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Private Funds: Life Insurance
Life Insurance as it Relates to Paying for Long Term Care

Life insurance policies are a common financial and estate planning instrument. Below, we discuss the types of life insurance policies, as well as how the policy is able to help cover the costs of senior care - some life insurance policies can convert into a long-term care plan. Let's start with the various types of life insurance coverage and then we explain how policies convert into a long-term care benefit plan which can help pay for senior care costs. We also cover Life Settlement Solutions - when a life insurance policy sells to a 3rd party to "abandon" the policy for more than the surrender value offered by the insurance company.

Types of Life Insurance Policies

Universal Life Insurance

Universal Life Insurance (UL) combines term life insurance and a buildup fund account. ULs allow for flexible premiums, which mean the policyholder can miss a premium or pay future premiums in advance. There are limitations on flexibility; depending on the cash value built up. The cash value applies to monthly premiums missed.

If all scheduled premiums paid and up-to-date, the policy continues to build cash value. If not, then the policy falls short on paid premiums, this affects the death benefit.

A Universal Life Insurance policy is:

  • As an alternative to long-term care insurance, where new policies have accelerated benefits for Long Term Care.
  • Pension maximization, where permanent death benefits serve an employee to elect the highest retirement income option from a defined benefit pension.

Whole Life Insurance

Whole Life Insurance (WL) provides the policyholder with coverage for the whole life. WL and UL Insurance are the most common types of permanent coverage.

With a Whole Life policy, the insurance company assumes the risk for the performance. Your premiums, cash values, and death benefits guaranteed by the company. The guarantees are laid out from the beginning, and if the claims and investment experience is better than what's projected, some policies pay dividends and are not taxable. In actuality, they're considered a refund of an over-payment made.

A policyholder can apply dividends to:

  • Buy more death benefit-allowing the death benefit to go up each year.
  • Accumulate at interest-allowing dividends to stay on deposit with the insurance company, and grow tax deferred.
  • Provide additional cash flow as cash payments to the policyholder.
  • Use to offset partial or full premiums-use the life insurance and cash value life insurance as a source of benefits: loans, withdrawals, pension funding, and tax planning.

Term Life Insurance

Term Life insurance is the most common type of life insurance. It's designed for people who:

  • Want the most death benefit for the least price
  • Think that their need for life insurance is temporary in nature
  • Are not sure whether they need permanent coverage

Term insurance is a contract making the policyholder's end of the deal - pay the premium on time. The insurance company's deal is to pay the death benefit if death occurs within the term period. Paying premiums are not required and the policy lapses.

The common policy terms are 10 year, 15 year, 20 year, and 30 year. Once the underwriting accepts a policyholder, they have guaranteed premiums. Term Insurance does not accumulate cash value nor can it apply to long-term care. It is solely used as a death benefit, paid during the specified term of the policy

Group Life Insurance

Group Life insurance is offered by an employer or an association, or a labor organization to its workers or members. Group life insurance is part of a benefit package.

The employer or association purchases coverage from a provider on a "wholesale" basis, making the individual's coverage costs much less than an individual policy. Some policies may not require an "out-of-pocket" premium for benefits but for policies that do, the individual can elect to have their portion deducted from their paycheck.

When and if the employee or member leaves the organization, the group life insurance policy cancels.

Life Insurance Policies Conversion Into a Long-Term Care Benefit Plan

Life insurance pays for Long-term care

Life insurance policies can convert into a long-term care plan. Note it is not a long-term care insurance policy, annuity, any form of LTC insurance policy, nor is it an accelerated death benefit. It converts to a pre-paid, long-term care benefit plan that covers monthly costs and is a unique financial option for retirees because there are no wait periods, no care limitations, no costs to apply, no requirements on terminally ill, and there are no premium payments. The policyholders use their right to convert an in-force life insurance policy to enroll in the benefits plan and are able to immediately direct payments to cover their assisted living and long-term care costs.

The long-term care conversion option applies to the following forms of life insurance:

  • Universal Life Insurance
  • Whole Life Insurance
  • Term Life Insurance
  • Group Life Insurance

Its value of the conversion depends on the death benefit.

