Medical records are the life blood of any life or health underwriter. The collection and review of medical records is the most costly, time consuming, and frustratingly inconsistent necessity of underwriting. As the United States medical system begins making truly meaningful progress away from a paper based system to one based on the electronic storage and dissemination of medical records, the impact on underwriters will be transformational. As those familiar with Star Trek know, when the Borg assimilates another individual entity into their collective they proclaim, “Resistance is futile”!
Introduction
Efforts to move the medical system away from a paper based system to one predominantly operating on an electronic platform have been underway for years. The improvements such a system would have for costs, operations and outcomes are obvious but the transformation by hospitals and physicians has been slow. Over the last two decades, factors such as cost, legacy systems, generational reluctance, worries about technological obsolescence, and fear that systems will be underutilized have all contributed to the glacial pace of adoption. But, in the last 3-5 years the pace has begun to hasten. A number of factors are contribution to the increasing adoption of Electronic Medical Records (EMR) on a national level. The cost of technology has dropped dramatically and the internet has been a big factor as well. The generational divide has shrunk with a greater percentage of medical professionals use technology and the internet on a daily basis. Last but not least, the government has come to realize the benefits of adoption and has been instituting programs and incentives to open up the “mainstreaming” of EMR.
From Bits to Bytes
The logic behind EMR is undeniable. Moving from an analog to a digital world holds a host of benefits for every stakeholder in healthcare. The conversation has been going on since at least the 1960’s, and there are some very interesting (and even humorous) visions for the future in older papers that reminds me of a trip to Disneyland’s “World of Tomorrow” attraction when I was a kid. One of the biggest factors to the delay in making the transition is that until relatively recently the technology has not really been there. Most early attempts at adopting EMR were thwarted by the inability of systems from different vendors to communicate with each other. In an attempt to develop the dominant platform, technological silos were built trapping data within a system and would not allow for “interoperability” or transfer of data across different institutions and systems. Interoperability is a key factor to getting any value from EMR. In fact, the discussion now has moved beyond records and has really shifted to connectivity and communication between various participants in a healthcare value chain..
Another key driver of today’s advances for EMR is the internet. The true utility of the internet only emerged in the last five years. Ten and fifteen years ago the internet was still very much in its infancy. Most companies looked at the internet as a curious novelty where they might put up a website that was little more than an electronic brochure. But, sometime around 1999-2000, IBM coined the phrase “E-Commerce” and a shift in attitudes and utilization began. More marketing than reality at the onset, concepts such as “E-Health”, Tele-Medicine, Smart Cards, and Electronic Medical Records all began to take root. Companies such as Amazon, E-Bay, Apple, Google, YouTube and now the social networking phenomenon driven by Twitter and Facebook proved that the E-Commerce hype of ten years ago was actually quite prescient. Not only could business be conducted using the internet, but the internet had proven itself to be the platform to provide the three key elements that any successful EMR initiative must have: Functionality, Interoperability, and Security.
Meaningful Use
Technological capabilities and capacity have increased, costs have decreased and the internet has created the avenue through which meaningful utilization can occur, yet adoption continues to be the exception and not the rule. In a 2008 New England Journal of Medicine survey of 2,800 physicians only 4% reported having a fully functional EMR platform. What will it take for national adoption of EMR? As is the case with most things that we know are good for us, it will take both the stick and the carrot. In the American Recovery and Reinvestment Act of 2009, President Obama specifically included incentives and possible penalties to move adoption of EMR forward at a much faster pace. Individual physicians are eligible for $64,000 in subsidies and hospitals could receive up to $11 million for implementing an EMR program. Medicare and Medicaid certified providers could also face reimbursement penalties if they do not have a system in place. Specific deadlines are yet to be established, but compliance to receive subsidies or avoid penalties will hinge on systems that would meet the definition of “meaningful use”.
Although the final definition of meaningful use is yet to be agreed upon by the Health IT Standards Committee (a federally mandated body), they have published a quasi-mission statement for the concept: “Better healthcare does not come solely from adoption of technology itself but through the exchange and use of health information to best inform clinical decisions at the point of care.” What is enlightening about this statement is that it emphasizes the use and exchange of data as the key and not the technology itself. It is not the “what” that is important, but rather the “how and why”. This is why functionality, interoperability and security become the three critical elements to a successful EMR platform.
