Understanding the Differences between Stranger Owned Life Insurance (STOLI) and Life Settlements
Executive Summary
The origins of Life Settlements can be traced back to a landmark Supreme Court ruling in 1911 that established the property ownership rights of a life insurance policy holder. By the end of the century, the conditions were right for a secondary life insurance market to emerge and flourish. The continuing debate around this evolving market has been the pros and cons to the overall health of the life insurance industry. Effective arguments, supported by market evidence from both sides, have been made about the benefits and threats of Life Settlements to the broader insurance industry. Both the Life Settlement and the life insurance industries have mobilized forces to bolster their position in what has become a vigorous debate. The major threat to the industry, and driving factor of the friction between the two camps, has been around Stranger Owned Life Insurance (STOLI). The NAIC and NCOIL have developed model regulations that are being introduced and adopted in some states to address STOLI abuses. Both the insurance and Life Settlement industry are opposed to STOLI, and the life insurance industry is on the record acknowledging the legal rights and market efficiency of policy holders’ ability to liquidate unneeded policies through a Life Settlement.
A robust secondary market will increase customers’ valuation of life insurance policies. Economic theory holds that an active and efficient secondary market for a good improves the liquidity of the good as an asset, and thus increases
the value of the good to consumers.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
Introduction: Evolution of a Market
In 1911, United States Supreme Court Justice Oliver Wendell Holmes ruled that life insurance possesses all of the inherent characteristics of personal property giving a policy owner the right to dispose of this asset as they see fit. By the end of the 20th Century, Viaticals emerged as an opportunity for AIDS patients to cash out of a life insurance policy while still alive to cover the high costs of care not covered by health insurance. The Life Settlement market became an offshoot of Viaticals and has been growing rapidly ever since, with $30 billion in transactions projected in 2007. In a 2003 study conducted by Conning & Co, they estimated that 90 million senior citizens owned approximately $500 billion worth of life insurance in 2003, of which over $100 billion was owned by seniors eligible for Life Settlements.
With this kind of market potential it is no surprise that Wall Street is now paying attention. In a Business Week article published in July of 2007, it was observed, “Wall Street sees huge profits in buying policies, throwing them into a pool, dividing the pool into bonds and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.” But, with these kinds of numbers and market potential it should be no surprise that regulators and law makers are paying attention as well.
The secondary market for life insurance policies gives the policyholder the economic freedom to choose between a number of buyers and, in so doing,
to receive the fair market price for their policy.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
Fundamental Property Rights
Life Settlements involving policies that were purchased based on a sound insurable interest premise are the foundation of a legitimate transaction. In fact, this type of a transaction is supported by the landmark Supreme Court decision, Grigbsy v. Russell. In Justice Holmes’ final opinion it was codified that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner could transfer without limitation.
This decision established a life insurance policy as transferable property that contains specific legal rights, including the right to:
· Name the policy beneficiary
· Change the beneficiary designation
· Assign the policy as collateral for a loan
· Borrow against the policy
· Sell the policy to another party
Justice Holmes makes a clear distinction between a policy based on insurable interest and one where none exists, “A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end. The very meaning of an insurable interest is an interest in having the life continue…”, his decision clearly considers an insurance policy to be the same as real property and does not oppose transferring the property/policy to an entity without an interest in the life of the insured, and to this point he is very clear, “…life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner's hands”.
Life insurance policies are typically assignable, which means that a policyholder is free to transfer their ownership of the policy to another person. A policyholder’s right to assign their policy to someone other than the insurance carrier has existed for some time.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
The Insurable Interest Debate
The right of a policy owner to transfer ownership interest is a guaranteed right under Constitutional law established by one of the greatest legal minds in our country’s history. But the difference he recognized between policies based on insurable interest and one where none exists is a problem that the Life Settlement industry must address. In the case of STOLI are we looking at what Justice Holmes defines as, “a pure wager”? If that is the case, then this practice could threaten not only the long term future of the Life Settlement marketplace but also the foundation of life insurance itself.
Both the Life Insurance and Life Settlement industry have spoken out on the STOLI issue and made their concerns clear. The circumvention of insurable interest and the prospect of Congress revoking the tax deferred status of inside build up for life insurance, if the perception of insurance changes from income protection to life expectancy speculation, is at the root of their fears. The tax free exemption for inside build up of a life insurance policy is constantly under scrutiny by law makers. If it is ever concluded that life insurance has changed from its original function of providing a death benefit for beneficiaries to an investment vehicle for third parties to place “wagers” with no insurable interest in the insured-- then the tax free exemption could be revoked.
Legislative activity in the states has picked up over the last year as bills have been introduced and passed designed to stop STOLI transactions. The Governor of Ohio signed into law a bill that extends the time that a policy must be owned by the policy holder from two years to five before it can be settled. It is important to note that this law recognizes and does not impede Life Settlements done for legitimate changes in personal circumstances such as an adverse turn in health, loss of job or death of the beneficiary. In September, 2008, California passed an anti-STOLI bill and sent it to the desk of Governor Schwarzenegger for signature. Governor Schwarzenegger subsequently vetoed the measure and stated, “I am also concerned that the final version of the bill may unfairly exclude some companies from participating in the legitimate life settlement market,” and that he wants to be sure that life settlement legislation “does not unfairly discriminate against legitimate companies trying to compete in the life settlement business.”
At the conclusion of the 2008 legislative session in California, Brad Wenger of the Association of California Life and Health Insurance Companies was asked to comment about the differences between a Life Settlement and STOLI, “When people with existing life insurance policies that they no longer need are approached by a life-settlement company that will offer them an amount of money if they assign their policies to the company – that is a legitimate transaction,” Wenger emphasized, “STOLI’s are different.” The Life Insurance Settlement Association opposes the practice of STOLI. They are on the record stating, “A STOLI transaction circumvents insurable interest laws and is, therefore, illegal. STOLI transactions abuse uninformed senior consumers and damage the reputation of the life settlement industry. Public policy makers should understand STOLI, its consequences, and the best methods to effectively prevent this practice.”
In the midst of these concerns and legislative developments surrounding STOLI, the Life Insurance industry is on the record acknowledging the legitimacy of Life Settlements. The American Council of Life Insurers (ACLI) are on the record saying that the anti-STOLI legislation they support would not “affect the property rights of policy owners who acquired life insurance in good faith,” rather they are combating transactions where, “the intent at the outset is to transfer the death benefits to investors.” During a panel session at ReFocus 2008, jointly presented by the ACLI and the Society of Actuaries, industry CEO’s agreed that there is a need for Life Settlements. Stuart Reese, chairman, president and CEO of MassMutual Life Insurance Company said that if a policy is purchased with protection in mind and is no longer needed after a period of time, then a contract holder does have property rights and “there is a legitimate Life Settlement business which is consistent with the purpose of insurance.” Jessica Bibliowicz, chairman and CEO of National Financial Partners of New York, a distributor of financial services products to the high net worth market explained that Life Settlements do make people feel more relaxed about their options. Bibliowicz added, “It is not just a matter of surrender or die.”
Viatical and Life Settlement firms allow policyholders who have experienced a negative shift in life expectancy to obtain the fair market value for their life insurance assets. The flexibility offered by the secondary market for life insurance policies gives a policyholder the ability to respond to changes in their life situation.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
Conclusion
The market is still evolving and the insurance industry is effectively wielding its considerable clout with regulators and law makers to ensure practices such as STOLI that game the system are curtailed. Third party sponsored life insurance transactions initiated for the sole purpose of flipping them in the Life Settlement marketplace is not a practice that is in the best interest of consumers or the industry. Conversely, in light of the long standing Supreme Court ruling on the transferability of insurance as property, the ability for those holding a policy based on insurable interest that they no longer need will always be able to maximize the value of that property through a Life Settlement transaction. The Life Settlement industry provides an important and efficient function to the insurance marketplace-- and it is a practice defended by the Supreme Court. But what constitutes insurable interest and ownership rights, and how that defines the key differences between STOLI and a Life Settlement, are important for the industry and consumers to understand.
A consumer now knows that if they should experience a decline in life expectancy and no longer need (or no longer be able to afford) their life insurance policy, they will be able to sell it for its market value instead of having to surrender it for the low price offered by the insurance carrier.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
Bibliography
“The Benefits of a Secondary Market for Life Insurance Policies”; Doherty, Neil and Singer, Hal; Wharton Financial Institutions Center
U.S. Supreme Court GRIGSBY v. RUSSELL, 222 U.S. 149 (1911) 222 U.S. 149; A. H. GRIGSBY, Petitioner, v. R. L. RUSSELL and Lillie Burchard, Administrators of John C. Burchard, Deceased. No. 53. Argued November 10 and 13, 1911. Decided December 4, 1911.
"Life Settlements: Additional Pressure on Life Profits”; Conning & Co., 2003
“Life Settlements: Betting on Death”; Goldstein, Matthew; Business Week; July 23, 2007
“Little Known Insurance Practice Targets the Elderly”; Howard, John; Capitol Weekly; September 11, 2008
“Press Release”; State of Ohio, Department of Insurance; September 11, 208
“Life Settlement Advisory”; Morris, Manning & Martin, LLP; October 2, 2008
“Issues: STOLI”; Issues; American Council of Life Insurers; http://www.acli.com/
“STOLI Poses Danger to Industry”; Connolly, Jim; National Underwriter; March, 2008
Wednesday, December 17, 2008
Wednesday, November 12, 2008
Underwriting the “Silver Tsunami”
By
Chris Orestis
Introduction
The approaching surge of Baby Boomers and the ever expanding ranks of the 65+ generation have been on our radar screen for years. But today, it is no longer a concept far off on in the future. The reality is that the conversion of Baby Boomers turning into bona-fide seniors is actually now upon us. The oldest Baby Boomers began qualifying to take government benefits last year, and according to the U.S. Census Bureau, in less than three years 8,000 Americans will start to become Medicare eligible every single day. This generation, from the youngest Baby Boomer to those now in their eighties, will require innovative solutions from life insurance, annuities, health and disability coverage, and long term care to address their financial needs.
Examining the Boom
The “Silver Tsunami” population can be broken into two distinct cohorts:
Cohort 1- Seniors born 1939 or before that account for 35,986,082, or 12.6% of the U. S. population. The gender split is 42% male and 58% female.
Cohort 2- Baby Boomers born 1946-1964 that account for 76,402,903, or 26% of the U. S. population. The gender split is 49% male and 51% female.
These two age based groups posses unique demographic characteristics that are important to understand if one is to measure, and then fully realize the opportunities of providing financial and healthcare services to meet their needs.
Baby Boomers account for 48% of U.S. families with 45 million households, and spending power of over $2 Trillion. The younger Boomers born between 1956 and 1964 have an average household population of 3.3 people (with 1 or more children), and an average annual income of $56,500 of which they spend $45,149. The older Boomers born between 1946 and 1955 have an average household population of 2.7 people (with 1 or no children), and an average annual income of $58,889 of which they spend $46,160. 69% of younger Boomers own their homes and devote a larger share of their monthly budgets to mortgage payments. This group also spends about 10% less than the average on life and other forms of personal insurance, while the older Boomers spend 20% more than the average.
Fast Fact
Over 50% of the Baby Boomers live in nine states
California, Texas, New York, Florida, Pennsylvania, Illinois, Ohio, Michigan, and New Jersey.
Average life expectancy from age 65 increased from 77.7 to 84 years for males and 79.7 to 87 years for females in the 60 year period from 1940-2000. Life expectancy going forward into 2040 should add another 3 years on average for both males and females. The age group of 85+ is the fastest growing segment, and they are experiencing the highest gains in life expectancy on a percentage basis. Further, the population of Centenarians (age 100+) more than doubled from 37,306 in 1990 to 88,289 in 2004. Important to note with all of the life expectancy gains is that the population of 65+ living in a nursing home accounts for 1,557,800 or 4.5% of the total cohort population. Most people that move into an assisted living or nursing home are a surviving spouse, and to that end, the number of seniors surviving a deceased spouse triples when moving from the age segment 65-74 to 85+.
The population of 65+ will increase 48% and the population of 85+ will increase 43% by 2020. The growth of the 65+ population will be attributable mostly to the aging of the Baby Boomers, but the growth of the 85+ population is primarily a factor of increasing life expectancy.
Underwriting Impaired Risk
Underwriting impaired risk tends to be more prevalent with our two cohorts, particularly with the 65+ group. This is one of the faster growing segments for the insurance industry with life, annuity and long term care products. This is also becoming an important area for group and work site benefits such as health, disability and disease specific insurance. According to the U.S. Department of Labor, the number of employed people still working between the ages of 65 and 90 has increased from 4.7%, or 600,000 people a decade ago, to 6.4%, or now over 1 million people. This means that the numbers of workers age 65 and over accessing benefits through employers will continue to grow with these evolving economic and life expectancy trends.
Over the last decade, advancements in underwriting and actuarial models, as well as medical science, have made it possible to price all insurance products at competitive rates in ways that once was unavailable to this age group. Underwriting seniors is a different process than underwriting “unimpaired” or relatively young and healthy applicants.
Fast Fact
Top health conditions that become causes of death for those 65+
- Vascular
- Cancer
- Stroke
- Dementia
- Influenza
Once people reach age 65: 80% of seniors report having at least one chronic condition, 50% report at least two, and 30% report having three or more chronic conditions. Additionally, 30% of people 65-70 have reported vascular issues and that number jumps to 70% once you get past the age of 70!
Beyond the obvious underwriting screens that are typically looked for; factors such as recent cessation of smoking, sudden weight loss, frailty and use of assistive devices, ADL impairments, MVR history and work/volunteering/travel schedules are scrutinized more closely with the 65+ group. Underwriting tools that can be used to measure impaired risk include Pulmonary Function Exams to measure decline of lung function, eGFR to measure kidney filtration, Serum Albumin levels as an indicator of “all-cause” mortality risk factors, and MMSE Cognitive Assessments to measure deterioration of visual, verbal, concentration, and orientation levels.
Another important health screen for this cohort is any recent history of falls and broken bones. There is at least a 30% chance that a person will need to move into a nursing home after a fall, and only 33% regain their pre-fall physical condition. Also, there is as high as a 35% chance of death within the first year of a fall.
As the individual ages, certain health conditions shift from being of concern to the norm. For example, seniors will typically experience a slowing of reflexes and loss of muscle mass. Renal and liver functions, as well as pulmonary and vascular capacity can all be expected to decrease. Cognitive abilities will begin to slow, and a certain level of “memory challenge” (not to be confused with Alzheimer’s Disease) will creep into the picture. Also, conditions such as cancer or heart disease that are long in remission, under control and/or being managed by medication become less of a factor in determining overall mortality and morbidity.
Level of education has a direct correlation to income, which in turn has also been proven to have a direct impact to overall health. Baby Boomers are the most educated generation in U.S. history with almost 90% completing high school and then 28.5% going on to earn at least a masters degree. The bottom line is that the better educated someone is, then the higher their income will be and in turn they can expect to be in better health and live longer.
Lastly, an important life expectancy concept to understand is “Morbidity Compression”. Current life expectancy trends indicate that more people than ever are living at a relatively healthy state up to average target ages based on their demographics. But if a person experiences any significant health impairment, then their remaining life expectancy usually becomes compressed. For example, a healthy individual in the 75-80 age range that lives at home, is able to care for and transport themselves, and pursues leisure vocations and social interaction could have a life expectancy of ten or twenty years. But if that individual experiences a TIA/stoke or breaks a hip, and then must either access home care or move into an assisted living or skilled nursing facility, it is more likely that the life expectancy range would compress to less than five years.
Conclusion
Previous generations retired on schedule and then lived the rest of their lives on pensions and government benefits. For the most part, they ceased becoming viable consumers of insurance and financial services. The Silver Tsunami generation will live, work, and stay active much longer than any generation in history. This will prolong their need and ability to continue being acquirers of health and financial security products. And with their expectations for quality lifestyles until the very end—they are going to need every possible financial tool to make it happen.
