Life settlements: A new generation of solutions helps seniors fund future care

As the aging population continues to grow, ensuring a financially secure retirement and funding long-term care have become critical challenges for Americans. Many seniors are unprepared for the costs associated with the unique challenges of aging and declining health throughout retirement, leading to concerns about maintaining their desired lifestyle and independence.

However, financial advisors can help their senior clients overcome these challenges by using tools that leverage the hidden value of life insurance policies: life settlement annuities and long-term care life settlements. These strategies can be effective in helping seniors fund their retirement, protect their assets and secure their long-term care needs by helping seniors leverage an illiquid asset to create a stable income stream, tax advantages and the financial resources required to cover the costs of senior living and health care services.

Life settlement annuities

Annuities are an often overlooked or misunderstood financial tool, but the past couple of years have seen record levels of activity in the annuity segment. Life settlements have become a growing mainstream option for senior policy owners who would otherwise abandon a life insurance policy they no longer need or want. Together, life settlement annuities are a way to potentially receive five to 10 times more than cash surrender value. This money can then be used to fund a variety of annuities designed for income protection, accumulation, distribution and long-term care needs.

Enhancing the value of the settlement, annuities can offer a higher payout to the policy owner than taking a lump sum. This payout can be set up to provide guaranteed lifetime income, growth and stability from fluctuating markets, tax advantages and flexibility for families.

Common retiree fears

Most people share a common thread of fears about living in retirement. The irony is that today, seniors are more afraid of living too long in retirement instead of not living long enough. Some common retiree fears include:

• Not having enough money to maintain their lifestyle.
• Running out of money.
• Becoming dependent on others.
• Inability to live independently.
• Needing long-term care and ending up in a nursing home and dependent on Medicaid.

Life settlement annuities provide several ways to address these fears and help provide for a stable and well-balanced retirement.

• Guaranteed income for life and security for beneficiaries. Annuities provide clients with a reliable income stream throughout their retirement years, offering financial stability and peace of mind for themselves and their loved ones.
• Tax advantages. Many annuities offer tax-deferred growth, allowing clients to accumulate funds without paying taxes until withdrawals are made. This can maximize earnings and minimize tax liabilities.
• Principal protection. Annuities can protect clients' principal from market volatility, ensuring their funds are safeguarded against potential losses.
• Long-term care coverage. LTC-based annuities specifically address the costs of long-term care services, help clients protect their retirement savings while providing flexibility in care options, and can offer a two- to three-times value enhancement trigger to pa yout specifically for qualified senior care services.

Four types of life settlement annuities to consider

1. Multiyear guaranteed annuities. MYGAs provide a guaranteed rate of return over a set period, offering clients a reliable income stream. They also offer tax-deferred growth backed by highly rated insurance companies, providing additional security.
2. Accumulation-based fixed indexed annuities. FIAs allow clients to accumulate funds while protecting their principal from market downturns. These annuities offer the potential for growth based on the performance of a stock market index, with principal protection.
3. Income-based FIAs. Income-based FIAs provide clients with a guaranteed income stream for life, regardless of market fluctuations. They offer a predictable income stream, potential death benefits for beneficiaries and tax-deferred growth.
4. LTC-based FIAs. LTC-based FIAs provide clients with the financial resources to cover the costs of long-term care services. This will protect retirement savings and assets, allow any choice for care including receiving care in their own home, increase the value of the annuity two to three times for qualified care, and potentially provide tax advantages.

Life settlement annuities offer a powerful solution to help seniors address their fears by funding their retirement and securing their long-term care needs through a seamless transaction of cashing out a life insurance policy at its highest market value and then seamlessly rolling those funds into a variety of custom designed annuity programs.

The challenge of funding long-term care

It is estimated that 70% of individuals over the age of 65 will need to pay for some form of long-term care in their lifetime. However, a significant percentage of Americans do not believe they will require such care or are unaware of the costs. The monthly expenses associated with long-term care can range from $5,000 for home care to $9,000 for a private room in a skilled nursing facility. While entitlement programs like Medicaid and Medicare, as well as long-term care insurance policies, can help cover these costs, there is often a gap that individuals need to fill with their own funds.

High policy abandonment rates

Currently, there are approximately 7.5 million active LTCi policies, but it is estimated that nearly nine out of 10 of today’s 255 million life insurance policies are at risk of being lapsed or surrendered. There are several reasons why policy owners choose to abandon their life insurance policies. These include the inability to afford ongoing premiums, a lack of need or desire for the policy, and the need for retirement or long-term care funding. With the oldest of the baby boomers scheduled to hit the age of 80 by 2025, and a significant number of this age cohort unprepared for long-term care, the need for alternative financial solutions to cover these expenses is more crucial than ever.

A mainstream financial option for seniors

Consumer awareness of life settlements is at an all-time high thanks to extensive television and online advertising. Settlement transactions hit $4.5 billion in 2022. Helping to propel this growth, LTC-life settlements emerged about 15 years ago and have become widely adopted. Seniors with health impairments (unable to perform two or more activities of daily living) and a measurable life expectancy of less than 10 years are eligible for LTC-life settlements. These also could qualify as both a Medicaid-qualified spend down and provide tax-free treatment of the settlement proceeds. Any type of life insurance policy - such as universal, whole and term policies with a minimum death benefit of $100,000 – is eligible.

Key benefits of LTC-life settlements

• LTC-life settlements cover immediate needs for senior living and long-term care services, including home care, assisted living, skilled nursing care, memory care and hospice.
• LTC-life settlements are not long-term care insurance, annuities or loans. LTC-life settlements provide policy owners with immediate access to their funds and complete control to meet changing care needs and costs.
• Funds obtained through LTC-life settlements can be tax free for policy owners who have been diagnosed as chronically or terminally ill.
• The funds are private pay and can delay the need for Medicaid, offering individuals more financial freedom and control over their care choices.
• Funds spent on care can qualify as a Medicaid-qualified spend-down, further supporting long-term care costs.

LTC-life settlements have emerged as a compelling financial solution for seniors seeking to secure long-term care services. With the ability to unlock the hidden value of life insurance policies, these settlements provide a lifeline to individuals facing financial challenges brought on by declining health and a loss of independence. As awareness grows and seniors recognize the potential benefits, of LTC-life settlements, they are poised to play an increasingly significant role in helping seniors achieve financial security in their retirement years while ensuring access to the care they need.

Financial advisors have a crucial role to play in helping seniors fund their retirement and secure long-term care services. Life settlement annuities and LTC-life settlements are compelling solutions, allowing clients to unlock the value of their life insurance policies and transfer the funds to annuities tailored to their needs or receive a lump sum payment that can be used for long-term care supports and services. By using these tools with an advisor’s guidance, seniors can overcome the challenges of aging and declining health so they can enjoy a fulfilling and worry-free lifestyle in their golden years.

Chris Orestis, CSA, is president of Retirement Genius. He may be contacted at [email protected].

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