Exchange of data
In recent years Health Information Exchanges (HIE) and Regional Health Information Organizations (RHIO) have been developing around the country to empower secure transfer of medical information between participants across a chain of care. This would include hospitals (and their various departments), physicians and practice groups, specialists, and providers of long term care. It could also include labs, pharmacy, and supplies. HIE’s function day-to-day transferring medical records throughout a connected group of stakeholders. The RHIO is the governing body that sets the standards for the HIE to follow in a given region so that all stakeholders can benefit from participation. Following the mandate set by the Office of the National Coordinator for Health Information Technology to create a National Health Information Network (NIHN); RHIO’s establish the local level of interoperable connectivity that must be in place to create a nation wide network. There are almost 200 RHIO’ around the country at various stages of development and functionality with as many as 57 currently reporting that they are actively exchanging health records across a variety of approved participants.
“In the past, technology was too slow, too expensive, unconnected, and technology was too quickly outdated for any meaningful level of adoption and information exchange to happen”, says Dr. Faiz Fatteh, CEO of Soren Technology, “but now the costs are very low if not non-existent, speed and security of connectivity is finally here, and the emphasis now has moved way beyond simply transferring records from paper to digital files, and it is really now all about sharing data through use of an HIE platform connected via a geographically situated RHIO.”
One stakeholder in the process slow to be involved in the development of the NIHN is the insurance industry. When looking at the various RHIO’s in place around the country, the proverbial elephant in the room is the lack of insurance companies involved. Save for a few exceptions and its own failed attempt at creating a national exchange, the insurance industry has not been as actively involved as it should be. Will that change? It appears that with the efforts towards national healthcare reform being driven by incentives and mandates to finally get a national network in place, the insurance industry will be well served to be getting on board as well.
What’s in it for me?
Financial incentives have been targeted at the providers, but the insurance industry stands to benefit from at least three perspectives:
1) Improved underwriting -- Obviously medical records are the key tool used in underwriting life and health insurance. Easier access to the most up to date and comprehensive records on an applicant can only improve the underwriting process, pricing, and outcomes. Anything that can be done to reduce the time and costs involved in collecting medical records and ensure the records collected are complete, would very much be to the advantage of the insurance company and the applicant.
2) Reduced claims -- Underwriting is always the best defense from unnecessary claims. Better coordination of care and records will provide information to avoid duplicative and unneeded treatments, poor outcomes, missed conditions, and opportunities for fraud.
3) Competitive necessity -- As time progresses there will be more pressure from providers with an EMR capacity to submit claims through them and manage the process on their platform. Insurers not participating will find themselves at a disadvantage in the marketplace.
“As one the largest APS retrieval companies in the United States, we touch thousands of medical records every day”, explained Parameds.com CEO, Eli Rowe, “and we know from experience how difficult the task of obtaining records is. The vast majority of records we collect are sent to us as paper and then need to be sorted and scanned before we can deliver them to our clients. We have looked for a long time at what it will take for payers to be successful participants in the growth of EMR, and our work with life, health, DI and LTC insurers have shown us that payers are well situated to play a lead role.”
Because of the central role that underwriting and claims plays in the world of health care, all carriers are in a position to lead and benefit from the rapid adoption of EMR and growth of a national exchange capability. The benefits to health insurers on the claims side and life insurers on the underwriting side are obvious, but DI and LTC insurers will see great benefits on both of those fronts as well. At the end of the day, it is good public policy and good business to be actively involved and help shape the outcome of what is inevitable.
Conclusion
“Progress has, of course, been made in the development of electronic medical record systems (EMRS). Very little of the data that are routinely generated by computer-such as laboratory test results-are now lost to electronic accessibility, as they typically were twenty years ago, when the typical lab instrument would print its results on paper and discard the electronic version. Nevertheless, much of the information on which clinical care is based continues, in most institutions, not to be captured in electronically usable form. This includes the results of patient and family histories, physical examinations, doctors' and nurses' notes, etc.”
That observation on the state of EMR was not written within the last couple of years, it was written 15 years ago by Peter Szolovits from MIT’s Laboratory for Computer Science. How much progress has been made since 1995 when this was written depends on your point of view. Current studies still show actual adoption and use of an EMR system that would meet the definition of “meaningful use” to be very small (various estimates are 1%-4% of providers). Yet, technology and costs are now conducive to rapid adoption, government incentives are in place, standards and regional networks to foster HIE are emerging across the country, and a majority of consumers support the idea of collecting and exchanging electronic medical records with proper privacy and security measures in place.