** This article consist of excerpted material from the White Paper, The Silver Tsunami by Chris Orestis available on request info@lifecarefunding.com
By
Chris Orestis
Introduction
The approaching surge of Baby Boomers and the ever expanding ranks of the 65+ generation have been on our radar screen for years. But today, it is no longer a concept far off on in the future. The reality is that the conversion of Baby Boomers turning into bona-fide seniors is actually now upon us. The oldest Baby Boomers began qualifying to take government benefits last year, and according to the U.S. Census Bureau, in less than three years 8,000 Americans will start to become Medicare eligible every single day. This generation, from the youngest Baby Boomer to those now in their eighties, will require innovative solutions from life insurance, annuities, health and disability coverage, and long term care to address their financial needs.
Examining the Boom
The “Silver Tsunami” population can be broken into two distinct cohorts:
Cohort 1- Seniors born 1939 or before that account for 35,986,082, or 12.6% of the U. S. population. The gender split is 42% male and 58% female.
Cohort 2- Baby Boomers born 1946-1964 that account for 76,402,903, or 26% of the U. S. population. The gender split is 49% male and 51% female.
These two age based groups posses unique demographic characteristics that are important to understand if one is to measure, and then fully realize the opportunities of providing financial and healthcare services to meet their needs.
Baby Boomers account for 48% of U.S. families with 45 million households, and spending power of over $2 Trillion. The younger Boomers born between 1956 and 1964 have an average household population of 3.3 people (with 1 or more children), and an average annual income of $56,500 of which they spend $45,149. The older Boomers born between 1946 and 1955 have an average household population of 2.7 people (with 1 or no children), and an average annual income of $58,889 of which they spend $46,160. 69% of younger Boomers own their homes and devote a larger share of their monthly budgets to mortgage payments. This group also spends about 10% less than the average on life and other forms of personal insurance, while the older Boomers spend 20% more than the average.
Fast Fact
Over 50% of the Baby Boomers live in nine states
California, Texas, New York, Florida, Pennsylvania, Illinois, Ohio, Michigan, and New Jersey.
Average life expectancy from age 65 increased from 77.7 to 84 years for males and 79.7 to 87 years for females in the 60 year period from 1940-2000. Life expectancy going forward into 2040 should add another 3 years on average for both males and females. The age group of 85+ is the fastest growing segment, and they are experiencing the highest gains in life expectancy on a percentage basis. Further, the population of Centenarians (age 100+) more than doubled from 37,306 in 1990 to 88,289 in 2004. Important to note with all of the life expectancy gains is that the population of 65+ living in a nursing home accounts for 1,557,800 or 4.5% of the total cohort population. Most people that move into an assisted living or nursing home are a surviving spouse, and to that end, the number of seniors surviving a deceased spouse triples when moving from the age segment 65-74 to 85+.
The population of 65+ will increase 48% and the population of 85+ will increase 43% by 2020. The growth of the 65+ population will be attributable mostly to the aging of the Baby Boomers, but the growth of the 85+ population is primarily a factor of increasing life expectancy.
Underwriting Impaired Risk
Underwriting impaired risk tends to be more prevalent with our two cohorts, particularly with the 65+ group. This is one of the faster growing segments for the insurance industry with life, annuity and long term care products. This is also becoming an important area for group and work site benefits such as health, disability and disease specific insurance. According to the U.S. Department of Labor, the number of employed people still working between the ages of 65 and 90 has increased from 4.7%, or 600,000 people a decade ago, to 6.4%, or now over 1 million people. This means that the numbers of workers age 65 and over accessing benefits through employers will continue to grow with these evolving economic and life expectancy trends.
Over the last decade, advancements in underwriting and actuarial models, as well as medical science, have made it possible to price all insurance products at competitive rates in ways that once was unavailable to this age group. Underwriting seniors is a different process than underwriting “unimpaired” or relatively young and healthy applicants.
Fast Fact
Top health conditions that become causes of death for those 65+
- Vascular
- Cancer
- Stroke
- Dementia
- Influenza
Once people reach age 65: 80% of seniors report having at least one chronic condition, 50% report at least two, and 30% report having three or more chronic conditions. Additionally, 30% of people 65-70 have reported vascular issues and that number jumps to 70% once you get past the age of 70!
Beyond the obvious underwriting screens that are typically looked for; factors such as recent cessation of smoking, sudden weight loss, frailty and use of assistive devices, ADL impairments, MVR history and work/volunteering/travel schedules are scrutinized more closely with the 65+ group. Underwriting tools that can be used to measure impaired risk include Pulmonary Function Exams to measure decline of lung function, eGFR to measure kidney filtration, Serum Albumin levels as an indicator of “all-cause” mortality risk factors, and MMSE Cognitive Assessments to measure deterioration of visual, verbal, concentration, and orientation levels.
Another important health screen for this cohort is any recent history of falls and broken bones. There is at least a 30% chance that a person will need to move into a nursing home after a fall, and only 33% regain their pre-fall physical condition. Also, there is as high as a 35% chance of death within the first year of a fall.
As the individual ages, certain health conditions shift from being of concern to the norm. For example, seniors will typically experience a slowing of reflexes and loss of muscle mass. Renal and liver functions, as well as pulmonary and vascular capacity can all be expected to decrease. Cognitive abilities will begin to slow, and a certain level of “memory challenge” (not to be confused with Alzheimer’s Disease) will creep into the picture. Also, conditions such as cancer or heart disease that are long in remission, under control and/or being managed by medication become less of a factor in determining overall mortality and morbidity.
Level of education has a direct correlation to income, which in turn has also been proven to have a direct impact to overall health. Baby Boomers are the most educated generation in U.S. history with almost 90% completing high school and then 28.5% going on to earn at least a masters degree. The bottom line is that the better educated someone is, then the higher their income will be and in turn they can expect to be in better health and live longer.
Lastly, an important life expectancy concept to understand is “Morbidity Compression”. Current life expectancy trends indicate that more people than ever are living at a relatively healthy state up to average target ages based on their demographics. But if a person experiences any significant health impairment, then their remaining life expectancy usually becomes compressed. For example, a healthy individual in the 75-80 age range that lives at home, is able to care for and transport themselves, and pursues leisure vocations and social interaction could have a life expectancy of ten or twenty years. But if that individual experiences a TIA/stoke or breaks a hip, and then must either access home care or move into an assisted living or skilled nursing facility, it is more likely that the life expectancy range would compress to less than five years.
Conclusion
Previous generations retired on schedule and then lived the rest of their lives on pensions and government benefits. For the most part, they ceased becoming viable consumers of insurance and financial services. The Silver Tsunami generation will live, work, and stay active much longer than any generation in history. This will prolong their need and ability to continue being acquirers of health and financial security products. And with their expectations for quality lifestyles until the very end—they are going to need every possible financial tool to make it happen.
** This article consist of excerpted material from the White Paper, The Silver Tsunami by Chris Orestis available on request info@lifecarefunding.com
Alternative Pay Plan: Life Insurance as a Funding Vehicle for Senior Housing and Care
By Chris Orestis
A consumer now knows that if they should experience a decline in life expectancy and no longer need (or no longer be able to afford) their life insurance policy, they will be able to sell it for its market value instead of having to surrender it for the low price offered by the insurance carrier.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
All indicators point to Senior Living companies doing a better job than most industries weathering the current economic storm afflicting the U.S. But the fact remains that the national media is beating a very steady drum beat about a slumping economy and the national mood is understandably skittish. Housing values and the elongated time it takes to sell, as well as the topsy-turvy stock market and the higher prices of fuel and groceries, have people nervous about funding retirement. Most Americans rely on the sale of their home as the primary source of revenue to pay for residence in an assisted living or continuing care retirement community. In today’s economic environment, it is important to provide seniors with every possible option to raise money from their assets when they are preparing to make the move into a senior living environment.
Most people don’t realize that a life insurance policy is an asset that can be liquidated at the discretion of the policy owner. Life insurance is legally recognized as personal property and ownership rights are the same as a home, stocks or any other asset. Over the last twenty years a financial option emerged that will provide a readily available source of funds for seniors that own a life insurance policy. It is called a Life Settlement, and very quickly it is becoming a financial tool for all forms of retirement living and care companies to overcome the impact of falling home and stock values.
Life Settlements are an offshoot of Viaticals that emerged in the late 1980’s. This unique financial vehicle afforded AIDS patients an opportunity for an early cash out of a life insurance policy to cover the high costs of care not covered by health insurance. The Life Settlement market has been evolving rapidly ever since, with approximately $30 billion in transactions completed in 2007. A study conducted by Conning & Co., found that 90 million senior citizens owned approximately $500 billion worth of life insurance in 2003. The University of Pennsylvania’s Wharton Business School conducted a study on the potential impact of the Life Settlement market concluding that life settlement providers are paying hundreds of millions to consumers for their underperforming life insurance policies, an opportunity that was not available to them just a few years before.
A New Financial Option Emerges
The definition of a Life Settlement is simply this: It’s the sale of a life insurance policy by the policy holder while still alive to an institutional investor that will pay a lot more for the policy than the cash “surrender” value. The institutional investor will then carry the policy as an investment for the remaining life span of the policy owner. Life insurance values are guaranteed and disconnected from the economy so there is no fluctuation, as is the case with real estate and stocks. Understanding the significance of owning a life insurance contract with guaranteed value, all of the major players on Wall Street (Morgan, Chase, Goldman, UBS, Deutsch Bank, Credit-Suisse, AIG, etc.), as well as major hedge funds and global financial institutions are now buying people’s policies on a mass scale. In a Business Week article published in July of 2007, it was observed, “Wall Street sees huge profits in buying policies, throwing them into a pool, dividing the pool into bonds and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.”
Life Settlements bring efficiency to the life insurance marketplace. They offer a competitive outlet to liquidate a life insurance policy that has outlived its purpose and/or to raise cash in a time of immediate crisis. But, life insurance companies have their concerns about the explosive growth of the Life Settlement market. Life insurers are worried about their bottom line when policies that no longer lapse or are converted for the cash “surrender” value have a negative impact on profitability. A significant percentage of the insurance industry’s profitability comes from collecting premium payments on policies that are either eventually abandoned or surrendered for pennies compared to their total value. Insurers are also concerned that the growth of life settlements could be at the expense of the already anemic long term care insurance market. In both cases, Life Settlements are an efficient market outlet to maximize the value of ones legitimate ownership interest in a life insurance policy; and insurers concerns are driven by the impact on their bottom line.
During a panel session at ReFocus 2008, jointly presented by the American Council of Life Insurers and the Society of Actuaries, industry CEO’s agreed that there is a need for life settlements. Stuart Reese, chairman, president and CEO of MassMutual Life Insurance Company said that if a policy is purchased with protection in mind and is no longer needed after a period of time, then a contract holder does have property rights and “there is a legitimate life settlement business which is consistent with the purpose of insurance.” Jessica Bibliowicz, chairman and CEO of National Financial Partners of New York, a distributor of financial services products to the high net worth market explained that Life Settlements do make people feel more relaxed about their options. Bibliowicz added, “It is not just a matter of surrender or die.”
At the conclusion of the 2008 legislative session in California, Brad Wenger of the Association of California Life and Health Insurance Companies was asked to comment about the differences between a Life Settlement and controversial Stranger Owned Life Insurance, or STOLI as it is known, and he explained, “When people with existing life insurance policies that they no longer need are approached by a life-settlement company that will offer them an amount of money if they assign their policies to the company – that is a legitimate transaction,” Wenger emphasized, “STOLI’s are different.”
Benefits for Senior Housing and Care
For seniors who own life insurance and are faced with the uncertain prospect of selling their home or stocks in such a down economy, Life Settlements are not only a chance to consider accessing an asset that will not fluctuate in value, but it is also an opportunity to liquidate a less dearly held asset. People obviously have a sentimental attachment to their home, stocks and other personal assets. This can cause delays in moving forward—but people have no sentimental attachment to an insurance policy and are more willing to liquidate it as a first option. If you can eliminate the reluctance seniors have about tapping into their most dearly held assets, and in the process eliminate the worry seniors have about outliving their money, then you can eliminate the delays in making a commitment to a course of action.
This is not just a financial tool-- it is also a marketing and relationship building opportunity by providing another option for prospective and current residents to find money to pay for residency and services. Properties are able to remove reasons for delay, and can provide peace of mind for seniors about prematurely running out of money. It is also another opportunity to reach out to residents and prospects and show them that you are actively looking to work with them because you care about their well being.
“We have talked to seniors who would like to move in, but they are a little hesitant, hoping the market will turn around,” said Debbie Howard, Northeast Divisional Vice President of Sales and Marketing with Emeritus Senior Living, “Our goal is to support our residents and make it easy for new residents to move in. A Life Settlement is another way for us to make it possible.”
Life Settlements to Pay for Senior Housing and Care
The majorities of people who can be helped by a Life Settlement are first encountered during the admissions/registration process while still living independently and have not yet altered their finances. People that have recently encountered a pressing need to understand their options about the best retirement or long term living scenario, and how to pay for it, will be those most likely to possess some measure of financial means and own a life insurance policy. There may also be some current residents that still own policies and need help raising money and they would most certainly be eligible as well.
The process of a Life Settlement is straightforward and takes between 30-60 days-- obviously much quicker than relying on the sale of a home. Life Settlements are not a loan or a reverse mortgage, not a government program and not long term care insurance—it is the sale of an asset through a competitive bidding process that will provide the policy owner with an unrestricted lump sum payment for a far greater amount than the cash “surrender” value. Once a policy owner sells their policy, they are no longer responsible for the premiums and they are free to use the money anyway they want. Also important to note is that there are absolutely no costs involved for the facility and no up front fees or out of pocket expenses involved for the policy owner.
Conclusion: A Win – Win Scenario
The secondary market for life insurance policies gives the policyholder the economic freedom to choose between a number of buyers and, in so doing, to receive the fair market price for their policy.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
According to the Society of Actuaries’ 2007 Retirement Survey: 60% of retirees worry about three things--
1. The cost of health care
2. The effect of inflation on their nest eggs
3. Not being able to maintain a reasonable standard of living for the rest of their lives
In light of today’s economy those concerns are well founded. With billions of dollars worth of life insurance owned by people over the age of 65-- tapping into Life Settlements as an alternative funding option for senior housing and care makes a lot of sense. Any chance to overcome financial hurdles preventing seniors from securing the best possible arrangement is in the best interest of the individual and their family, the facility and the government. Life Settlements are an easy to understand and straightforward financial tool to accomplish the goal of welcoming a resident who is able to afford living without fear of running out of money.
By Chris Orestis
A consumer now knows that if they should experience a decline in life expectancy and no longer need (or no longer be able to afford) their life insurance policy, they will be able to sell it for its market value instead of having to surrender it for the low price offered by the insurance carrier.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
All indicators point to Senior Living companies doing a better job than most industries weathering the current economic storm afflicting the U.S. But the fact remains that the national media is beating a very steady drum beat about a slumping economy and the national mood is understandably skittish. Housing values and the elongated time it takes to sell, as well as the topsy-turvy stock market and the higher prices of fuel and groceries, have people nervous about funding retirement. Most Americans rely on the sale of their home as the primary source of revenue to pay for residence in an assisted living or continuing care retirement community. In today’s economic environment, it is important to provide seniors with every possible option to raise money from their assets when they are preparing to make the move into a senior living environment.
Most people don’t realize that a life insurance policy is an asset that can be liquidated at the discretion of the policy owner. Life insurance is legally recognized as personal property and ownership rights are the same as a home, stocks or any other asset. Over the last twenty years a financial option emerged that will provide a readily available source of funds for seniors that own a life insurance policy. It is called a Life Settlement, and very quickly it is becoming a financial tool for all forms of retirement living and care companies to overcome the impact of falling home and stock values.
Life Settlements are an offshoot of Viaticals that emerged in the late 1980’s. This unique financial vehicle afforded AIDS patients an opportunity for an early cash out of a life insurance policy to cover the high costs of care not covered by health insurance. The Life Settlement market has been evolving rapidly ever since, with approximately $30 billion in transactions completed in 2007. A study conducted by Conning & Co., found that 90 million senior citizens owned approximately $500 billion worth of life insurance in 2003. The University of Pennsylvania’s Wharton Business School conducted a study on the potential impact of the Life Settlement market concluding that life settlement providers are paying hundreds of millions to consumers for their underperforming life insurance policies, an opportunity that was not available to them just a few years before.
