A New Way To Fund Long-Term Care?

By Cyril Tuohy

InsuranceNewsNet

New trends in the life settlements market, particularly around policies with lower face amounts, has opened the door for advisors to discuss the financing of nursing home care, assisted living and home health care through cash values stored in universal and whole life contracts.

The idea could be used to help fund long-term care insurance (LTCi), which many middle-market buyers find too expensive.

“It’s an opportunity for the financial advisors or insurance agents to have a conversation with the family as they are saying what are our options to care for mom and dad,” Scott Hawkins, an analyst with Conning & Co., said in an interview with InsuranceNewsNet.

In the settlement of a life insurance policy, the policyholder “settles” or sells his or her life insurance policy by signing over the policy to a buyer who continues to pay the premium but collects a portion of the death benefit. 

The price the buyer pays falls somewhere between the cash value accumulated in the policy and the benefit paid at death. A whole life policy with a $10,000 cash value and a $50,000 death benefit may sell for $12,000 or $15,000, for instance.

In exchange for settling the policy, the policyholder gives up the death benefit and the funds are invested in an account used to pay for long-term care. Life settlements in states considering the Medicaid life settlement provision allow sellers to retain partial death benefits.

Investors have typically shown an interest in life settlements when face amounts fall anywhere between $2 million and $4 million. Investors with a $100 million life settlements fund, for instance, might buy as many as 40 policies each with a face amount of $2.5 million.

For investors, the risk is concentrated. If life expectancies exceed actuarial projections on four of the policies – 10 percent – investors are on the hook for longer premium payouts on each policy, thereby lowering the rate of return on the $100 million portfolio, Hawkins said.

However, investors looking at the long-term care market need to realize that average face values may be considerably smaller. This means that the same $100 million settlements fund could buy 400 policies, each with a face amount of $250,000, or it could buy 4,000 policies each with a face amount of $25,000.

A move toward smaller face amounts could mean that longevity risk – the risk of a policyholder living past actuarial assumptions – is spread across a broader base. Off-base projections on as many as 100 polices only represents 2.5 percent of the 4,000 policies, thanks to the law of large numbers. “If the life settlement investor can figure out a way to efficiently assemble smaller policies there's a role for long-term care funding,” said Hawkins, who recently published a research report titled “Life Settlements: A New Opportunity in Smaller Policies.”

Hawkins said life settlements represent more of an opportunity for the life settlement market, but only if investors can find a way to make enough of a return on settlements in which policies have relatively small face amounts and low cash values.

Brokerage fees and transaction costs reduce the appeal to investors for smaller face values, and long-term care riders on life insurance products represent a challenge to the development of life insurance settlements as a vehicle for long-term care funding, he also said.

States have also spread the word about life settlement options to pay for long-term care. In June, Texas Gov. Rick Perry signed a law giving state Medicaid officials the authority to let people know they can sell their life policies to pay for long-term care, and similar bills are pending in New York, California, Florida, Kentucky, Louisiana, Maine and New Jersey.

“More and more financial planners are aware of this option,” Hawkins said.

Based on Conning’s latest estimates of the life settlement market, investors bought approximately $2 billion worth of U.S. life insurance face values in 2012, and held just under $35 billion of in-force U.S. life settlements at the end of 2012.

Over the ten-year period from 2013 to 2022, the average annual amount of life settlements will come to $2.2 billion, with the estimated annual growth for face value settled increasing between 1 and 2 percent a year, Conning estimates.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.