Ten and fifteen years ago, it was a matter of if EMR could happen. Now it is just a matter of when. We will see more progress in this direction over the next 2-5 years than we have during the last 30. The insurance industry stands to benefit greatly from what is emerging and it is happening faster than you think. “Prepare to be assimilated--resistance is futile…”
Sunday, January 3, 2010
Tuesday, November 24, 2009
Growing Financial Pressure on Seniors as Government Pushes Back
Numerous studies and reports continue highlighting the pressure being placed on seniors to find ways to cover the growing costs of Long Term Care
By Chris Orestis
In a recent report, the government agency that administers Medicare and Medicaid detailed the possible impact of cuts proposed in healthcare reform passed by the House of Representatives. The study states that the proposed $500 billion in cuts would be so severe that hospitals and nursing homes would be forced to stop accepting Medicare as payment.
The report says that seniors would suffer form additional reductions in benefits and services to pay for the $500 billion in reduced spending. The White House answered back against the report’s findings by saying the reductions would come in the form of reduced wasted spending on fraud and abuse in the system and from administrative savings through such efficiencies as expanded use of electronic medical records. Democrats also contend that these cuts would extend the life of Medicare a number of years before becoming insolvent.
As is often the case, both sides are focusing on the aspects of this study that bolster their position in the debate. But regardless of who is right, one truth is clear—seniors need to be preparing themselves for less and less financial support coming from the government. The burden to cover the costs of senior housing and long term care will continue to be pushed back on seniors and their families and people should do all they can to prepare for the inevitable.
Two recent reports add more evidence to the alarming trend of financial pressure being pushed back onto seniors and their families as they reach the age that the costs of long term care play a central role in their lives. In addition to Medicaid cuts in the states and cuts to Medicare being proposed as part of healthcare reform, more money will continue coming out of seniors’ pockets.
The annual MetLife Mature Markets Institute study tracking the costs of long term care in assisted living, nursing homes and home healthcare was recently released showing significant increases in costs over the last year:
- Nursing Home costs rose 3.3%
- Assisted Living costs rose 3.3%
- Home Healthcare costs rose 5%
- Adult Day care costs rose 4.7%
The increasing costs of long term care can be attributed to the most basic economic principal there is: supply and demand. The economic crisis has slowed the construction and expansion of facility based care. Also, more people requiring long term care are having a difficult time selling their homes. As the population of seniors demanding long term care services of every type increases, the supply of options and dollars is decreasing—driving up the costs.
In another alarming report, the costs of Medicare premiums will rise 15% next year. This will push the monthly Medicare premium above $100 for the first time in history. The final outcome of this increase, or measures to offset the increase, is being debated in Congress as part of healthcare reform. Regardless of the outcome, this will now become a yearly struggle as the population going onto Medicare is exploding-- and just when the country is least prepared financially to accommodate the demand.
The realities of a global economic recession intersecting with explosive growth in the senior populations will create increasing pressures for the United States. More people needing help (money), with less resources to go around (money), equals hard choices about how to help those who need it most (money). Increasing emphasis on the individual to shoulder more of the costs of their senior years will grow quickly. Moves to cut COLA’s, raise the minimum age for Medicare and cut Medicaid funding in the states will become more common occurrences.
The Baby Boom generation is still in the early stages of moving into their retirement years and the amount of money required to support these programs is already overwhelming. As economic and demographic trends over the coming years continues to challenge the governments ability to keep pace, seniors and their families must do all they can to prepare themselves financially for the costs of retirement and the even greater costs of long term healthcare.
By Chris Orestis
In a recent report, the government agency that administers Medicare and Medicaid detailed the possible impact of cuts proposed in healthcare reform passed by the House of Representatives. The study states that the proposed $500 billion in cuts would be so severe that hospitals and nursing homes would be forced to stop accepting Medicare as payment.
The report says that seniors would suffer form additional reductions in benefits and services to pay for the $500 billion in reduced spending. The White House answered back against the report’s findings by saying the reductions would come in the form of reduced wasted spending on fraud and abuse in the system and from administrative savings through such efficiencies as expanded use of electronic medical records. Democrats also contend that these cuts would extend the life of Medicare a number of years before becoming insolvent.
As is often the case, both sides are focusing on the aspects of this study that bolster their position in the debate. But regardless of who is right, one truth is clear—seniors need to be preparing themselves for less and less financial support coming from the government. The burden to cover the costs of senior housing and long term care will continue to be pushed back on seniors and their families and people should do all they can to prepare for the inevitable.