A New Financial Option Emerges
The definition of a Life Settlement is simply this: It’s the sale of a life insurance policy by the policy holder while still alive to an institutional investor that will pay a lot more for the policy than the cash “surrender” value. The institutional investor will then carry the policy as an investment for the remaining life span of the policy owner. Life insurance values are guaranteed and disconnected from the economy so there is no fluctuation, as is the case with real estate and stocks. Understanding the significance of owning a life insurance contract with guaranteed value, all of the major players on Wall Street (Morgan, Chase, Goldman, UBS, Deutsch Bank, Credit-Suisse, AIG, etc.), as well as major hedge funds and global financial institutions are now buying people’s policies on a mass scale. In a Business Week article published in July of 2007, it was observed, “Wall Street sees huge profits in buying policies, throwing them into a pool, dividing the pool into bonds and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.”
Life Settlements bring efficiency to the life insurance marketplace. They offer a competitive outlet to liquidate a life insurance policy that has outlived its purpose and/or to raise cash in a time of immediate crisis. But, life insurance companies have their concerns about the explosive growth of the Life Settlement market. Life insurers are worried about their bottom line when policies that no longer lapse or are converted for the cash “surrender” value have a negative impact on profitability. A significant percentage of the insurance industry’s profitability comes from collecting premium payments on policies that are either eventually abandoned or surrendered for pennies compared to their total value. Insurers are also concerned that the growth of life settlements could be at the expense of the already anemic long term care insurance market. In both cases, Life Settlements are an efficient market outlet to maximize the value of ones legitimate ownership interest in a life insurance policy; and insurers concerns are driven by the impact on their bottom line.
During a panel session at ReFocus 2008, jointly presented by the American Council of Life Insurers and the Society of Actuaries, industry CEO’s agreed that there is a need for life settlements. Stuart Reese, chairman, president and CEO of MassMutual Life Insurance Company said that if a policy is purchased with protection in mind and is no longer needed after a period of time, then a contract holder does have property rights and “there is a legitimate life settlement business which is consistent with the purpose of insurance.” Jessica Bibliowicz, chairman and CEO of National Financial Partners of New York, a distributor of financial services products to the high net worth market explained that Life Settlements do make people feel more relaxed about their options. Bibliowicz added, “It is not just a matter of surrender or die.”
At the conclusion of the 2008 legislative session in California, Brad Wenger of the Association of California Life and Health Insurance Companies was asked to comment about the differences between a Life Settlement and controversial Stranger Owned Life Insurance, or STOLI as it is known, and he explained, “When people with existing life insurance policies that they no longer need are approached by a life-settlement company that will offer them an amount of money if they assign their policies to the company – that is a legitimate transaction,” Wenger emphasized, “STOLI’s are different.”
Benefits for Senior Housing and Care
For seniors who own life insurance and are faced with the uncertain prospect of selling their home or stocks in such a down economy, Life Settlements are not only a chance to consider accessing an asset that will not fluctuate in value, but it is also an opportunity to liquidate a less dearly held asset. People obviously have a sentimental attachment to their home, stocks and other personal assets. This can cause delays in moving forward—but people have no sentimental attachment to an insurance policy and are more willing to liquidate it as a first option. If you can eliminate the reluctance seniors have about tapping into their most dearly held assets, and in the process eliminate the worry seniors have about outliving their money, then you can eliminate the delays in making a commitment to a course of action.
This is not just a financial tool-- it is also a marketing and relationship building opportunity by providing another option for prospective and current residents to find money to pay for residency and services. Properties are able to remove reasons for delay, and can provide peace of mind for seniors about prematurely running out of money. It is also another opportunity to reach out to residents and prospects and show them that you are actively looking to work with them because you care about their well being.
“We have talked to seniors who would like to move in, but they are a little hesitant, hoping the market will turn around,” said Debbie Howard, Northeast Divisional Vice President of Sales and Marketing with Emeritus Senior Living, “Our goal is to support our residents and make it easy for new residents to move in. A Life Settlement is another way for us to make it possible.”
Life Settlements to Pay for Senior Housing and Care
The majorities of people who can be helped by a Life Settlement are first encountered during the admissions/registration process while still living independently and have not yet altered their finances. People that have recently encountered a pressing need to understand their options about the best retirement or long term living scenario, and how to pay for it, will be those most likely to possess some measure of financial means and own a life insurance policy. There may also be some current residents that still own policies and need help raising money and they would most certainly be eligible as well.
The process of a Life Settlement is straightforward and takes between 30-60 days-- obviously much quicker than relying on the sale of a home. Life Settlements are not a loan or a reverse mortgage, not a government program and not long term care insurance—it is the sale of an asset through a competitive bidding process that will provide the policy owner with an unrestricted lump sum payment for a far greater amount than the cash “surrender” value. Once a policy owner sells their policy, they are no longer responsible for the premiums and they are free to use the money anyway they want. Also important to note is that there are absolutely no costs involved for the facility and no up front fees or out of pocket expenses involved for the policy owner.
Conclusion: A Win – Win Scenario
The secondary market for life insurance policies gives the policyholder the economic freedom to choose between a number of buyers and, in so doing, to receive the fair market price for their policy.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
According to the Society of Actuaries’ 2007 Retirement Survey: 60% of retirees worry about three things--
1. The cost of health care
2. The effect of inflation on their nest eggs
3. Not being able to maintain a reasonable standard of living for the rest of their lives
In light of today’s economy those concerns are well founded. With billions of dollars worth of life insurance owned by people over the age of 65-- tapping into Life Settlements as an alternative funding option for senior housing and care makes a lot of sense. Any chance to overcome financial hurdles preventing seniors from securing the best possible arrangement is in the best interest of the individual and their family, the facility and the government. Life Settlements are an easy to understand and straightforward financial tool to accomplish the goal of welcoming a resident who is able to afford living without fear of running out of money.
Economic “Perfect Storms” in the Wake of the Silver Tsunami
By Chris Orestis
There are two inextricably linked fundamentals that determine the quality of life for Baby Boomers and Seniors: health and finances. As they age and life expectancies compress, there is less time and vitality available to recover from injury and illness. The same is true of financial “vitality”. People in their thirties and forties have time to recover from set backs in the stock market, housing values, or business and investment fluctuations. Once people reach their sixties, it is too late to start a meaningful savings program (as the benefits of compound interest have long since abated) and if investments and/or property are underperforming there may be little time available to wait for recovery.
Retirements funded by a corporate pension after a life time of service are almost extinct in this country. Beyond Social Security and Medicare, the vast majority of Americans today rely on equity in their homes to be a major component of their retirement. For seniors facing major costs such as health care and long term care, the current state of the economy could not be worse. The impact of the sub-prime mortgage implosion on credit and equities markets has resulted in a huge hit on many American’s net worth via erosion in home equity. In fact the National Association of Home Builders released a report in June of 2008 citing that, $426 billion of equity in the U.S. has vanished. That is almost half a TRILLION dollars taken away from Americans in less than two years!
During an interview with former Federal Reserve Chairman Alan Greenspan in July, 2008 he was quoted as saying that the U.S. housing market is nowhere near the bottom and that our economy is teetering on the brink of recession. He described the confluence of economic factors currently battering the U.S. a once in a century “phenomenon”. Validating his concerns is the most recent reports released on foreclosures showing a 55% increase from July of 2007 to July of 2008. That translates into 1 in every 464 households in this country foreclosed in July, 2008. Maybe even more alarming is the 184% increase in bank repossessions during the same time period. The top states in the country for foreclosures is Nevada, California, Florida, Ohio, Georgia, Michigan, Colorado, Utah, Virginia, Texas, Illinois, and New York.
When Greenspan talks about this “phenomenon” he is talking about the combination of the real estate woes and the alarming pace of inflation in core areas such as food and fuel costs. The impact of these two areas has been causing huge swings on an almost daily basis in the stock market furthering adding to people’s concerns. Energy prices are up almost 30% for the year and food prices have increased 6%. Even with recent declines in oil prices and a drop at the fuel pump, oil prices are still double what they were in the summer of 2007 and grain prices are double what they were in the summer of 2006.
The impact that this is having on seniors is very serious. Home equity is in reverse and savings and equities are being chewed up by inflation and stock market volatility. Social programs such as Social Security are not doing much better with the smallest benefit increase in the last four years at 2.3% for 2008. According to the AARP, the number of seniors filing for bankruptcy over the age of 55 in the last year was about 250,000. At this pace, the recent study by Ernst & Young LLP showing that three out of every five new middle class retirees will outlive their financial assets if they do not downwardly adjust their standard of living (expenses) by 24%-37% looks to be optimistic.
During good times, equity in homes and the growth of the stock market can propel a high standard of living in retirement and also help to fund the expenses associated with health care and long term care. But during hard times, when these critical economic engines are not cooperating the outlook can change drastically.
Long Term Care Crisis
The double-edged sword of the senior market is the long term care crisis. Everyone will eventually need to secure some form of long term care and/or assisted living, but no one likes to think about it today and making plans for the future is easily put off until later. In fact, the long term care crisis in the United States is a lot like global warming. There is no denying it is happening and that you are going to be impacted—but it seems like it is far enough away into an uncertain future that today’s needs and priorities take precedence. As is usually the case with the human condition, we seldom plan for a crisis and instead are forced to react to it when it is upon us. One study on how seniors make choices about senior residential and long term care options showed three distinct and familiar patterns:
13% actively plan for retirement and how they will live as they grow older and frailer
40% actively plan following a “near catastrophic” health event such as total joint replacement or extended illness
46+% never plan and must make decisions about site of care in a very short period of time, usually while still in the hospital
Currently in the U.S. there are over 1.5 million people living in nursing homes. Of that population, 72% are female and the 85+ population is growing the fastest with a 20% increase. The oldest old are living longer and they are costing more than ever to support with private or public funds. This is important to consider when planning for the future because as of today, 56% of residents will live in a nursing home anywhere from one to five years or more (with a national average of 30 months).
For the population of 900,000 people currently living in assisted living facilities, the vast majority of financing is private pay. In addition to the monthly cost for a room, apartment or cottage; residents may also face one-time entrance fees ranging from $60,000-$350,000 for higher end “resort style” or “cottage” properties. Additional monthly fees ranging from $348-$522 are often times charged for transportation, dementia care, meal delivery to residence, and other extras that would add to quality of life.
With the reality of escalating costs and the growing senior population; we will see increasing pressure on publicly funded programs such as Medicare and Medicaid (which combined pays for roughly 80% all long term care related expenses in the U.S.), and moves to make it more difficult to qualify. The economic squeeze of inflation, the real estate crisis and stock market performance are all contributing to declines in tax revenues for the states. When taxes shrink one of the most vulnerable areas is also one of the most expensive for state budgets: Medicaid and other social support programs. The long term care industry and the government at all levels are in agreement on how to compensate. More emphasis must be placed on the individual to pay for as much care and housing as possible with private funds before any public funds are made available. But what are some private funding options that people should be considering?
An obvious source of funds to cover these expenses would be from long term care insurance. The only problem is that attractive tax deductions have never been established to incentivize growth in the market, and it has been stalled for over a decade. As of today, long term care insurance accounts for an anemic single digit percentage of all funding for senior housing and care.
A primary option that people have often looked to is cashing in their home through a sale to raise the funds to sustain themselves (or to meet spend down requirements). But, the current real estate market has taught us, as is the case with the stock market, that it is always vulnerable to a correction. Another means to extract equity from a home could be through a reverse mortgage, and it might be a good option for a home healthcare arrangement, but what happens if health conditions deteriorate rapidly and the person must move into a facility on short notice? The home owner is then faced with the dilemma of funds that can’t be used for a setting outside of the home, and a loan that must be paid back immediately.
If a person has built up cash value in a life insurance policy, they could consider taking a loan against the policy or surrendering it for the cash value. Also, if someone attempts to qualify for Medicaid, a life insurance policy would be an “unprotected” asset subject to the 60 month look back period. It would need to be liquidated and spent down on care before eligibility could begin. According to a Federal Government Accounting Office (GAO) report released to the U.S. Congress in March, 2007: when examining a sample population of over 500 Medicaid applicants entering long term care facilities, 38% owned a life insurance policy that needed to be liquidated because it exceeded minimum state mandated asset levels.
As we all watch the current economic crisis unfold on a daily basis it is important to understand how the value of life insurance policies are affected by these events. The value of a life insurance policy is guaranteed by law. Insurance companies are legally required to maintain enough cash reserves to pay off the death benefit of the policies they issue. Even in the case of AIG, there are enough cash reserves in place to cover all of the company’s outstanding policies. That money can not be touched for any reason other than to cover their active insurance policies. The volatility of the stock market and the drop in real estate values have absolutely no impact on life insurance polices or the reserves put aside to cover them.
According to most economists, this economic crisis could result in a recession that will last well beyond 2009. For most people who own life insurance policies in the U.S. today, it may be the most stable asset they currently own. Their home and stock portfolios may be suffering significant losses in value, but their life insurance policy has not, and will not change in value. The demand for life insurance policies in the Life Settlement market is stronger than ever because insurance polices are disconnected from the economy and their value remains constant despite the current economic turmoil.
When cashing out a life insurance policy, either by choice or because of an eligibility mandate, the superior option is a Life Settlement. This process will ensure that the highest possible value is obtained for the policy through bidding from multiple institutional sources in the secondary market. Also, any tax implications for capital gains realized from a Life Settlement would be offset by deductions based on spending the money for “the entire cost of maintenance in a nursing home or home for the aged” (sec. 1016 U.S. Master Tax Code 2008). The Conning & Co. Research study "Life Settlements: Additional Pressure on Life Profits” found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements. Statistical data gathered on policies “settled” in 2007 continues to verify that the difference between the amounts of money that can be realized through a Life Settlement is significantly greater than through cash “surrender” value. When the time comes to look at funding vehicles to pay for long term care related expenses, cashing in a life insurance policy through a Life Settlement could be an excellent financial move.
** This article consist of excerpted material from the White Paper, The Silver Tsunami by Chris Orestis available on request info@lifecarefunding.com
By Chris Orestis
There are two inextricably linked fundamentals that determine the quality of life for Baby Boomers and Seniors: health and finances. As they age and life expectancies compress, there is less time and vitality available to recover from injury and illness. The same is true of financial “vitality”. People in their thirties and forties have time to recover from set backs in the stock market, housing values, or business and investment fluctuations. Once people reach their sixties, it is too late to start a meaningful savings program (as the benefits of compound interest have long since abated) and if investments and/or property are underperforming there may be little time available to wait for recovery.
Retirements funded by a corporate pension after a life time of service are almost extinct in this country. Beyond Social Security and Medicare, the vast majority of Americans today rely on equity in their homes to be a major component of their retirement. For seniors facing major costs such as health care and long term care, the current state of the economy could not be worse. The impact of the sub-prime mortgage implosion on credit and equities markets has resulted in a huge hit on many American’s net worth via erosion in home equity. In fact the National Association of Home Builders released a report in June of 2008 citing that, $426 billion of equity in the U.S. has vanished. That is almost half a TRILLION dollars taken away from Americans in less than two years!
During an interview with former Federal Reserve Chairman Alan Greenspan in July, 2008 he was quoted as saying that the U.S. housing market is nowhere near the bottom and that our economy is teetering on the brink of recession. He described the confluence of economic factors currently battering the U.S. a once in a century “phenomenon”. Validating his concerns is the most recent reports released on foreclosures showing a 55% increase from July of 2007 to July of 2008. That translates into 1 in every 464 households in this country foreclosed in July, 2008. Maybe even more alarming is the 184% increase in bank repossessions during the same time period. The top states in the country for foreclosures is Nevada, California, Florida, Ohio, Georgia, Michigan, Colorado, Utah, Virginia, Texas, Illinois, and New York.
