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.