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
Wednesday, November 12, 2008
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
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