When Greenspan talks about this “phenomenon” he is talking about the combination of the real estate woes and the alarming pace of inflation in core areas such as food and fuel costs. The impact of these two areas has been causing huge swings on an almost daily basis in the stock market furthering adding to people’s concerns. Energy prices are up almost 30% for the year and food prices have increased 6%. Even with recent declines in oil prices and a drop at the fuel pump, oil prices are still double what they were in the summer of 2007 and grain prices are double what they were in the summer of 2006.
The impact that this is having on seniors is very serious. Home equity is in reverse and savings and equities are being chewed up by inflation and stock market volatility. Social programs such as Social Security are not doing much better with the smallest benefit increase in the last four years at 2.3% for 2008. According to the AARP, the number of seniors filing for bankruptcy over the age of 55 in the last year was about 250,000. At this pace, the recent study by Ernst & Young LLP showing that three out of every five new middle class retirees will outlive their financial assets if they do not downwardly adjust their standard of living (expenses) by 24%-37% looks to be optimistic.
During good times, equity in homes and the growth of the stock market can propel a high standard of living in retirement and also help to fund the expenses associated with health care and long term care. But during hard times, when these critical economic engines are not cooperating the outlook can change drastically.
Long Term Care Crisis
The double-edged sword of the senior market is the long term care crisis. Everyone will eventually need to secure some form of long term care and/or assisted living, but no one likes to think about it today and making plans for the future is easily put off until later. In fact, the long term care crisis in the United States is a lot like global warming. There is no denying it is happening and that you are going to be impacted—but it seems like it is far enough away into an uncertain future that today’s needs and priorities take precedence. As is usually the case with the human condition, we seldom plan for a crisis and instead are forced to react to it when it is upon us. One study on how seniors make choices about senior residential and long term care options showed three distinct and familiar patterns:
13% actively plan for retirement and how they will live as they grow older and frailer
40% actively plan following a “near catastrophic” health event such as total joint replacement or extended illness
46+% never plan and must make decisions about site of care in a very short period of time, usually while still in the hospital
Currently in the U.S. there are over 1.5 million people living in nursing homes. Of that population, 72% are female and the 85+ population is growing the fastest with a 20% increase. The oldest old are living longer and they are costing more than ever to support with private or public funds. This is important to consider when planning for the future because as of today, 56% of residents will live in a nursing home anywhere from one to five years or more (with a national average of 30 months).
For the population of 900,000 people currently living in assisted living facilities, the vast majority of financing is private pay. In addition to the monthly cost for a room, apartment or cottage; residents may also face one-time entrance fees ranging from $60,000-$350,000 for higher end “resort style” or “cottage” properties. Additional monthly fees ranging from $348-$522 are often times charged for transportation, dementia care, meal delivery to residence, and other extras that would add to quality of life.
With the reality of escalating costs and the growing senior population; we will see increasing pressure on publicly funded programs such as Medicare and Medicaid (which combined pays for roughly 80% all long term care related expenses in the U.S.), and moves to make it more difficult to qualify. The economic squeeze of inflation, the real estate crisis and stock market performance are all contributing to declines in tax revenues for the states. When taxes shrink one of the most vulnerable areas is also one of the most expensive for state budgets: Medicaid and other social support programs. The long term care industry and the government at all levels are in agreement on how to compensate. More emphasis must be placed on the individual to pay for as much care and housing as possible with private funds before any public funds are made available. But what are some private funding options that people should be considering?
An obvious source of funds to cover these expenses would be from long term care insurance. The only problem is that attractive tax deductions have never been established to incentivize growth in the market, and it has been stalled for over a decade. As of today, long term care insurance accounts for an anemic single digit percentage of all funding for senior housing and care.
A primary option that people have often looked to is cashing in their home through a sale to raise the funds to sustain themselves (or to meet spend down requirements). But, the current real estate market has taught us, as is the case with the stock market, that it is always vulnerable to a correction. Another means to extract equity from a home could be through a reverse mortgage, and it might be a good option for a home healthcare arrangement, but what happens if health conditions deteriorate rapidly and the person must move into a facility on short notice? The home owner is then faced with the dilemma of funds that can’t be used for a setting outside of the home, and a loan that must be paid back immediately.
If a person has built up cash value in a life insurance policy, they could consider taking a loan against the policy or surrendering it for the cash value. Also, if someone attempts to qualify for Medicaid, a life insurance policy would be an “unprotected” asset subject to the 60 month look back period. It would need to be liquidated and spent down on care before eligibility could begin. According to a Federal Government Accounting Office (GAO) report released to the U.S. Congress in March, 2007: when examining a sample population of over 500 Medicaid applicants entering long term care facilities, 38% owned a life insurance policy that needed to be liquidated because it exceeded minimum state mandated asset levels.
As we all watch the current economic crisis unfold on a daily basis it is important to understand how the value of life insurance policies are affected by these events. The value of a life insurance policy is guaranteed by law. Insurance companies are legally required to maintain enough cash reserves to pay off the death benefit of the policies they issue. Even in the case of AIG, there are enough cash reserves in place to cover all of the company’s outstanding policies. That money can not be touched for any reason other than to cover their active insurance policies. The volatility of the stock market and the drop in real estate values have absolutely no impact on life insurance polices or the reserves put aside to cover them.
According to most economists, this economic crisis could result in a recession that will last well beyond 2009. For most people who own life insurance policies in the U.S. today, it may be the most stable asset they currently own. Their home and stock portfolios may be suffering significant losses in value, but their life insurance policy has not, and will not change in value. The demand for life insurance policies in the Life Settlement market is stronger than ever because insurance polices are disconnected from the economy and their value remains constant despite the current economic turmoil.
When cashing out a life insurance policy, either by choice or because of an eligibility mandate, the superior option is a Life Settlement. This process will ensure that the highest possible value is obtained for the policy through bidding from multiple institutional sources in the secondary market. Also, any tax implications for capital gains realized from a Life Settlement would be offset by deductions based on spending the money for “the entire cost of maintenance in a nursing home or home for the aged” (sec. 1016 U.S. Master Tax Code 2008). The Conning & Co. Research study "Life Settlements: Additional Pressure on Life Profits” found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements. Statistical data gathered on policies “settled” in 2007 continues to verify that the difference between the amounts of money that can be realized through a Life Settlement is significantly greater than through cash “surrender” value. When the time comes to look at funding vehicles to pay for long term care related expenses, cashing in a life insurance policy through a Life Settlement could be an excellent financial move.
** This article consist of excerpted material from the White Paper, The Silver Tsunami by Chris Orestis available on request info@lifecarefunding.com
Thursday, August 7, 2008
Bibiliography of Chris Orestis
Published Articles/Studies:
· Life Settlements vs. STOLI: Let’s Get the Debate Straight
(published December, 2008 - ProducersWEB)
· Understanding the Differences between Stranger Owned Life Insurance (STOLI)and Life Settlements
(published December, 2008 - On the Risk)
· Life Settlements vs. STOLI
(published December, 2008 - Insurance News Net Magazine)
· Underwriting the “Silver Tsunami”
(published November, 2008 - ProducersWEB)
· Alternative Pay Plan
(published October, 2008 - Assisted Living Executive (magazine of ALFA)
· Economic Storms and Quality of Life in the Wake of the “Silver Tsunami”
(published September, 2008 - ProducersWEB, and ISIS)
· The Silver Tsunami (magazine cover story) and WHITE PAPER
(published August, 2008 - Insurance News Net Magazine )
· WHITE PAPER- Life Settlements: Looking for a Calm Financial Harbor in a “Perfect Storm”
(published July, 2008)
· Underwriting in the 21st Century: Informals—Turning a Pain into Profits
(published June, 2008 - On the Risk, and InsuranceNewsNet, June, 2008, ProducersWEB,
July, 2008)
· Life Settlements: Protecting the Golden Goose
(published April, 2008 - Insurance News Net Magazine)
· Underwriting in the 21st Century: Exploring the Direct-to-Consumer Channel
(published September, 2007 - On the Risk, and InsuranceNewsNet, September, 2007, ProducersWEB,
November, 2007, posted on SmartBrief)
· Aging and Long-Term Care Insurance: A National Policy Perspective
(published August, 2007 - Society of Actuaries: Long Term Care Section Newsletter, and
InsuranceNewsNet, September, 2007, ProducersWEB, September, 2007, posted on SmartBrief)
· Underwriting in the 21st Century: Remote Underwriting Study 2007 (Underwriting in your Underpants)
(published June, 2007 - On the Risk)
· Underwriting in the 21st Century: Understanding the Risks of Private Aviation
(published March, 2007 - On the Risk and InsuranceNewsNet, July, 2007 World News Network, July, 2007, ProducersWEB, October, 2007)
· INDUSTRY STUDY- Underwriting in your Underpants: Remote Underwriting Study 2006-2007
(Released at 37th Annual MUD Meeting as reported by National Underwriter, January, 2007, and featured by Insurance News Net, January, 2007, InsureIntell, February, 2007, Hot Notes by Hank George, 2007, posted on SmartBrief)
· Bringing Together the Pieces of the Insurance Puzzle by Understanding the Lifecycle of a Policy
(published February, 2007 - InsuranceNewsNet and HealthDecisions, InsureIntell, April, 2007, ProducersWEB, August, 2007)
· Breaking Down Barriers Between Underwriting and Distribution
(published January, 2007 – InsuranceNewsNet and InsureIntell, February, 2007; ProducersWEB, July, 2007)
· Overcoming the Underwriting Crunch through Outsourcing
(published January, 2007 – InsuranceNewsNet and InsureIntell, February, 2007)
· Underwriting in the 21st Century: Life Outside the Home Office
(published December, 2006 - On the Risk and InsuranceNewsNet, March, 2007, ProducersWEB, August, 2007)
· Underwriting in the 21st Century: Mastering the APS Paradox
(published September, 2006 - On the Risk and InsuranceNewsNet, February, 2007, InsureIntell, February, 2007, ProducersWEB, September, 2007)
· Underwriting As A Profit Center: Bringing Together the Pieces of the Puzzle
(published June, 2006 - On the Risk)
· How Insurance Companies Benefit from Professionally Summarized (APS) Attending Physician Statements
(published June, 2006 – InsuranceNewsNet and HealthDecisions)
· Underwriting As A Profit Center or How I Survived The 21st Century
(published December, 2005 - On the Risk)
· Life Settlements vs. STOLI: Let’s Get the Debate Straight
(published December, 2008 - ProducersWEB)
· Understanding the Differences between Stranger Owned Life Insurance (STOLI)and Life Settlements
(published December, 2008 - On the Risk)
· Life Settlements vs. STOLI
(published December, 2008 - Insurance News Net Magazine)
· Underwriting the “Silver Tsunami”
(published November, 2008 - ProducersWEB)
· Alternative Pay Plan
(published October, 2008 - Assisted Living Executive (magazine of ALFA)
· Economic Storms and Quality of Life in the Wake of the “Silver Tsunami”
(published September, 2008 - ProducersWEB, and ISIS)
· The Silver Tsunami (magazine cover story) and WHITE PAPER
(published August, 2008 - Insurance News Net Magazine )
· WHITE PAPER- Life Settlements: Looking for a Calm Financial Harbor in a “Perfect Storm”
(published July, 2008)
· Underwriting in the 21st Century: Informals—Turning a Pain into Profits
(published June, 2008 - On the Risk, and InsuranceNewsNet, June, 2008, ProducersWEB,
July, 2008)
· Life Settlements: Protecting the Golden Goose
(published April, 2008 - Insurance News Net Magazine)
· Underwriting in the 21st Century: Exploring the Direct-to-Consumer Channel
(published September, 2007 - On the Risk, and InsuranceNewsNet, September, 2007, ProducersWEB,
November, 2007, posted on SmartBrief)
· Aging and Long-Term Care Insurance: A National Policy Perspective
(published August, 2007 - Society of Actuaries: Long Term Care Section Newsletter, and
InsuranceNewsNet, September, 2007, ProducersWEB, September, 2007, posted on SmartBrief)
· Underwriting in the 21st Century: Remote Underwriting Study 2007 (Underwriting in your Underpants)
(published June, 2007 - On the Risk)
· Underwriting in the 21st Century: Understanding the Risks of Private Aviation
(published March, 2007 - On the Risk and InsuranceNewsNet, July, 2007 World News Network, July, 2007, ProducersWEB, October, 2007)
· INDUSTRY STUDY- Underwriting in your Underpants: Remote Underwriting Study 2006-2007
(Released at 37th Annual MUD Meeting as reported by National Underwriter, January, 2007, and featured by Insurance News Net, January, 2007, InsureIntell, February, 2007, Hot Notes by Hank George, 2007, posted on SmartBrief)
· Bringing Together the Pieces of the Insurance Puzzle by Understanding the Lifecycle of a Policy
(published February, 2007 - InsuranceNewsNet and HealthDecisions, InsureIntell, April, 2007, ProducersWEB, August, 2007)
· Breaking Down Barriers Between Underwriting and Distribution
(published January, 2007 – InsuranceNewsNet and InsureIntell, February, 2007; ProducersWEB, July, 2007)
· Overcoming the Underwriting Crunch through Outsourcing
(published January, 2007 – InsuranceNewsNet and InsureIntell, February, 2007)
· Underwriting in the 21st Century: Life Outside the Home Office
(published December, 2006 - On the Risk and InsuranceNewsNet, March, 2007, ProducersWEB, August, 2007)
· Underwriting in the 21st Century: Mastering the APS Paradox
(published September, 2006 - On the Risk and InsuranceNewsNet, February, 2007, InsureIntell, February, 2007, ProducersWEB, September, 2007)
· Underwriting As A Profit Center: Bringing Together the Pieces of the Puzzle
(published June, 2006 - On the Risk)
· How Insurance Companies Benefit from Professionally Summarized (APS) Attending Physician Statements
(published June, 2006 – InsuranceNewsNet and HealthDecisions)
· Underwriting As A Profit Center or How I Survived The 21st Century
(published December, 2005 - On the Risk)
WHITE PAPER- Life Settlements: Looking for a Calm Financial Harbor in a Perfect Storm
Life Settlements: Looking for a Calm Financial Harbor in a “Perfect Storm”
Executive Summary
The U.S. is facing a three front crisis that poses long lasting implications for the providers of senior housing and senior care:
The economy is currently in its worst slump since the great depression, and we may never see home values or commodity prices (fuel, groceries, etc.) return to where they were just a year ago.
The 65+ population is about to explode with the aging of the Baby Boomers, and as they age we will see life expectancies continue to increase.
Governmental budgets will be pushed more and more to the breaking point trying to fund the care of the exploding senior population through Social Security, Medicare, and in particular, Medicaid.
The senior housing and senior care industry is only beginning to come to grips with this “perfect storm” of demographic and economic factors-- and how it will impact the financing of their services. Adaptation and creativity will be necessary to stay ahead of the evolving U.S. socio-economic landscape.
In this paper we explore how a market innovation that emerged over the last decade called a “Life Settlement”, is now being used as an alternative funding mechanism for the entire continuum of senior housing and care.
Introduction: Stormy Seas Ahead
We see the headlines everyday.
Study Finds Increases in Nursing Home, Assisted Living Costs
Genworth study tracks fifth straight year of cost increases, trend to continue with Baby Boomers
-- AP Newswire April 29, 2008
Americans Delay Retirement as Housing, Stocks Swoon
Nest Eggs Shrink; Deferring Dreams
--
getCSS("3088867")
Wall Street Journal April 1, 2008
Bleak Retirements for 150 Million?
Majority of Americans aren’t saving nearly enough; expenses they’ll face are sobering
--
getCSS("3088867")
MSN Money.com MarketWatch March 28, 2008
Housing prices to free fall in 2008 - Merrill
According to a Merrill Lynch report, home prices will drop 15 percent this year, and declines will continue in 2009 (and 2010).
-- CNNMoney.com staff writer January 23, 2008
Only 1 in 4 U.S. Adults Think They Can Pay for Long-Term Care
74% Confident they do not have enough money, 33% Unsure
-- SeniorJournal.com February 1, 2006
The economy is besieged by slumping home sales and foreclosures, erratic stock prices, imploding sub-prime mortgage portfolios, and people’s incomes are being eaten up at an alarming rate by the increasing cost of goods and fuel. But for the most vulnerable of our population, seniors facing health and long term care challenges, the added pressures of this down economy have created a “perfect storm”.
