“In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin, letter to Jean-Baptiste Leroy, 1789
So far as we know, the best anyone has been able to do about taxes is try to avoid them; death is another matter; if no one has found a way to avoid it, some people have found a way to profit from it. A recent article in the Huffington Post looks at some of the potential consequences of a new law in Texas and suggests that it may have serious consequences for the life insurance industry.
The Texas law in question allows a special consideration of Medicaid eligibility. Usually, eligibility for Medicaid is reserved for people who are virtually without income or assets. The new law allows individuals with a life insurance policy as an asset to enter the Medicaid program if they get a life insurance settlement and use the proceeds specifically for long-term care.
A life insurance settlement of the type allowed under Texas law is called a “viatical” settlement and involves the sale of a life insurance policy to a third party in for a percentage of the face amount. Typically, the purchaser then pays the ongoing premium. It is easy to appreciate the value of purchasing an interest in the life insurance of a person who is 80 years old and has paid premiums for 40 years.
Viaticals have been around for a long time, but Texas is upping the ante on these transactions by state support for their use in paying for long-term care expenses. The Texas law is serving as a model for other states and similar legislation is being considered in California, Kentucky, Florida, Louisiana, Montana, North Carolina and New Jersey.
There are important implications of this state support for third party insurance purchases for the life insurance industry. Life insurance is a risk management tool that many policyholders will use differently over their lifetime. Many policyholders will allow life insurance to lapse as their needs change. Converting a large number of policies into instruments that may require a payout at face value will change how underwriters look at policies and premiums. In the main, it is likely to cause premiums to increase over time.
Washington State has generally taken a rather cautious approach to viaticals. The State’s advisory information on viaticals does not come the Insurance Commissioner as an advisory on Washington Life insurance, but as investment advice from the Department of Financial Institutions. That department offers many cautions about investing in viaticals at all.
You may think the whole business of viaticals seems a bit creepy and particularly so if encouraged by the state. You might have a lot of company in that thought. Viaticals are very sophisticated investment devices that can make money for investors but are hardly a win-win situation. For many seniors there may be better options for realizing value from their life insurance policies than offering them up for sale.
In this complicated financial area it is best to know all of your available options before you make a decision to sell an interest in a life insurance policy. You can always talk to an insurance professional at Homer Smith Insurance to explore the options available.