Two recent reports add more evidence to the alarming trend of financial pressure being pushed back onto seniors and their families as they reach the age that the costs of long term care play a central role in their lives. In addition to Medicaid cuts in the states and cuts to Medicare being proposed as part of healthcare reform, more money will continue coming out of seniors’ pockets.
The annual MetLife Mature Markets Institute study tracking the costs of long term care in assisted living, nursing homes and home healthcare was recently released showing significant increases in costs over the last year:
- Nursing Home costs rose 3.3%
- Assisted Living costs rose 3.3%
- Home Healthcare costs rose 5%
- Adult Day care costs rose 4.7%
The increasing costs of long term care can be attributed to the most basic economic principal there is: supply and demand. The economic crisis has slowed the construction and expansion of facility based care. Also, more people requiring long term care are having a difficult time selling their homes. As the population of seniors demanding long term care services of every type increases, the supply of options and dollars is decreasing—driving up the costs.
In another alarming report, the costs of Medicare premiums will rise 15% next year. This will push the monthly Medicare premium above $100 for the first time in history. The final outcome of this increase, or measures to offset the increase, is being debated in Congress as part of healthcare reform. Regardless of the outcome, this will now become a yearly struggle as the population going onto Medicare is exploding-- and just when the country is least prepared financially to accommodate the demand.
The realities of a global economic recession intersecting with explosive growth in the senior populations will create increasing pressures for the United States. More people needing help (money), with less resources to go around (money), equals hard choices about how to help those who need it most (money). Increasing emphasis on the individual to shoulder more of the costs of their senior years will grow quickly. Moves to cut COLA’s, raise the minimum age for Medicare and cut Medicaid funding in the states will become more common occurrences.
The Baby Boom generation is still in the early stages of moving into their retirement years and the amount of money required to support these programs is already overwhelming. As economic and demographic trends over the coming years continues to challenge the governments ability to keep pace, seniors and their families must do all they can to prepare themselves financially for the costs of retirement and the even greater costs of long term healthcare.
Wednesday, September 2, 2009
Life Expectancy Compression
The impact of moving into a long term care facility on length of life
Life Expectancy has been on an upward trajectory for over 100 years. According to the most recent report released by the AARP, the age group 65 and above will increase 89% over the next twenty years, and the 85 and older population will grow 74% during the same period. This rise in life expectancy, and the impact on quality of life was explored by James F. Fries in his 1982 study for the National Academy of Sciences entitled “The Compression of Morbidity”. In the paper, Fries contends that the aging population will live longer and in much better condition for a longer period of time due to improved lifestyles, nutrition, exercise, abstinence, and education. The flip side of this dynamic is that once people experience a disease or injury that requires long term care, the result is most often a dramatic decrease of life expectancy. For example, an age appropriately healthy 78 year old that lives an independent and active lifestyle might have a life expectancy of 15 years or greater. If that same individual suffered physical trauma or a disorder that required a move into a long term care facility, their life expectancy could be reduced 50%-75%.
The Assisted Living and Skilled Nursing Home (Senior Living) industry currently houses approximately 2,000,000 people across 60,000 facilities in the United States. This represents one of the biggest components of our country’s health care system and as an industry, theses facilities experience the impact of “Life Expectancy Compression” on a daily basis. Average “length of stay” is a carefully tracked industry benchmark for determining turnover and occupancy metrics. In the annual State of the Senior Housing Industry report released by the American Senior Housing Association (ASHA) the Senior Living industry reported average length of stay in 2008: Assisted Living (21 months), Independent Living (38 months), CCRC (77 months) and Alzheimer’s Care (17 months).
According to the National Center for Assisted Living (NCAL), of those currently residing in an assisted living community 34% will move to a skilled nursing facility due to deteriorating health and 30% will die. The mortality rate of individuals moving into a skilled nursing facility is death within the first 12 months by as much as 50%-60%. The mortality rate is even higher in the first 6 months.
In addition to length of stay experience, there are a number of studies that have been conducted measuring life expectancy across significant population cohorts in various forms of long term care settings:
In the study Mortality-related factors and 1-year survival in nursing home residents it was concluded from a population of over 100,000 residents during a three year period: “Major factors associated with 1-year mortality were identified in both the newly admitted and long-stay cohorts. MDS data can identify major factors associated with 1-year mortality in newly admitted and long-stay nursing home residents.” The first year of residence in a nursing home is the highest risk of death for the resident.