The combined impact of these negative economic conditions, and the pressure on public programs to meet the increasing demand to fund senior care, is creating a surging tide for seniors that threaten to put many underwater. The undeniable goal of government is for individuals to cover senior housing and long term care expenses with more and more private funds. But very few have managed to accumulate enough savings to independently sustain years of quality lifestyle and care. Now, compounding this problem is the fact that traditional sources of funds are drying up as the housing and stock markets swoon.
According to a MSN Money.com Market Watch report (March 28, 2008) “a sixty five year old couple retiring now would need more than $300,000 set aside just to pay for health care costs over twenty years and would need $550,000 if they were to live into their early nineties.” Particularly alarming, according to the report, is the fact that these numbers, “haven’t factored in the costs of nursing homes, assisted living facilities or home health aides—and those costs are staggering!” The reality is that very few people will have half a million dollars to cover health care costs-- without even accounting for the costs associated with long term care and retirement living. Most people will depend on public funds to take care of them, but as the Baby Boom generation swells the number of seniors age 65 and over, those public funds will become harder and harder to access. Many others that are relying on equity built up in their homes or stocks are finding out now just how risky that proposition can be.
Fortunately, a financial tool has emerged that can provide a readily available source of funds for seniors that own a life insurance policy. It is called a Life Settlement, and very quickly it is becoming a financial tool for retirement living and skilled nursing facilities. In the face of falling home and stock values, rising inflation, and depleted savings; generating cash through a Life Settlement is rapidly becoming a welcome and much needed financial alternative to these strained resources.
A New Financial Option Emerges
The definition of a Life Settlement is simply this: It’s the sale of a life insurance policy by the policy holder while still alive to an institutional investor that will pay a lot more for the policy than the cash “surrender” value. The institutional investor will then carry the policy as an investment for the remaining life span of the policy owner. The Life Settlement secondary market emerged about ten years ago as financial institutions began competing to buy and hold people’s life insurance policies as investments. Life insurance values are guaranteed and disconnected from the economy so there is no fluctuation, as is the case with real estate and stocks. Understanding the significance of owning a life insurance contract with guaranteed value, all of the major players on Wall Street (Morgan, Chase, Goldman, UBS, Deutsch Bank, AIG, etc.), as well as major hedge funds and global financial institutions are now buying people’s policies on a mass scale.
A Life Settlement can be thought of similarly to a Reverse Mortgage. It is an alternative way for seniors to tap into an existing asset to generate liquidity to cover immediate needs —but there are also important differences:
- A Reverse Mortgage is a loan that must be paid back, with interest and fees, once the secured property is no longer the primary residence (a prohibitive requirement for someone seeking to move into a senior housing or care facility).
- A Life Settlement is the sale of a life insurance policy to a third party while the policy owner is still alive for a lump sum payment-- and since it is not a loan, the funds are unrestricted and require no repayment.
The Long Term Care Crisis Grows
People seldom plan for a crisis and instead are forced to react to it when it is upon them. A recent study on how choices are made about senior housing and senior care showed three all too familiar patterns:
13% actively plan for retirement and how they will live as they grow older and frailer
40% actively plan following a “near catastrophic” health event such as total joint replacement or extended illness
46+% never plan and must make decisions about site of care in a very short period of time, usually while still in the hospital
The problem is that the combined impact of our nation’s economic strains and people’s tendency to not plan and save threatens to sink the vast majority of people’s chances for quality “golden years”. Compounding the stress on the system is the fact that by 2020, the population of 65+ will increase 48% and the population of 85+ will increase 43%. The growth of the 65+ population will be attributable mostly to the aging of the Baby Boomers, but the growth of the 85+ population is primarily a factor of increasing life expectancy.
Currently in the U.S. there are over 1.5 million people living in nursing homes. Of that population, 72% are female and the 85+ population is growing the fastest with a 20% increase. The oldest old are living longer and they are costing more than ever to support with private or public funds. This is important to consider when planning for the future because as of today, 56% of residents will live in a nursing home anywhere from one to five years or more (with a national average of 30 months).
For the population of 900,000 people currently living in assisted living facilities, the vast majority of financing is private pay. In addition to the monthly cost for a room, apartment or cottage; residents may also face one-time entrance fees ranging from $60,000-$350,000 for higher end “resort style” properties. Additional monthly fees ranging from $348-$522 are often times charged for transportation, dementia care, meal delivery to residence, and other extras that would add to quality of life.
As of 2000, the most recent year for data, there were 1,355,290 people receiving some form of extended home-based healthcare. Of that population, 70% were 65+ and 65% were female. The average time span of care was for 312 days, and over 93% of the care was being delivered by Medicare/Medicaid certified agencies.
Fast Fact
Current national average costs across the three categories of long term care for 2008
Home/Community-
Non-Medicare Certified, Licensed “Companion” Care - $18/hr (4% over 2007)
Non-Medicare Certified, Licensed “Home Health Aide” - $19/hr (3% over 2007)
Medicare Certified “Home Health Aide” - $38/hr (18% over 2007)
Adult Day Health Care Center - $61 per day
Assisted Living Facility-
Private One Bedroom - $3,008 per month (11% over 2007)
Nursing Home-
Semi-Private Room - $187 per day (4% over 2007)
Private Room - $209 per day (2% over 2007)
With the reality of these kinds of costs and the growing senior population; we will see increasing pressure on publicly funded programs such as Medicare and Medicaid (which combined pays for roughly 80% all long term care related expenses in the U.S.) and moves to make it more difficult to qualify. The long term care industry and the government at all levels are in agreement. More emphasis must be placed on the individual to pay for as much care and housing as possible with private funds before any public funds are made available. But what are some private funding options that people should be considering?
An obvious source of funds to cover these expenses would be from long term care insurance. The only problem is that tax deductions have never been established that would incentivize growth in the market, and it has been stalled for over a decade. As of today, long term care insurance accounts for an anemic single digit percentage of all funding for senior housing and care. That leaves private pay to pick up close to 20% of the approximate total of $200 billion spent on all long term care service last year. But where do those funds come from if you have not saved literally hundreds of thousands in cash?
A primary option that people have often looked to is cashing in their home through a sale to raise the funds to sustain themselves (or to meet spend down requirements). But, the current real estate market has taught us, as is the case with the stock market, that it is always vulnerable to a correction. Another means to extract equity from a home could be through a reverse mortgage, and it might be a good option for a home healthcare arrangement, but what happens if health conditions deteriorate rapidly and the person must move into a facility on short notice? The home owner is then faced with the dilemma of funds that can’t be used for a setting outside of the home, and a loan that must be paid back immediately.
If a person has built up cash value in a life insurance policy, they could consider taking a loan against the policy or surrendering it for the cash value. Also, if someone attempts to qualify for Medicaid, a life insurance policy would be an “unprotected” asset subject to the 60 month look back period, and it would need to be liquidated and spent down on care before eligibility could begin. According to a Federal Government Accounting Office (GAO) report released to the U.S. Congress in March, 2007: when examining a sample population of over 500 Medicaid applicants entering long term care facilities, 38% owned a life insurance policy that needed to be liquidated because it exceeded minimum state mandated asset levels. Statistical data gathered on policies “settled” in 2007 continues to verify that the difference between the amounts of money that can be realized through a Life Settlement is significantly greater than through cash “surrender” value.
When cashing out a life insurance policy, either by choice or because of an eligibility mandate, the superior option is a Life Settlement. This process will ensure that the highest possible value is obtained for the policy through bidding from multiple institutional sources in the secondary market. Also, any tax implications for capital gains realized from a Life Settlement would be offset by deductions based on spending the money for “the entire cost of maintenance in a nursing home or home for the aged” (sec. 1016 U.S. Master Tax Code 2008). When the time comes to look at funding vehicles to pay for long term care related expenses, cashing in a life insurance policy through a Life Settlement could be an excellent financial move.
Storm Clouds Begin to Clear
For seniors faced with the uncertain prospect of selling their home, securities or savings in such a down economy, Life Settlements are not only a chance to consider accessing an asset that will not fluctuate in value, but it is also an opportunity to liquidate a less dearly held asset. People obviously have a sentimental attachment to their home, stocks and other personal assets. This can cause delays in moving forward—but people have no sentimental attachment to an insurance policy and are more willing to liquidate it as a first option. If you can eliminate the reluctance seniors have about tapping into their most dearly held assets, and in the process eliminate the worry seniors have about outliving their money, then you can eliminate the delays in making a commitment to a course of action.
This is not just a financial tool-- it is also a great marketing and relationship building opportunity by providing another option for prospective and current residents to find money to pay for residency and services. Properties are able to remove reasons for delay, and can provide peace of mind for seniors about prematurely running out of money. It is also another opportunity to reach out to residents and prospects and show them that you are actively looking to work with them because you care about their well being.
How Life Settlements are Being Used to Pay for Senior Housing and Care
The majority of people who can be helped by a Life Settlement are first encountered during the admissions/registration process. People who are living independently and have recently encountered a pressing need to understand their options about the best retirement or long term living scenario, and how to pay for it, will be those most likely to possess some measure of financial means and own a life insurance policy. Typically social workers, the marketing department or the administrative/admissions office will be in a position to offer this as an option when people are considering their finances. There may also be some current residents that still own policies and need help raising money (and they would most certainly be eligible), but primarily it will be those living independently who have not yet altered their finances that will be most readily helped.
The process of a Life Settlement is straightforward and takes between 30-60 days-- obviously much quicker than relying on the sale of a home. Remember, this is not a loan, not a government program and not long term care insurance—it is the sale of an asset through a competitive bidding process that will provide the policy owner with a lump sum payment for a far greater amount than the cash surrender value. Once a policy owner sells their policy, they are no longer responsible for the premiums and they are free to use the money anyway they want. Also important to note is that there are absolutely no costs involved for the facility, and no up front fees or out of pocket expenses involved for the policy owner.
In the case of people entering a private pay arrangement directly or after a Medicare funded “short term” stay is over, how to raise enough money to last indefinitely could be one of the biggest emotional and financial challenges of their life. For those intimidated by the thought of selling their home or liquidating other assets to secure the funds they will need, a Life Settlement is a welcome alternative source of funds to access.
Anyone that owns life insurance and will rely on Medicaid to cover expenses associated with their care will be required to cash in the policy if its face value exceeds state mandated asset levels. The proceeds must then be spent down to cover the cost of care before Medicaid coverage can begin. If they decide to hold onto a policy, the beneficiaries could be subject to asset recovery efforts once the policy owner is deceased. The owner of a life insurance policy in this situation would be well served to explore the benefits of a Life Settlement. They could receive significantly more money than the cash “surrender” value that would be given to them by an insurance company-- and in turn sustain a private pay arrangement for a much longer period of time.
Conclusion: A Win – Win Scenario
According to the Society of Actuaries’ 2007 Retirement Survey: 60% of retirees worry about three things--
The cost of health care
The effect of inflation on their nest eggs
Not being able to maintain a reasonable standard of living for the rest of their lives
With today’s economy those concerns are well founded. There is billions of dollars worth of life insurance owned by people over the age of 65 today-- tapping into Life Settlements as an alternative funding option for senior housing and care makes a lot of sense. Any chance to overcome financial hurdles preventing seniors from securing the best possible arrangement is in the best interest of the individual and their family, the facility and the government. Life Settlements are an easy to understand and straightforward financial tool to accomplish the goal of welcoming a resident who is able to afford living without fear of running out of money.
Sources
AARP Public Policy Institute, Across the States Profiles of Long Term Care and Independent Living, Seventh Edition 2006
Genworth Financial, 2008 Costs of Care Survey, April 2008
Government Accounting Office (GAO), Report to Congressional Requesters on Medicaid Long Term Care Impact of Deficit Reduction Act, March 2007
Health Care Financing Review, Winter 2002 Study
Life Policy Dynamics, 2007 Summary: U.S. Life Settlement Market Analysis, March 2008
MetLife Mature Market Institute, Demographic Profile Americans 65+, 2008
MetLife Mature Market Institute, Demographic Profile American Baby Boomers, 2008
MetLife Mature Market Institute, Market Survey of Adult Day Services & Home Care Costs, September 2007
MetLife Mature Market Institute, Market Survey of Nursing Home & Assisted Living Costs, October 2007
MSN Money.com Market Watch, Bleak Retirements for 150 Million?, March 2008
Society of Actuaries, Life Settlements 101: Introduction to the Secondary Market in Life Insurance, October 2007
United States Census Bureau
Executive Summary
The U.S. is facing a three front crisis that poses long lasting implications for the providers of senior housing and senior care:
The economy is currently in its worst slump since the great depression, and we may never see home values or commodity prices (fuel, groceries, etc.) return to where they were just a year ago.
The 65+ population is about to explode with the aging of the Baby Boomers, and as they age we will see life expectancies continue to increase.
Governmental budgets will be pushed more and more to the breaking point trying to fund the care of the exploding senior population through Social Security, Medicare, and in particular, Medicaid.
The senior housing and senior care industry is only beginning to come to grips with this “perfect storm” of demographic and economic factors-- and how it will impact the financing of their services. Adaptation and creativity will be necessary to stay ahead of the evolving U.S. socio-economic landscape.
In this paper we explore how a market innovation that emerged over the last decade called a “Life Settlement”, is now being used as an alternative funding mechanism for the entire continuum of senior housing and care.
Introduction: Stormy Seas Ahead
We see the headlines everyday.
Study Finds Increases in Nursing Home, Assisted Living Costs
Genworth study tracks fifth straight year of cost increases, trend to continue with Baby Boomers
-- AP Newswire April 29, 2008
Americans Delay Retirement as Housing, Stocks Swoon
Nest Eggs Shrink; Deferring Dreams
--
getCSS("3088867")
Wall Street Journal April 1, 2008
Bleak Retirements for 150 Million?
Majority of Americans aren’t saving nearly enough; expenses they’ll face are sobering
--
getCSS("3088867")
MSN Money.com MarketWatch March 28, 2008
Housing prices to free fall in 2008 - Merrill
According to a Merrill Lynch report, home prices will drop 15 percent this year, and declines will continue in 2009 (and 2010).
-- CNNMoney.com staff writer January 23, 2008
Only 1 in 4 U.S. Adults Think They Can Pay for Long-Term Care
74% Confident they do not have enough money, 33% Unsure
-- SeniorJournal.com February 1, 2006
The economy is besieged by slumping home sales and foreclosures, erratic stock prices, imploding sub-prime mortgage portfolios, and people’s incomes are being eaten up at an alarming rate by the increasing cost of goods and fuel. But for the most vulnerable of our population, seniors facing health and long term care challenges, the added pressures of this down economy have created a “perfect storm”.
The combined impact of these negative economic conditions, and the pressure on public programs to meet the increasing demand to fund senior care, is creating a surging tide for seniors that threaten to put many underwater. The undeniable goal of government is for individuals to cover senior housing and long term care expenses with more and more private funds. But very few have managed to accumulate enough savings to independently sustain years of quality lifestyle and care. Now, compounding this problem is the fact that traditional sources of funds are drying up as the housing and stock markets swoon.
According to a MSN Money.com Market Watch report (March 28, 2008) “a sixty five year old couple retiring now would need more than $300,000 set aside just to pay for health care costs over twenty years and would need $550,000 if they were to live into their early nineties.” Particularly alarming, according to the report, is the fact that these numbers, “haven’t factored in the costs of nursing homes, assisted living facilities or home health aides—and those costs are staggering!” The reality is that very few people will have half a million dollars to cover health care costs-- without even accounting for the costs associated with long term care and retirement living. Most people will depend on public funds to take care of them, but as the Baby Boom generation swells the number of seniors age 65 and over, those public funds will become harder and harder to access. Many others that are relying on equity built up in their homes or stocks are finding out now just how risky that proposition can be.
Fortunately, a financial tool has emerged that can provide a readily available source of funds for seniors that own a life insurance policy. It is called a Life Settlement, and very quickly it is becoming a financial tool for retirement living and skilled nursing facilities. In the face of falling home and stock values, rising inflation, and depleted savings; generating cash through a Life Settlement is rapidly becoming a welcome and much needed financial alternative to these strained resources.