Cash value is not a factor in determining the conversion value of a life insurance policy and it's not limited to the issuing carrier. The LTC benefits plan transfers the death benefit into a permanent long-term care benefit account that pays a monthly amount direct to the assisted living facility. Once a policy converts, the benefit payments begin immediately and the premiums stop.

If the policy holder passes away before the benefit amount spends down, then any remaining balance goes to the family or named beneficiary as a final lump sum payment.

What's Wrong with Using Insurance as an Investment?

Life insurance is not a way to invest for retirement, a forced savings account. Retirement plans like 401(k)s are a better investment for that purpose. Bottom line: The cash-value policy can grow tax-deferred, but money in IRAs and 401(k)s does too. The cash-value insurance is generally a poor investment for retirement.

Life Settlement Solutions

What is a Life Settlement?

It is a sale of an existing life insurance policy to a third-party for more than its cash surrender value but less than its net death benefit.

Some seniors, 70 years of age or older, find that their life insurance policies no longer meet their needs, so the insurance companies offer them a "surrender" to their policies. But oftentimes, the surrender value is less than the policy's face value. So, older consumers turn to a life settlement. It is a sale of the existing life insurance policy for more than its cash surrender value but less than its net death benefit. Transactions like these are for estate or financial planning purposes. Rather than continuing to pay premiums, life settlements give payoffs that are greater than surrendering a policy.

Reasons Seniors Abandon a Life Insurance Policy

Let's look at some of the reasons a person might consider a Life Settlement for a life insurance policy:

  • It's no longer needed or wanted - circumstances have changed. Maybe a spouse or another beneficiary deceased or the original purpose to provide protection no longer exists.
  • Policyholders can obtain better, more expansive coverage with lower premium payments in the current market.
  • Premium payments have become unreasonable. The escalating premium payments are a financial burden. They need to avoid these payments to sustain a good quality of life.
  • In recent years, financial markets created new opportunities for smart investors and seniors want to maximize the value of their assets and estates.
  • Mounting healthcare costs - health problems increase financial burdens and needs. Under these conditions, an existing life insurance policy is not be considered relevant compared to a chronic condition

Whether a senior holds a term, universal life, or whole life policy, one can sale of an existing life insurance policy to a third-party.

Benefits of Life Settlement

Let's look at the benefits of a Life Insurance Settlement:

  • Pay for long-term care expenses. By selling the policy a senior is able to generate cash to apply to assisted living expenses.
  • Have retirement income and relief from premiums especially for older consumers who cannot afford the premium payments. When premiums no longer exist, seniors are able to make ends meet.

Disadvantages of a Life Settlement

Let's look at some drawbacks of a Life Settlement:

  • Forfeit the insurance that could be left to heirs - giving up proceeds that heirs might receive upon a senior's death. Know that the amount heirs receive upon a person's death would always be higher than the immediate amount a person receives in a life settlement.
  • Impact on Medicaid - the cash received could affect any form of low-income assistance.
  • If a senior has debt, the proceeds from a life settlement could be claimed by creditors.
  • Life settlements are subject to both federal and state income tax. Taxes owed on excess earnings of premiums.

The Life Settlement Process in a Nutshell

  1. Complete a questionnaire and authorization, along with medical records for the last five years.
  2. When the process begins, it's important to keep up premium payments - only make the minimum premium payment needed to keep the policy in force. If there is a large enough cash surrender value then the senior are able to stop making premium payments altogether. It's important to remember that life settlement providers do not complete a transaction, if the policy is in grace.
  3. Involve the family in the discussion during the process; the beneficiaries of a trust or designated contacts for the insured. Concerns from family members need addressing before time and money paid into executing a life settlement.
  4. Prepare documents - this step cuts down on wasted time during the valuation process.

Life settlements provide an alternative to surrendering an unwanted policy. Consumer education of the life settlement process will minimize the life settlement cycle and create a happier experience.

Carol Marak
Carol Marak

After seven years of helping her aging parents, Carol Marak has become a dedicated senior care writer. Since 2007, she has been doing the research to find answers to common concerns: housing, aging and health, staying safe and independent, and planning long-term.