The research paper Death Rates Following Nursing Home & Care Facility Placement concludes: “There is evidence that people with dementia admitted to nursing homes and care facilities die comparatively quickly. It is known that mortality rates are high, initially, when people move from their own homes. Mortality rates are especially high in nursing homes.” The mortality rate for an individual moving into an Alzheimer’s care unit within the first year is greater than 50%.
In recent years the insurance industry has begun taking a closer look at the unique factors of underwriting seniors. As more insurance products are sold to higher risk populations, it has become critical to better understand factors impacting morbidity and mortality. Senior Vice President and Chief Medical Officer of RGA Reinsurance Company, J. Carl Holowaty, MD, DBIM, stated in a 2009 paper published in the Journal of the Academy of Life Underwriting that loss of ADL’s (activities of daily living: bathing, dressing, toileting, transferring, and continence) increases the risk of death. He also cites “will to live” in the elderly “must be taken very seriously” and that there is a relationship between mortality and degree of social engagement and changes in social patterns over time. Moving into an institutional care facility is possibly the single most disruptive event to patterns of social engagement that a person could experience (ranking maybe even higher than the death of a spouse).
What has been observed by daily experience throughout the entire long term care industry, and supported by numerous studies, is that individuals living in institutional care (regardless of age) will have significantly shorter life expectancies than their contemporaries living independently. Mortality is not only driven by their condition, but also by the impact of the significant change in environment. There are intangible factors such as “will to live” and tangible factors such as exposure to communicable diseases in the group environment that all come together to “compress” their life expectancy. Until very recently, actuarial tables and life expectancy calculations have ignored this well known and well documented fact. But now, the reality of this dynamic is becoming more important as the population of people reaching the compression point is increasing. Accurate underwriting in today’s “Silver Tsunami” driven world must take into account that people may be living longer and healthier lives, but when they cross the morbidity threshold, their life expectancies drop dramatically.
Exhibits
1) Length of Stay Data, Group 1 (Skilled Nursing Provider)
2008:
Medicaid admissions= 149 residents @ 379 days
Private Pay admissions= 77 residents @ 335 days
2) Length of Stay Data, Group 2 (Assisted Living Provider)
2007-2009(Q2):
44 deceased residents with a combined average length of stay of 2.9 years
- 75% female
- 25% male
Sources
American Seniors Housing Association, The State of Senior Housing, 2008
Death Rates Following Nursing Homes & Care Facility Placement: http://alzheimers.about.com/od/caregivers/a/surv_nurs_homes.htm
Mortality-related factors and 1-year survival in nursing home residents: http://www.ncbi.nlm.nih.gov/pubmed/12558718
Mortality, Disability, and Nursing Home Use for Persons with and without Hip Fracture: A Population-Based Study: http://pt.wkhealth.com/pt/re/jags/abstract.00004495-20021000000005.htm;jsessionid=KQNQ9hz1WyBL5gzxJTCyh2y2PWYj6FQs2mKGrcYjjpVndtf9g7jP!331639832!181195628!8091!-1
2008 MetLife Market Survey of Nursing Homes and Assisted Living Costs: http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-studies-2008-nhal-costs.pdf
Demographic Profile of 65+ Population : http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-studies-65-profile-20041010.pdf
Demographic Profile of American Baby Boomers: http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-studies-boomer-profile-2007.pdf
Nursing Homes Fact Sheet , AARP Public Policy Institute: http://www.aarp.org/research/longtermcare/nursinghomes/aresearch-import-669-FS10R.html
The Silver Tsunami: http://www.lifecarefunding.com/whitepapers/LifeCareFundingGroupWhitePaper8-08SilverTsunami.pdf
Brown Atlas of Dying: http://www.chcr.brown.edu/dying/BROWNATLAS.HTM
CDC, National Center for Health Statistics: http://www.cdc.gov/nchs/default.htm
The Compression of Morbidity: http://www.milbank.org/quarterly/830427fries.pdf
Life Expectancy has been on an upward trajectory for over 100 years. According to the most recent report released by the AARP, the age group 65 and above will increase 89% over the next twenty years, and the 85 and older population will grow 74% during the same period. This rise in life expectancy, and the impact on quality of life was explored by James F. Fries in his 1982 study for the National Academy of Sciences entitled “The Compression of Morbidity”. In the paper, Fries contends that the aging population will live longer and in much better condition for a longer period of time due to improved lifestyles, nutrition, exercise, abstinence, and education. The flip side of this dynamic is that once people experience a disease or injury that requires long term care, the result is most often a dramatic decrease of life expectancy. For example, an age appropriately healthy 78 year old that lives an independent and active lifestyle might have a life expectancy of 15 years or greater. If that same individual suffered physical trauma or a disorder that required a move into a long term care facility, their life expectancy could be reduced 50%-75%.