A New Financial Option Emerges
The definition of a Life Settlement is simply this: It’s the sale of a life insurance policy by the policy holder while still alive to an institutional investor that will pay a lot more for the policy than the cash “surrender” value. The institutional investor will then carry the policy as an investment for the remaining life span of the policy owner. The Life Settlement secondary market emerged about ten years ago as financial institutions began competing to buy and hold people’s life insurance policies as investments. Life insurance values are guaranteed and disconnected from the economy so there is no fluctuation, as is the case with real estate and stocks. Understanding the significance of owning a life insurance contract with guaranteed value, all of the major players on Wall Street (Morgan, Chase, Goldman, UBS, Deutsch Bank, AIG, etc.), as well as major hedge funds and global financial institutions are now buying people’s policies on a mass scale.
A Life Settlement can be thought of similarly to a Reverse Mortgage. It is an alternative way for seniors to tap into an existing asset to generate liquidity to cover immediate needs —but there are also important differences:
- A Reverse Mortgage is a loan that must be paid back, with interest and fees, once the secured property is no longer the primary residence (a prohibitive requirement for someone seeking to move into a senior housing or care facility).
- A Life Settlement is the sale of a life insurance policy to a third party while the policy owner is still alive for a lump sum payment-- and since it is not a loan, the funds are unrestricted and require no repayment.
The Long Term Care Crisis Grows
People seldom plan for a crisis and instead are forced to react to it when it is upon them. A recent study on how choices are made about senior housing and senior care showed three all too familiar patterns:
13% actively plan for retirement and how they will live as they grow older and frailer
40% actively plan following a “near catastrophic” health event such as total joint replacement or extended illness
46+% never plan and must make decisions about site of care in a very short period of time, usually while still in the hospital
The problem is that the combined impact of our nation’s economic strains and people’s tendency to not plan and save threatens to sink the vast majority of people’s chances for quality “golden years”. Compounding the stress on the system is the fact that by 2020, the population of 65+ will increase 48% and the population of 85+ will increase 43%. The growth of the 65+ population will be attributable mostly to the aging of the Baby Boomers, but the growth of the 85+ population is primarily a factor of increasing life expectancy.
Currently in the U.S. there are over 1.5 million people living in nursing homes. Of that population, 72% are female and the 85+ population is growing the fastest with a 20% increase. The oldest old are living longer and they are costing more than ever to support with private or public funds. This is important to consider when planning for the future because as of today, 56% of residents will live in a nursing home anywhere from one to five years or more (with a national average of 30 months).
For the population of 900,000 people currently living in assisted living facilities, the vast majority of financing is private pay. In addition to the monthly cost for a room, apartment or cottage; residents may also face one-time entrance fees ranging from $60,000-$350,000 for higher end “resort style” properties. Additional monthly fees ranging from $348-$522 are often times charged for transportation, dementia care, meal delivery to residence, and other extras that would add to quality of life.
As of 2000, the most recent year for data, there were 1,355,290 people receiving some form of extended home-based healthcare. Of that population, 70% were 65+ and 65% were female. The average time span of care was for 312 days, and over 93% of the care was being delivered by Medicare/Medicaid certified agencies.
Fast Fact
Current national average costs across the three categories of long term care for 2008
Home/Community-
Non-Medicare Certified, Licensed “Companion” Care - $18/hr (4% over 2007)
Non-Medicare Certified, Licensed “Home Health Aide” - $19/hr (3% over 2007)
Medicare Certified “Home Health Aide” - $38/hr (18% over 2007)
Adult Day Health Care Center - $61 per day
Assisted Living Facility-
Private One Bedroom - $3,008 per month (11% over 2007)
Nursing Home-
Semi-Private Room - $187 per day (4% over 2007)
Private Room - $209 per day (2% over 2007)
With the reality of these kinds of costs and the growing senior population; we will see increasing pressure on publicly funded programs such as Medicare and Medicaid (which combined pays for roughly 80% all long term care related expenses in the U.S.) and moves to make it more difficult to qualify. The long term care industry and the government at all levels are in agreement. More emphasis must be placed on the individual to pay for as much care and housing as possible with private funds before any public funds are made available. But what are some private funding options that people should be considering?
An obvious source of funds to cover these expenses would be from long term care insurance. The only problem is that tax deductions have never been established that would incentivize growth in the market, and it has been stalled for over a decade. As of today, long term care insurance accounts for an anemic single digit percentage of all funding for senior housing and care. That leaves private pay to pick up close to 20% of the approximate total of $200 billion spent on all long term care service last year. But where do those funds come from if you have not saved literally hundreds of thousands in cash?
A primary option that people have often looked to is cashing in their home through a sale to raise the funds to sustain themselves (or to meet spend down requirements). But, the current real estate market has taught us, as is the case with the stock market, that it is always vulnerable to a correction. Another means to extract equity from a home could be through a reverse mortgage, and it might be a good option for a home healthcare arrangement, but what happens if health conditions deteriorate rapidly and the person must move into a facility on short notice? The home owner is then faced with the dilemma of funds that can’t be used for a setting outside of the home, and a loan that must be paid back immediately.
If a person has built up cash value in a life insurance policy, they could consider taking a loan against the policy or surrendering it for the cash value. Also, if someone attempts to qualify for Medicaid, a life insurance policy would be an “unprotected” asset subject to the 60 month look back period, and it would need to be liquidated and spent down on care before eligibility could begin. According to a Federal Government Accounting Office (GAO) report released to the U.S. Congress in March, 2007: when examining a sample population of over 500 Medicaid applicants entering long term care facilities, 38% owned a life insurance policy that needed to be liquidated because it exceeded minimum state mandated asset levels. Statistical data gathered on policies “settled” in 2007 continues to verify that the difference between the amounts of money that can be realized through a Life Settlement is significantly greater than through cash “surrender” value.
When cashing out a life insurance policy, either by choice or because of an eligibility mandate, the superior option is a Life Settlement. This process will ensure that the highest possible value is obtained for the policy through bidding from multiple institutional sources in the secondary market. Also, any tax implications for capital gains realized from a Life Settlement would be offset by deductions based on spending the money for “the entire cost of maintenance in a nursing home or home for the aged” (sec. 1016 U.S. Master Tax Code 2008). When the time comes to look at funding vehicles to pay for long term care related expenses, cashing in a life insurance policy through a Life Settlement could be an excellent financial move.
Storm Clouds Begin to Clear
For seniors faced with the uncertain prospect of selling their home, securities or savings in such a down economy, Life Settlements are not only a chance to consider accessing an asset that will not fluctuate in value, but it is also an opportunity to liquidate a less dearly held asset. People obviously have a sentimental attachment to their home, stocks and other personal assets. This can cause delays in moving forward—but people have no sentimental attachment to an insurance policy and are more willing to liquidate it as a first option. If you can eliminate the reluctance seniors have about tapping into their most dearly held assets, and in the process eliminate the worry seniors have about outliving their money, then you can eliminate the delays in making a commitment to a course of action.
This is not just a financial tool-- it is also a great marketing and relationship building opportunity by providing another option for prospective and current residents to find money to pay for residency and services. Properties are able to remove reasons for delay, and can provide peace of mind for seniors about prematurely running out of money. It is also another opportunity to reach out to residents and prospects and show them that you are actively looking to work with them because you care about their well being.
How Life Settlements are Being Used to Pay for Senior Housing and Care
The majority of people who can be helped by a Life Settlement are first encountered during the admissions/registration process. People who are living independently and have recently encountered a pressing need to understand their options about the best retirement or long term living scenario, and how to pay for it, will be those most likely to possess some measure of financial means and own a life insurance policy. Typically social workers, the marketing department or the administrative/admissions office will be in a position to offer this as an option when people are considering their finances. There may also be some current residents that still own policies and need help raising money (and they would most certainly be eligible), but primarily it will be those living independently who have not yet altered their finances that will be most readily helped.
The process of a Life Settlement is straightforward and takes between 30-60 days-- obviously much quicker than relying on the sale of a home. Remember, this is not a loan, not a government program and not long term care insurance—it is the sale of an asset through a competitive bidding process that will provide the policy owner with a lump sum payment for a far greater amount than the cash surrender value. Once a policy owner sells their policy, they are no longer responsible for the premiums and they are free to use the money anyway they want. Also important to note is that there are absolutely no costs involved for the facility, and no up front fees or out of pocket expenses involved for the policy owner.
In the case of people entering a private pay arrangement directly or after a Medicare funded “short term” stay is over, how to raise enough money to last indefinitely could be one of the biggest emotional and financial challenges of their life. For those intimidated by the thought of selling their home or liquidating other assets to secure the funds they will need, a Life Settlement is a welcome alternative source of funds to access.
Anyone that owns life insurance and will rely on Medicaid to cover expenses associated with their care will be required to cash in the policy if its face value exceeds state mandated asset levels. The proceeds must then be spent down to cover the cost of care before Medicaid coverage can begin. If they decide to hold onto a policy, the beneficiaries could be subject to asset recovery efforts once the policy owner is deceased. The owner of a life insurance policy in this situation would be well served to explore the benefits of a Life Settlement. They could receive significantly more money than the cash “surrender” value that would be given to them by an insurance company-- and in turn sustain a private pay arrangement for a much longer period of time.
Conclusion: A Win – Win Scenario
According to the Society of Actuaries’ 2007 Retirement Survey: 60% of retirees worry about three things--
The cost of health care
The effect of inflation on their nest eggs
Not being able to maintain a reasonable standard of living for the rest of their lives
With today’s economy those concerns are well founded. There is billions of dollars worth of life insurance owned by people over the age of 65 today-- tapping into Life Settlements as an alternative funding option for senior housing and care makes a lot of sense. Any chance to overcome financial hurdles preventing seniors from securing the best possible arrangement is in the best interest of the individual and their family, the facility and the government. Life Settlements are an easy to understand and straightforward financial tool to accomplish the goal of welcoming a resident who is able to afford living without fear of running out of money.
Sources
AARP Public Policy Institute, Across the States Profiles of Long Term Care and Independent Living, Seventh Edition 2006
Genworth Financial, 2008 Costs of Care Survey, April 2008
Government Accounting Office (GAO), Report to Congressional Requesters on Medicaid Long Term Care Impact of Deficit Reduction Act, March 2007
Health Care Financing Review, Winter 2002 Study
Life Policy Dynamics, 2007 Summary: U.S. Life Settlement Market Analysis, March 2008
MetLife Mature Market Institute, Demographic Profile Americans 65+, 2008
MetLife Mature Market Institute, Demographic Profile American Baby Boomers, 2008
MetLife Mature Market Institute, Market Survey of Adult Day Services & Home Care Costs, September 2007
MetLife Mature Market Institute, Market Survey of Nursing Home & Assisted Living Costs, October 2007
MSN Money.com Market Watch, Bleak Retirements for 150 Million?, March 2008
Society of Actuaries, Life Settlements 101: Introduction to the Secondary Market in Life Insurance, October 2007
United States Census Bureau
Wednesday, August 6, 2008
The Silver Tsunami
The Silver Tsunami- Original Verison
(edited version published August, 2008 Insurance News Net Magazine)
Executive Summary
The approaching surge of Baby Boomers and the ever expanding ranks of the 65+ generation have been on our radar screen for years. But today, it is no longer a concept far off on in the future. The reality is that the conversion of Baby Boomers turning into bona-fide seniors is actually now upon us. The oldest Baby Boomers began qualifying to take government benefits last year, and according to the U.S. Census Bureau, in less than three years 8,000 Americans will start to become Medicare eligible every single day. This generation, from the youngest Baby Boomer to those now in their eighties, will require innovative solutions from life insurance, annuities, health and disability coverage, and long term care to address their financial needs.
But how well do we really know these people? What are their plans for the future and are they financially prepared? What are the realities that will confront them as they move across the age continuum of Baby Boomer to 65-- and then continue aging for many years to come?
In this paper we will look at statistical data from a wide range of sources to create a picture of the Baby Boomers and the 65+ seniors ahead of them. Together they are a “Silver Tsunami” that will hit the U.S. economic and social fabric with a force unprecedented in any nation’s history. We will examine the opportunities and challenges associated with this group. We will also consider the impact of economic conditions and the eventual realities that will confront them, and us all, as aging and the necessity of long term care goes from a distant concept to a frighteningly expensive reality.
Demographic Profiles
The first step in harnessing the opportunities and mastering the challenges that will come in the wake of the “Silver Tsunami” is analyzing and understanding this population that is so different from any other in U.S. history.
The “Silver Tsunami” population can be broken into two distinct cohorts:
Cohort 1- Seniors born 1939 or before that account for 35,986,082, or 12.6% of the U. S. population. The gender split is 42% male and 58% female.
Cohort 2- Baby Boomers born 1946-1964 that account for 76,402,903, or 26% of the U. S. population. The gender split is 49% male and 51% female.
These two age based groups posses unique demographic characteristics that are important to understand if one is to measure, and then fully realize the opportunities of providing financial and healthcare services to meet their needs.
Average life expectancy from age 65 increased from 77.7 to 84 years for males and 79.7 to 87 years for females in the 60 year period from 1940-2000. Life expectancy going forward into 2040 should add another 3 years on average for both males and females. The age group of 85+ is the fastest growing segment, and they are experiencing the highest gains in life expectancy on a percentage basis. Further, the population of Centenarians (age 100+) more than doubled from 37,306 in 1990 to 88,289 in 2004. Important to note with all of the life expectancy gains is that the population of 65+ living in a nursing home accounts for 1,557,800 or 4.5% of the total cohort population. Most people that move into an assisted living or nursing home are a surviving spouse, and to that end, the number of seniors surviving a deceased spouse triples when moving from the age segment 65-74 to 85+.
Fast Fact
Top 5 states of residence for the 65+ cohort as a percentage of population
- Florida (17.6%)
- West Virginia (15.6%)
- Pennsylvania (15.3%)
- Iowa (14.9%)
- North Dakota (14.7%)
- Rhode Island (14.5%)
Average household income for age 65-74 is $35,118, and then drops to $23,890 for age 75+. The 70-74 segment has the highest net worth at $120,000, but once seniors reach age 75+ their average net worth drops to $100,000. For the entire cohort of 65+, home ownership is 80% with almost 75% living unencumbered by a mortgage, but when you remove home equity from the equation, average net worth drops significantly from a high of $31,400 to a low of $19,025.
Fats Fact
Three largest expense areas for the 65+ cohort
housing and food
transportation
healthcare
Baby Boomers account for 48% of U.S. families with 45 million households, and spending power of over $2 Trillion. The younger Boomers born between 1956 and 1964 have an average household population of 3.3 people (with 1 or more children), and an average annual income of $56,500 of which they spend $45,149. The older Boomers born between 1946 and 1955 have an average household population of 2.7 people (with 1 or no children), and an average annual income of $58,889 of which they spend $46,160. 69% of younger Boomers own their homes and devote a larger share of their monthly budgets to mortgage payments. This group also spends about 10% less than the average on life and other forms of personal insurance, while the older Boomers spend 20% more than the average.
Fast Fact
Over 50% of the Baby Boomers live in nine states
California, Texas, New York, Florida, Pennsylvania, Illinois, Ohio, Michigan, and New Jersey.
The population of 65+ will increase 48% and the population of 85+ will increase 43% by 2020. The growth of the 65+ population will be attributable mostly to the aging of the Baby Boomers, but the growth of the 85+ population is primarily a factor of increasing life expectancy. Currently, there are three states where the 65+ population exceeds 15% of the states total: Florida, Pennsylvania, and West Virginia. That number will grow to 42 states by 2020.
