves three options. The policy owner can
- let the policy lapse and receive nothing.
- take the cash surrender value from the insurance carrier
- or...transact a life settlement and receive a lump sum which is
typically three to four times the amount of the cash surrender
value.
Any other questions, please let me know. I would be more than happy to speak over the phone as well. You can reach me at 888-877-5686. Just ask for Derek.
Posted: Fri Oct 10, 2008 06:07 pm Post Subject:
I don't want to sound ignorant but I just do not believe in reverse mortgages or what the OP here is talking about. I mena these companies can really benefit from these types of deals. I would rather see some creditable charity make money off me when I die.
Posted: Fri Oct 10, 2008 06:45 pm Post Subject:
I understand the opposing view points and take them into considerations. But, I'd like to reiterate the point I made earlier, the life settlement option is not always the best scenario. Of course we'd all prefer to leave all of our money to loved ones or charities of our choice when we pass, but that is not always an option for the average individual.
The article touches on the possibility that the current cost of living for some seniors may place a financial burden on loved ones.
Posted: Sat Oct 11, 2008 02:21 am Post Subject:
I sense that you are skeptical of Life Settlements.
You're sniffer is correct... :wink:I understand Derek, that you aren't 'pushing' this on anyone, but you did post this here so I would like to explore this, and perhaps EVERYONE doing this isn't as ethical as you either... :wink:
So in 'theory' only....
Mr. Jones has a 250k policy he pays 250 a month, he's in good health and is 85 years old...his primary beneficary (his wife) is dead, his contingent beneficarys (his children) are not....he comes to you says, 'hey derek I'm broke, I've been paying these premiums for 20 years and can't afford them anymore what can you do for me'....you say, ok Mr. Jones, you make me the primary beneficary, I'll pay the premiums until you die, and I'll give you 3 times the surrender value which is what 15k so I'll give you 45k, and we're done....is that in essence how this works? then the former contingent beneficiarys know nothing about this, when dad dies, SURPRISE...is that right? also how or what is this ''commission'' you mention? by commission to do you mean the death benefit?
Posted: Sat Oct 11, 2008 02:41 am Post Subject:
Reverse Mortgage? Reverse Life Insurance?
Posted: Wed Oct 22, 2008 01:38 pm Post Subject:
Lori,
We are on the same page that the life settlement option is not always the best scenario. The keyword in the sentence is ‘option'. It gives clients an additional option instead of letting their policy lapse or taking the cash-surrender-value if they are looking for an exit strategy. Since you mention charity giving and donating a policy to the charity, why not consider giving the proceeds of a life settlement directly to the charity? Instead of having to wait until the individual is deceased the charity is able to immediately use the donated funds.
In response to the question on Mr Jones: Unless you have a medical history of the client and are able to determine the individual's life expectancy using industry approved methods and there is an illustration available showing the exact premium outlay, account value, and cash-surrender-value for each year of the policy then the pricing is purely guess-work. Like life insurance companies use, there are pricing models that take into account all of the factors previously mentioned in order to determine a offer price based on the rate of the return that the institutional investor is looking for.
The client's illustration and medical information are reviewed and the policy is evaluated. An offer (if the policy is of economic value, which not all are) is then presented to the representative of the client or the insured directly if we are working with the consumer. If the offer is acceptable to the client, a closing package is then sent out within 24 hours of receiving our signed offer letter back. If there are any representatives assisting the client, then they are able to take a portion of the commission out of the gross purchase price. The maximum that they could take would be the lesser of
1) 6% of the face value
or
2) 33% of the net value added (the difference between our offer and the CSV).
All commissions paid to representatives are disclosed in the contracts and the seller must sign off stating that they are aware of the values paid out.
In Mr Jones example, his premium to face ratio is annually 1.2% which is extremely rare at the age of 85. Two to three times the CSV is just an average of what the traditional life settlement typically generates. Life Settlement transactions have paid the seller anywhere from 5-70% of the death benefit, however most settlements happen between 10% and 30% of the death benefit. The client would probably receive an offer more like 40-50% as his premium is really low, however this is all theoretical assumptions as we have no information regarding Mr. Jones.
So, you have never been approached by a client that was looking to let their policy lapse or take the CSV? As an agent you no longer make trailing commissions from the insurance carrier on that policy once the policy is terminated, however on a life settlement a one-time commission is earned for helping your client receive a value better than what the insurance carrier is willing to pay for the exit strategy.
Posted: Wed Oct 22, 2008 03:38 pm Post Subject:
Syre glad I don't have a Life settlement...seems to contraversal...Good Luck Mr. Jones.
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