The Assisted Living and Skilled Nursing Home (Senior Living) industry currently houses approximately 2,000,000 people across 60,000 facilities in the United States. This represents one of the biggest components of our country’s health care system and as an industry, theses facilities experience the impact of “Life Expectancy Compression” on a daily basis. Average “length of stay” is a carefully tracked industry benchmark for determining turnover and occupancy metrics. In the annual State of the Senior Housing Industry report released by the American Senior Housing Association (ASHA) the Senior Living industry reported average length of stay in 2008: Assisted Living (21 months), Independent Living (38 months), CCRC (77 months) and Alzheimer’s Care (17 months).
According to the National Center for Assisted Living (NCAL), of those currently residing in an assisted living community 34% will move to a skilled nursing facility due to deteriorating health and 30% will die. The mortality rate of individuals moving into a skilled nursing facility is death within the first 12 months by as much as 50%-60%. The mortality rate is even higher in the first 6 months.
In addition to length of stay experience, there are a number of studies that have been conducted measuring life expectancy across significant population cohorts in various forms of long term care settings:
In the study Mortality-related factors and 1-year survival in nursing home residents it was concluded from a population of over 100,000 residents during a three year period: “Major factors associated with 1-year mortality were identified in both the newly admitted and long-stay cohorts. MDS data can identify major factors associated with 1-year mortality in newly admitted and long-stay nursing home residents.” The first year of residence in a nursing home is the highest risk of death for the resident.
The research paper Death Rates Following Nursing Home & Care Facility Placement concludes: “There is evidence that people with dementia admitted to nursing homes and care facilities die comparatively quickly. It is known that mortality rates are high, initially, when people move from their own homes. Mortality rates are especially high in nursing homes.” The mortality rate for an individual moving into an Alzheimer’s care unit within the first year is greater than 50%.
In recent years the insurance industry has begun taking a closer look at the unique factors of underwriting seniors. As more insurance products are sold to higher risk populations, it has become critical to better understand factors impacting morbidity and mortality. Senior Vice President and Chief Medical Officer of RGA Reinsurance Company, J. Carl Holowaty, MD, DBIM, stated in a 2009 paper published in the Journal of the Academy of Life Underwriting that loss of ADL’s (activities of daily living: bathing, dressing, toileting, transferring, and continence) increases the risk of death. He also cites “will to live” in the elderly “must be taken very seriously” and that there is a relationship between mortality and degree of social engagement and changes in social patterns over time. Moving into an institutional care facility is possibly the single most disruptive event to patterns of social engagement that a person could experience (ranking maybe even higher than the death of a spouse).
What has been observed by daily experience throughout the entire long term care industry, and supported by numerous studies, is that individuals living in institutional care (regardless of age) will have significantly shorter life expectancies than their contemporaries living independently. Mortality is not only driven by their condition, but also by the impact of the significant change in environment. There are intangible factors such as “will to live” and tangible factors such as exposure to communicable diseases in the group environment that all come together to “compress” their life expectancy. Until very recently, actuarial tables and life expectancy calculations have ignored this well known and well documented fact. But now, the reality of this dynamic is becoming more important as the population of people reaching the compression point is increasing. Accurate underwriting in today’s “Silver Tsunami” driven world must take into account that people may be living longer and healthier lives, but when they cross the morbidity threshold, their life expectancies drop dramatically.