When it comes to tracking and categorizing the financial habits of the growing populations of Baby Boomers and Seniors, Claritas developed an effective demographic segmentation system called P$ychleNE (for more information visit www.claritas.com) which is particularly insightful for producers of annuity and life insurance products. Their system breaks down U.S. households by financial behavior across 58 segments within 13 life stage groups going back to 1987. For our two cohorts, the 65+ seniors of cohort 1 and the Baby Boomers of cohort 2, P$ychleNE segments them into two unique groups, and then two more that they share with similar characteristics regardless of age classification. Based on their financial behavior, the segments break out across the following primary classifications and related sub-sets that describe key aspects of their life style and spending habits:
Cohort 1
- Wealthy Seniors (Five sub-sets of 65+ retired and living in comfortable suburban homes with substantial nest eggs)
o Globetrotters
o Golden Agers
o Civic Spirits
o Savvy Savers
o Annuity-Ville
- Mid-scale Matures (Four sub-sets of 65+ with working class wages and modest income producing assets)
o Early-Bird Specials
o Conservative Couples
o Senior Solitaire
o Old Homesteaders
Cohort 2
- Boomer Comfort (Five sub-sets of educated, well-off, tech savvy professionals with six figure incomes, strong performing assets and receptivity to insurance products)
o Power Couples
o Big Spenders
o Jumbo Mortgagees
o Bargain Lovers
o Suburban Scramble
- Financial Elite (Two sub-sets of the most affluent segment in the U.S. with the highest income producing assets, highest incomes, and large sums of money to manage across stocks, real estate, insurance, and annuities)
o Wealth Market
o Business Class
Cohort 1 and 2 Blend
- Upscale Empty Nesters (Four sub-sets of well-off 55+ with sizable income producing assets and retirement accounts with large portfolios of securities and real estate as well as accumulators of insurance and annuities typically with the assistance of financial planners and insurance agents)
o Retiree Chic
o Leisure Land
o Travel & Antiques
o Comfortably Retired
- Retirement Blues (Five sub-sets of 55+ with low levels of income and assets and very modest life styles)
o Retirement Ready
o Hunters & Collectors
o Urbanistas
o Senior City Blues
Impaired Risk
Underwriting impaired risk tends to be more prevalent with our two cohorts, particularly with the 65+ group. This is one of the faster growing segments for the insurance industry with life, annuity and long term care products. This is also becoming an important area for group and work site benefits such as health, disability and disease specific insurance. According to the U.S. Department of Labor, the number of employed people still working between the ages of 65 and 90 has increased from 4.7%, or 600,000 people a decade ago, to 6.4%, or now over 1 million people. This means that the numbers of workers age 65 and over accessing benefits through employers will continue to grow with these evolving economic and life expectancy trends.
Over the last decade, advancements in underwriting and actuarial models, as well as medical science, have made it possible to price all insurance products at competitive rates in ways that once was unavailable to this age group. Underwriting seniors is a different process than underwriting “unimpaired” or relatively young and healthy applicants.
Fast Fact
Top health conditions that become causes of death for those 65+
- Vascular
- Cancer
- Stroke
- Dementia
- Influenza
Once people reach age 65: 80% of seniors report having at least one chronic condition, 50% report at least two, and 30% report having three or more chronic conditions. Additionally, 30% of people 65-70 have reported vascular issues and that number jumps to 70% once you get past the age of 70!
Beyond the obvious underwriting screens that are typically looked for; factors such as recent cessation of smoking, sudden weight loss, frailty and use of assistive devices, ADL impairments, MVR history and work/volunteering/travel schedules are scrutinized more closely with the 65+ group. Underwriting tools that can be used to measure impaired risk include Pulmonary Function Exams to measure decline of lung function, eGFR to measure kidney filtration, Serum Albumin levels as an indicator of “all-cause” mortality risk factors, and MMSE Cognitive Assessments to measure deterioration of visual, verbal, concentration, and orientation levels.
Another important health screen for this cohort is any recent history of falls and broken bones. There is at least a 30% chance that a person will need to move into a nursing home after a fall, and only 33% regain their pre-fall physical condition. Also, there is as high as a 35% chance of death within the first year of a fall.
As the individual ages, certain health conditions shift from being of concern to the norm. For example, seniors will typically experience a slowing of reflexes and loss of muscle mass. Renal and liver functions, as well as pulmonary and vascular capacity can all be expected to decrease. Cognitive abilities will begin to slow, and a certain level of “memory challenge” (not to be confused with Alzheimer’s Disease) will creep into the picture. Also, conditions such as cancer or heart disease that are long in remission, under control and/or being managed by medication become less of a factor in determining overall mortality and morbidity.
Level of education has a direct correlation to income, which in turn has also been proven to have a direct impact to overall health. Baby Boomers are the most educated generation in U.S. history with almost 90% completing high school and then 28.5% going on to earn at least a masters degree. The bottom line is that the better educated someone is, then the higher their income will be and in turn they can expect to be in better health and live longer.
Lastly, an important life expectancy concept to understand is “Morbidity Compression”. Current life expectancy trends indicate that more people than ever are living at a relatively healthy state up to average target ages based on their demographics. But if a person experiences any significant health impairment, then their remaining life expectancy usually becomes compressed. For example, a healthy individual in the 75-80 age range that lives at home, is able to care for and transport themselves, and pursues leisure vocations and social interaction could have a life expectancy of ten or twenty years. But if that individual experiences a TIA/stoke or breaks a hip, and then must either access home care or move into an assisted living or skilled nursing facility, it is more likely that the life expectancy range would compress to less than five years.
The Wild Card: Economic Challenges
There are two inextricably linked fundamentals that determine the quality of life for Baby Boomers and seniors: health and finances. As they age and life expectancies compress, there is less time and vitality available to recover from injury and illness. The same is true of financial “vitality”. People in their thirties and forties have time to recover from set backs in the stock market, housing values, or business and investment fluctuations. Once people reach their sixties, it is too late to start a meaningful savings program (as the benefits of compound interest have long since abated) and if investments and/or property are underperforming there may be little time available to wait for recovery.
Retirements funded by a corporate pension after a life time of service are almost extinct in this country. Beyond Social Security and Medicare, the vast majority of Americans today rely on equity in their homes to be a major component of their retirement. For seniors facing major costs such as health care and long term care, the current state of the economy could not be worse. The impact of the sub-prime mortgage implosion on credit and equities markets has resulted in a huge hit on many American’s net worth via erosion in home equity. In fact the National Association of Home Builders released a report in June of 2008 citing that, $426 billion of equity in the U.S. has vanished. That is almost half a TRILLION dollars taken away from Americans in less than two years!
During an interview with former Federal Reserve Chairman Alan Greenspan in July, 2008 he was quoted as saying that the U.S. housing market is nowhere near the bottom and that our economy is teetering on the brink of recession. He described the confluence of economic factors currently battering the U.S. a once in a century “phenomenon”. Validating his concerns is the most recent reports released on foreclosures showing a 55% increase from July of 2007 to July of 2008. That translates into 1 in every 464 households in this country foreclosed in July, 2008. Maybe even more alarming is the 184% increase in bank repossessions during the same time period. The top states in the country for foreclosures is Nevada, California, Florida, Ohio, Georgia, Michigan, Colorado, Utah, Virginia, Texas, Illinois, and New York.
When Greenspan talks about this “phenomenon” he is talking about the combination of the real estate woes and the alarming pace of inflation in core areas such as food and fuel costs. The impact of these two areas has been causing huge swings on an almost daily basis in the stock market furthering adding to people’s concerns. Energy prices are up almost 30% for the year and food prices have increased 6%. Even with recent declines in oil prices and a drop at the fuel pump, oil prices are still double what they were in the summer of 2007 and grain prices are double what they were in the summer of 2006.
The impact that this is having on seniors is very serious. Home equity is in reverse and savings and equities are being chewed up by inflation and stock market losses. Social programs such as Social Security are not doing much better with the smallest benefit increase in the last four years at 2.3% for 2008. According to the AARP, the number of seniors filing for bankruptcy over the age of 55 in the last year was about 250,000. At this pace, the recent study by Ernst & Young LLP showing that three out of every five new middle class retirees will outlive their financial assets if they do not downwardly adjust their standard of living (expenses) by 24%-37% looks to be optimistic.
During good times, equity in homes and the growth of the stock market can propel a high standard of living in retirement and also help to fund the expenses associated with health care and long term care. But during hard times, when these critical economic engines are not cooperating the outlook can change drastically.
Long Term Care Crisis
The double-edged sword of the senior market is the long term care crisis. Everyone will eventually need to secure some form of long term care and/or assisted living, but no one likes to think about it today and making plans for the future is easily put off until later. In fact, the long term care crisis in the United States is a lot like global warming. There is no denying it is happening and that you are going to be impacted—but it seems like it is far enough away into an uncertain future that today’s needs and priorities take precedence. As is usually the case with the human condition, we seldom plan for a crisis and instead are forced to react to it when it is upon us. One study on how seniors make choices about senior residential and long term care options showed three distinct and familiar patterns:
13% actively plan for retirement and how they will live as they grow older and frailer
40% actively plan following a “near catastrophic” health event such as total joint replacement or extended illness
46+% never plan and must make decisions about site of care in a very short period of time, usually while still in the hospital
On the one hand, the exploding senior population and their inevitable need to finance senior residential and long term care options should be a tremendous opportunity for the financial planning and insurance agency world. The problem is that the combined impact of our nation’s economic strains and people’s tendency to not plan and save, is brewing a perfect storm that threatens to sink the vast majority of people’s chances for quality “golden years”. The costs of healthcare and long term care alone are staggering. According to a MSN Money.com Market Watch report (March 28, 2008) “a sixty five year old couple retiring now would need more than $300,000 set aside just to pay for health care costs over twenty years and would need $550,000 if they were to live into their early nineties.” Particularly alarming, according to the report, is the fact that these numbers, “haven’t factored in the costs of nursing homes, assisted living facilities or home health aides—and those costs are staggering!”
Currently in the U.S. there are over 1.5 million people living in nursing homes. Of that population, 72% are female and the 85+ population is growing the fastest with a 20% increase. The oldest old are living longer and they are costing more than ever to support with private or public funds. This is important to consider when planning for the future because as of today, 56% of residents will live in a nursing home anywhere from one to five years or more (with a national average of 30 months).
For the population of 900,000 people currently living in assisted living facilities, the vast majority of financing is private pay. In addition to the monthly cost for a room, apartment or cottage; residents may also face one-time entrance fees ranging from $60,000-$350,000 for higher end “resort style” or “cottage” properties. Additional monthly fees ranging from $348-$522 are often times charged for transportation, dementia care, meal delivery to residence, and other extras that would add to quality of life.
As of 2000, the most recent year for data, there were 1,355,290 people receiving some form of extended home-based healthcare. Of that population, 70% were from our 65+ cohort and 65% were female. The average time span of care was for 312 days, and over 93% of the care was being delivered by Medicare/Medicaid certified agencies.
Fast Fact
Current national average costs across the three categories of long term care for 2008
Home/Community-
Non-Medicare Certified, Licensed “Companion” Care - $18/hr (4% over 2007)
Non-Medicare Certified, Licensed “Home Health Aide” - $19/hr (3% over 2007)
Medicare Certified “Home Health Aide” - $38/hr (18% over 2007)
Adult Day Health Care Center - $61 per day
Assisted Living Facility-
Private One Bedroom - $3,008 per month (11% over 2007)
Nursing Home-
Semi-Private Room - $187 per day (4% over 2007)
Private Room - $209 per day (2% over 2007)
With the reality of these kinds of costs and the growing senior population; we will see increasing pressure on publicly funded programs such as Medicare and Medicaid (which combined pays for roughly 80% all long term care related expenses in the U.S.), and moves to make it more difficult to qualify. The economic squeeze of inflation, the real estate crisis and stock market performance are all contributing to declines in tax revenues for the states. When taxes shrink one of the most vulnerable areas is also one of the most expensive for state budgets: Medicaid and other social support programs. The long term care industry and the government at all levels are in agreement on how to compensate. More emphasis must be placed on the individual to pay for as much care and housing as possible with private funds before any public funds are made available. But what are some private funding options that people should be considering?
An obvious source of funds to cover these expenses would be from long term care insurance. The only problem is that attractive tax deductions have never been established to incentivize growth in the market, and it has been stalled for over a decade. As of today, long term care insurance accounts for an anemic single digit percentage of all funding for senior housing and care. That leaves private pay to pick up close to 20% of the approximate total of $200 Billion spent on all long term care service last year. But where do those funds come from if you have not saved literally hundreds of thousands in cash?
A primary option that people have often looked to is cashing in their home through a sale to raise the funds to sustain themselves (or to meet spend down requirements). But, the current real estate market has taught us, as is the case with the stock market, that it is always vulnerable to a correction. Another means to extract equity from a home could be through a reverse mortgage, and it might be a good option for a home healthcare arrangement, but what happens if health conditions deteriorate rapidly and the person must move into a facility on short notice? The home owner is then faced with the dilemma of funds that can’t be used for a setting outside of the home, and a loan that must be paid back immediately.
If a person has built up cash value in a life insurance policy, they could consider taking a loan against the policy or surrendering it for the cash value. Also, if someone attempts to qualify for Medicaid, a life insurance policy would be an “unprotected” asset subject to the 60 month look back period. It would need to be liquidated and spent down on care before eligibility could begin. According to a Federal Government Accounting Office (GAO) report released to the U.S. Congress in March, 2007: when examining a sample population of over 500 Medicaid applicants entering long term care facilities, 38% owned a life insurance policy that needed to be liquidated because it exceeded minimum state mandated asset levels.
When cashing out a life insurance policy, either by choice or because of an eligibility mandate, the superior option is a Life Settlement. This process will ensure that the highest possible value is obtained for the policy through bidding from multiple institutional sources in the secondary market. Also, any tax implications for capital gains realized from a Life Settlement would be offset by deductions based on spending the money for “the entire cost of maintenance in a nursing home or home for the aged” (sec. 1016 U.S. Master Tax Code 2008). The Conning & Co. Research study "Life Settlements: Additional Pressure on Life Profits” found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements. Statistical data gathered on policies “settled” in 2007 continues to verify that the difference between the amounts of money that can be realized through a Life Settlement is significantly greater than through cash “surrender” value. When the time comes to look at funding vehicles to pay for long term care related expenses, cashing in a life insurance policy through a Life Settlement could be an excellent financial move.
Conclusion
Previous generations retired on schedule and then lived the rest of their lives on pensions and government benefits. For the most part, they ceased becoming viable consumers of insurance and financial services. The Silver Tsunami generation will live, work, and stay active much longer than any generation in history. This will prolong their need and ability to continue being acquirers of health and financial security products. And with their expectations for quality lifestyles until the very end—they are going to need every possible financial tool to make it happen.
Sources
AARP Public Policy Institute, Across the States Profiles of Long Term Care and Independent Living, Seventh Edition 2006
Claritas P$ycleNE, Actionable Segmentation Solution
Genworth Financial, 2008 Costs of Care Survey, April 2008
Government Accounting Office (GAO), Report to Congressional Requesters on Medicaid Long Term Care Impact of Deficit Reduction Act, March 2007
Health Care Financing Review, Winter 2002 Study
John Hancock Life Insurance, More Tools for Underwriting the Elderly?, October 2007
Life Policy Dynamics, 2007 Summary: U.S. Life Settlement Market Analysis, March 2008
MetLife Mature Market Institute, Demographic Profile Americans 65+, 2008
MetLife Mature Market Institute, Demographic Profile American Baby Boomers, 2008
MetLife Mature Market Institute, Market Survey of Adult Day Services & Home Care Costs, September 2007
MetLife Mature Market Institute, Market Survey of Nursing Home & Assisted Living Costs, October 2007
MSN Money.com Market Watch, Bleak Retirements for 150 Million?, March 2008
Society of Actuaries, Life Settlements 101: Introduction to the Secondary Market in Life Insurance, October 2007
Swiss RE, Underwriting the Elderly presentation at NEHOUA 24th Annual Seminar, October 2007
Americans for Secure Retirement/Ernst & Young LLP, Retirement vulnerability of new retirees: The likelihood of outliving their asset, July, 2008
The New York Times, Budget Pain Hits States, With Relief Not in Sight, July, 2008
MSNBC.com, Higher inflation brings lower standard of living, August, 2008
MSNBC.com, Economy hitting elderly especially hard, July, 2008
MSNBC.com, Greenspan: Economy ‘on the brink’ of recession, July, 2008
MSNBC.com, Foreclosure filings up 55 percent in July, August, 2008
United States Census Bureau
Thursday, March 6, 2008
Aging and Long Term Care Insurance: A National Policy Perspective
published August, 2007 - Society of Actuaries: Long Term Care Section Newsletter, and InsuranceNewsNet, September, 2007, ProducersWEB, September, 2007, posted on SmartBrief
Aging and Long Term Care Insurance: A National Policy Perspective
September, 2007
Introduction
The aging baby boom generation and the burgeoning long term care financing crisis that lays in their wake has been a subject of national discussion for well over a decade. No one institution, be it public or private, will be able to handle the care of our nation’s aging population alone. The debate about this issue has been ongoing since the administration of FDR conceived of social security and then Lyndon Johnson ushered in the era of Medicare and Medicaid.