Exhibits
1) Length of Stay Data, Group 1 (Skilled Nursing Provider)
2008:
Medicaid admissions= 149 residents @ 379 days
Private Pay admissions= 77 residents @ 335 days
2) Length of Stay Data, Group 2 (Assisted Living Provider)
2007-2009(Q2):
44 deceased residents with a combined average length of stay of 2.9 years
- 75% female
- 25% male
Sources
American Seniors Housing Association, The State of Senior Housing, 2008
Death Rates Following Nursing Homes & Care Facility Placement: http://alzheimers.about.com/od/caregivers/a/surv_nurs_homes.htm
Mortality-related factors and 1-year survival in nursing home residents: http://www.ncbi.nlm.nih.gov/pubmed/12558718
Mortality, Disability, and Nursing Home Use for Persons with and without Hip Fracture: A Population-Based Study: http://pt.wkhealth.com/pt/re/jags/abstract.00004495-20021000000005.htm;jsessionid=KQNQ9hz1WyBL5gzxJTCyh2y2PWYj6FQs2mKGrcYjjpVndtf9g7jP!331639832!181195628!8091!-1
2008 MetLife Market Survey of Nursing Homes and Assisted Living Costs: http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-studies-2008-nhal-costs.pdf
Demographic Profile of 65+ Population : http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-studies-65-profile-20041010.pdf
Demographic Profile of American Baby Boomers: http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-studies-boomer-profile-2007.pdf
Nursing Homes Fact Sheet , AARP Public Policy Institute: http://www.aarp.org/research/longtermcare/nursinghomes/aresearch-import-669-FS10R.html
The Silver Tsunami: http://www.lifecarefunding.com/whitepapers/LifeCareFundingGroupWhitePaper8-08SilverTsunami.pdf
Brown Atlas of Dying: http://www.chcr.brown.edu/dying/BROWNATLAS.HTM
CDC, National Center for Health Statistics: http://www.cdc.gov/nchs/default.htm
The Compression of Morbidity: http://www.milbank.org/quarterly/830427fries.pdf
Life Settlements: The Legal Rights of Insurance Policy Owners
The right of a policy owner to engage in a Life Settlement was guaranteed when U.S. Supreme Court Justice Oliver Wendell Holmes ruled in 1911 that life insurance is personal property and the owner is protected by all the same inalienable rights that any owner of real estate, stocks or any other assets enjoy. 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 $13 billion in transactions completed in 2008.
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. The Wharton Business School issued a study where they observed, “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 study also went on to observe that a life settlement, “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 right of a policy owner to engage in a life settlement is guaranteed 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
A number of insurance industry organizations such as the National Association of Insurance Commissioners (NAIC), National Council of Insurance Legislators (NCOIL), American Council of Life Insurers (ACLI), National Association of Insurance and Financial Advisors (NAIFA), American Association of Life Underwriters (AALU) and the Life Insurance Settlement Association (LISA) have also recognized the legal rights of a policy owner to liquidate a life insurance policy through a life settlement.
During a panel session at ReFocus 2008, jointly presented by the ACLI and the Society of Actuaries, industry CEO’s agreed on the need for Life Settlements. Stuart Reese, chairman, president and CEO of MassMutual Life Insurance Company said that if a policy is first 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.”
“The Life Settlement industry provides an important and efficient function to the insurance marketplace-- and it is a practice established by the Supreme Court”, said Chris Orestis, President of Life Care Funding Group (www.lifecarefunding.com), “In light of the long standing Supreme Court ruling on the transferability of insurance as property; those holding a policy that they no longer need will always be able to maximize the value of that property through a life settlement transaction.”
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. The Wharton Business School issued a study where they observed, “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 study also went on to observe that a life settlement, “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 right of a policy owner to engage in a life settlement is guaranteed 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
A number of insurance industry organizations such as the National Association of Insurance Commissioners (NAIC), National Council of Insurance Legislators (NCOIL), American Council of Life Insurers (ACLI), National Association of Insurance and Financial Advisors (NAIFA), American Association of Life Underwriters (AALU) and the Life Insurance Settlement Association (LISA) have also recognized the legal rights of a policy owner to liquidate a life insurance policy through a life settlement.
During a panel session at ReFocus 2008, jointly presented by the ACLI and the Society of Actuaries, industry CEO’s agreed on the need for Life Settlements. Stuart Reese, chairman, president and CEO of MassMutual Life Insurance Company said that if a policy is first 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.”
“The Life Settlement industry provides an important and efficient function to the insurance marketplace-- and it is a practice established by the Supreme Court”, said Chris Orestis, President of Life Care Funding Group (www.lifecarefunding.com), “In light of the long standing Supreme Court ruling on the transferability of insurance as property; those holding a policy that they no longer need will always be able to maximize the value of that property through a life settlement transaction.”
Wednesday, December 17, 2008
Life Settlements vs. STOLI
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
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, 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.
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