We were fortunate enough recently to sit down with Robert Blancato, a principal and president of Matz, Blancato & Associates at their K St. office in Washington, DC to discuss the perspective of national policy makers about the current state of the Long Term Care Insurance industry. Mr. Blancato is a recognized expert and leader on the topic of aging, having spent 30 years in Washington, DC involved in this issue. He was Staff Director on the House Select Committee on Aging’s Human Services Subcommittee from 1977-1988. He currently serves on the Policy Committee and Executive Committee of the 2005 White House Conference of Aging, as appointed by Speaker of the House Rep. Nancy Pelosi. He was Executive Director of the 1995 White House Conference on Aging, as appointed by the President of the United States. In 1998, he was a delegate to the White House Conference on Social Security. Mr. Blancato has worked closely with the insurance industry over the years through numerous initiatives with the major trade organizations and carries of Long Term Care insurance, and he serves on the boards of numerous advocacy and charitable organizations with the mission of improving the quality of life for the aging.
Q & A
Q: Recently in the New York Times there was an article about Long Term Care insurance claims practices. What is your opinion of that article?
A: The article was an unfortunate example of journalistic opportunism to create a more sensational “expose” than was deserved. First of all, the article was written about the practices of one company, but the way in which it was portrayed would lead many to believe that this was how an entire industry conducts its business. That is unfair journalism and it could not have been done at a worse time. This country needs to focus its energies on creating comprehensive solutions to deal with the coming crisis in financing the care of our aging population. Fear mongering and casting an unfairly wide net do not help us attain the real goal of harnessing the collective energies and resources of the private and public sectors in finding ways to ensure an appropriate quality of life for those who can no longer care for themselves.
As is the culture of Washington, DC during a national election cycle, I would not be surprised to see hearings on this issue as inquiries by the major candidates for President have gone to GAO (the Government Accounting Office) looking into discrepancies between Long Term Care insurance and Medicaid funding for services rendered. This is time and energy that should be spent on solutions and unfortunately could end up instead being spent on investigations.
Q: Where are there examples of positive dialogue and progress on this issue?
A: One of the better examples that I can point to is the 2005 White House Conference on Aging. This is a once a decade gathering of a cross section of disciplines, interest groups, and experts from across the United States, with delegations sent from every state, that has been hosted by the President of the United States since President Truman in 1950. The mission statement of the conference (as enacted by law 85-908) is to, “promote the dignity, health, and economic security of older Americans.” 1,200 delegates worked together to prioritize 50 major issues that would impact the aged over the next decade. Second only to renewing the “Older Americans Act” (originally enacted as a result of the 1961 Conference on Aging), the delegates called for a national strategy and effort to address issues around quality, choice, financing, and defining roles and responsibilities for long term care of the elderly as their highest priority.
In my opinion this recommendation from the Conference report is a blue print for action that represents the thinking of the best minds from every state in the Union and should be taken up by Congress immediately. The report acknowledges the fact that this is a task too big for any one sector or institution and that the crisis is a ticking time bomb that should be moved to the front burner—before we are forced to operate in crisis mode.
Q: How do you explain the delays in taking real action and responsibility on the political and consumer fronts?
A: Unfortunately it is human nature to wait until there is a crisis to act. Although the prospect of living in nursing home that is funded by Medicaid dollars, and the quality of life that would afford is a bleak sounding future, it seems so abstract to us that we either ignore or are unwilling to believe that could be our fate. Priorities that are here and today command our attention and dollars, and too many of us delay getting ready for the final days until it is too late. It is the same dynamic for law makers. They are concerned about spending priorities and budgets that will have immediate impact and the “long term care crisis” can seem like it is a long time away, and then it slips on the list of priorities. Unfortunately the end results for us as individuals and as a county if we delay are the same—too little, too late and a poor quality of life as the end result.
Q: What are some potential “tipping points” to spur action?
A: Any significant efforts to reform entitlements will create a whole lot of action on this issue. But remember, this is the third rail of politics and not many dare touch it. A couple of examples of attempts to make changes that would have an impact in this area include: tightening asset transfer rules which would make it more difficult to qualify for Medicaid-- the default payer of long term care services by a vast majority, and “re-balancing” efforts to direct money away from skilled nursing facilities (nursing homes) and towards more community and home/family based care giving. Neither of these efforts has made a significant impact yet. Again it boils down to the simple fact that people don’t pay attention to this issue until it hits home and then changes from being a theoretical problem for others, to a real problem for the individual.
Q: What will it take to get law makers to help stimulate private market solutions?
A: First and foremost LTC insurance will need to escalate the pace of modernizing to stay relevant with how the public wants to deal with care giving. The vast majority of people want to handle care at the community and in-home level. Policy makers would like to encourage this direction because it de-centralizes responsibility and instills in family care givers a personal stake to negotiate in the market for the best value and price of care. Lawmakers favor personal responsibility in health care reform as is evidenced by market innovations such as health savings accounts, and they are equally interested in seeing the long term care market go in this direction as well.
Insurance companies need to keep up with this rapid pace of evolution and must modernize product offerings if they are going to improve their chances at obtaining meaningful tax qualified status from law makers. As LTC policies continue to become multi-dimensional, more constituencies will have a stake in the game and the chances for political and market advancement will increase. The emergence of plans combining life insurance and long term care insurance is an example of market innovation, but the tax code is yet to catch up.
Insurers need to continue examining trends and better understand what the consumer wants. Products designed towards in-home care and supporting family care givers will be a bigger winner in the market and on Capitol Hill, than products geared towards nursing home care.
Q: Is there enough awareness about private market solutions and the burgeoning crisis?
A: There are some examples of effective public advocacy and awareness initiatives over the years. The LTC Clearinghouse has been doing good work for years. The “Own Your Future” campaign made some in-roads in the states where their focused communication effort was deployed. Another example is the broad based coalition, Americans for Long Term Care Security that I headed up out of Washington, DC for a number of years.
I also thought that the launch of the Federal Long Term Care Insurance program was very effective. They launched the plan for federal employees back around 2001 and it was a very well coordinated communication/education/marketing program that drove a lot of new subscribers. The challenge is being able to sustain that level of activity. A stop and start campaign is only effective for a short time and then you need to start all over again at a later date.
The recent New York Times article is a set back for public perception and acceptance of Long Term Care insurance as a viable solution. The industry still needs to overcome quality issues and a negative perception. It is also difficult to overcome the theoretical vs. reality problem with a life issue that seems far off in the future, and one most people don’t want to contemplate.
This reality also makes things difficult for the industry politically because law makers have a mixed opinion about Long Term Care insurance and the future crisis continues to be more theoretical than reality for them as well. This makes it a “second tier” issue compared to health insurance or covering children. There is still not enough confidence in the market or urgency about the future crisis to move tax incentives that would have a real impact on sales.
Conclusion
Mr. Blancato’s observations are common sense and ring true. The Long Term Care Insurance industry has been waiting a long time for the level of sales to match the urgency of the pending crisis. People (and lawmakers) by nature will only react to a crisis when it has entered their lives and becomes reality. How much less expensive and disastrous would it have been to spend money preparing New Orleans to handle a Hurricane Katrina instead of confronting the aftermath? It was known for years that it was just a matter of when and not if the big storm would hit—the only question was one of preparedness. The same is the case with the aging baby boomers and the impact they will have when that storm hits. It is just a matter of when, not if, and it will take the insurance industry, health care providers, individuals, and law makers all facing this reality and working towards a common goal of preparedness to avoid the potential devastation.
Copyright 2007 by the Society of Actuaries, Schaumburg, Illinois. Reprinted with permission.
Aging and Long Term Care Insurance: A National Policy Perspective
September, 2007
Introduction
The aging baby boom generation and the burgeoning long term care financing crisis that lays in their wake has been a subject of national discussion for well over a decade. No one institution, be it public or private, will be able to handle the care of our nation’s aging population alone. The debate about this issue has been ongoing since the administration of FDR conceived of social security and then Lyndon Johnson ushered in the era of Medicare and Medicaid.
We were fortunate enough recently to sit down with Robert Blancato, a principal and president of Matz, Blancato & Associates at their K St. office in Washington, DC to discuss the perspective of national policy makers about the current state of the Long Term Care Insurance industry. Mr. Blancato is a recognized expert and leader on the topic of aging, having spent 30 years in Washington, DC involved in this issue. He was Staff Director on the House Select Committee on Aging’s Human Services Subcommittee from 1977-1988. He currently serves on the Policy Committee and Executive Committee of the 2005 White House Conference of Aging, as appointed by Speaker of the House Rep. Nancy Pelosi. He was Executive Director of the 1995 White House Conference on Aging, as appointed by the President of the United States. In 1998, he was a delegate to the White House Conference on Social Security. Mr. Blancato has worked closely with the insurance industry over the years through numerous initiatives with the major trade organizations and carries of Long Term Care insurance, and he serves on the boards of numerous advocacy and charitable organizations with the mission of improving the quality of life for the aging.
Q & A
Q: Recently in the New York Times there was an article about Long Term Care insurance claims practices. What is your opinion of that article?
A: The article was an unfortunate example of journalistic opportunism to create a more sensational “expose” than was deserved. First of all, the article was written about the practices of one company, but the way in which it was portrayed would lead many to believe that this was how an entire industry conducts its business. That is unfair journalism and it could not have been done at a worse time. This country needs to focus its energies on creating comprehensive solutions to deal with the coming crisis in financing the care of our aging population. Fear mongering and casting an unfairly wide net do not help us attain the real goal of harnessing the collective energies and resources of the private and public sectors in finding ways to ensure an appropriate quality of life for those who can no longer care for themselves.
As is the culture of Washington, DC during a national election cycle, I would not be surprised to see hearings on this issue as inquiries by the major candidates for President have gone to GAO (the Government Accounting Office) looking into discrepancies between Long Term Care insurance and Medicaid funding for services rendered. This is time and energy that should be spent on solutions and unfortunately could end up instead being spent on investigations.
Q: Where are there examples of positive dialogue and progress on this issue?
A: One of the better examples that I can point to is the 2005 White House Conference on Aging. This is a once a decade gathering of a cross section of disciplines, interest groups, and experts from across the United States, with delegations sent from every state, that has been hosted by the President of the United States since President Truman in 1950. The mission statement of the conference (as enacted by law 85-908) is to, “promote the dignity, health, and economic security of older Americans.” 1,200 delegates worked together to prioritize 50 major issues that would impact the aged over the next decade. Second only to renewing the “Older Americans Act” (originally enacted as a result of the 1961 Conference on Aging), the delegates called for a national strategy and effort to address issues around quality, choice, financing, and defining roles and responsibilities for long term care of the elderly as their highest priority.
In my opinion this recommendation from the Conference report is a blue print for action that represents the thinking of the best minds from every state in the Union and should be taken up by Congress immediately. The report acknowledges the fact that this is a task too big for any one sector or institution and that the crisis is a ticking time bomb that should be moved to the front burner—before we are forced to operate in crisis mode.
Q: How do you explain the delays in taking real action and responsibility on the political and consumer fronts?
A: Unfortunately it is human nature to wait until there is a crisis to act. Although the prospect of living in nursing home that is funded by Medicaid dollars, and the quality of life that would afford is a bleak sounding future, it seems so abstract to us that we either ignore or are unwilling to believe that could be our fate. Priorities that are here and today command our attention and dollars, and too many of us delay getting ready for the final days until it is too late. It is the same dynamic for law makers. They are concerned about spending priorities and budgets that will have immediate impact and the “long term care crisis” can seem like it is a long time away, and then it slips on the list of priorities. Unfortunately the end results for us as individuals and as a county if we delay are the same—too little, too late and a poor quality of life as the end result.
Q: What are some potential “tipping points” to spur action?
A: Any significant efforts to reform entitlements will create a whole lot of action on this issue. But remember, this is the third rail of politics and not many dare touch it. A couple of examples of attempts to make changes that would have an impact in this area include: tightening asset transfer rules which would make it more difficult to qualify for Medicaid-- the default payer of long term care services by a vast majority, and “re-balancing” efforts to direct money away from skilled nursing facilities (nursing homes) and towards more community and home/family based care giving. Neither of these efforts has made a significant impact yet. Again it boils down to the simple fact that people don’t pay attention to this issue until it hits home and then changes from being a theoretical problem for others, to a real problem for the individual.
Q: What will it take to get law makers to help stimulate private market solutions?
A: First and foremost LTC insurance will need to escalate the pace of modernizing to stay relevant with how the public wants to deal with care giving. The vast majority of people want to handle care at the community and in-home level. Policy makers would like to encourage this direction because it de-centralizes responsibility and instills in family care givers a personal stake to negotiate in the market for the best value and price of care. Lawmakers favor personal responsibility in health care reform as is evidenced by market innovations such as health savings accounts, and they are equally interested in seeing the long term care market go in this direction as well.
Insurance companies need to keep up with this rapid pace of evolution and must modernize product offerings if they are going to improve their chances at obtaining meaningful tax qualified status from law makers. As LTC policies continue to become multi-dimensional, more constituencies will have a stake in the game and the chances for political and market advancement will increase. The emergence of plans combining life insurance and long term care insurance is an example of market innovation, but the tax code is yet to catch up.
Insurers need to continue examining trends and better understand what the consumer wants. Products designed towards in-home care and supporting family care givers will be a bigger winner in the market and on Capitol Hill, than products geared towards nursing home care.
Q: Is there enough awareness about private market solutions and the burgeoning crisis?
A: There are some examples of effective public advocacy and awareness initiatives over the years. The LTC Clearinghouse has been doing good work for years. The “Own Your Future” campaign made some in-roads in the states where their focused communication effort was deployed. Another example is the broad based coalition, Americans for Long Term Care Security that I headed up out of Washington, DC for a number of years.
I also thought that the launch of the Federal Long Term Care Insurance program was very effective. They launched the plan for federal employees back around 2001 and it was a very well coordinated communication/education/marketing program that drove a lot of new subscribers. The challenge is being able to sustain that level of activity. A stop and start campaign is only effective for a short time and then you need to start all over again at a later date.
The recent New York Times article is a set back for public perception and acceptance of Long Term Care insurance as a viable solution. The industry still needs to overcome quality issues and a negative perception. It is also difficult to overcome the theoretical vs. reality problem with a life issue that seems far off in the future, and one most people don’t want to contemplate.
This reality also makes things difficult for the industry politically because law makers have a mixed opinion about Long Term Care insurance and the future crisis continues to be more theoretical than reality for them as well. This makes it a “second tier” issue compared to health insurance or covering children. There is still not enough confidence in the market or urgency about the future crisis to move tax incentives that would have a real impact on sales.
Conclusion
Mr. Blancato’s observations are common sense and ring true. The Long Term Care Insurance industry has been waiting a long time for the level of sales to match the urgency of the pending crisis. People (and lawmakers) by nature will only react to a crisis when it has entered their lives and becomes reality. How much less expensive and disastrous would it have been to spend money preparing New Orleans to handle a Hurricane Katrina instead of confronting the aftermath? It was known for years that it was just a matter of when and not if the big storm would hit—the only question was one of preparedness. The same is the case with the aging baby boomers and the impact they will have when that storm hits. It is just a matter of when, not if, and it will take the insurance industry, health care providers, individuals, and law makers all facing this reality and working towards a common goal of preparedness to avoid the potential devastation.
Copyright 2007 by the Society of Actuaries, Schaumburg, Illinois. Reprinted with permission.
Subscribe to:
Posts (Atom)
