In this article we will cover:
- How to get cash out of your life insurance policy.
- What is a Life Settlement?
- Medicaid and its role in LTC
- New Options for Life Insurance
- Selling your Life Insurance Policy
- Other Options to pay for Long Term Care
- Best Way to pay for long term care and more….
ADVANCED TOPIC: How to leverage your life insurance policy.
Selling your life insurance policy
Life Insurance cash value could help you pay for medical or long term care expenses expecially if you do not have Long term Care Insurance. If you have owned your insurance for an extended period of time – 20 or more years, you may have a considerable sum built up within the policy. However, if this is what you are considering, you may find better alternatives.
The longer you have been paying on the policy, the larger your payout will be, assuming you have not borrowed or withdrawn cash previously. If you have had the policy for only a few years, the amount of money you would receive really wouldn’t amount to much.
While cashing in life insurance is a time-honored solution, there are a number of options which may result in a more substantial payout. When you cash in your life policy, you receive the exact amount of the cash value, and you no longer have a death benefit, which can present a difficulty for your loved ones upon your death.
Some insurance policies have a built-in delay factor, up to 6 months, to protect themselves from lots of folks cashing in their policies at the same time. However, at no time in recent history, has that provision been used. So, it’s pretty safe to say this is the quickest method of obtaining your cash.
Life Settlement and Viatical Settlement
Let’s look at the big three: life settlement, viatical settlement and policy loans. First, the terms life settlement and viatical settlement are often confused or used interchangeably, but there are important differences.
Life settlement is generally entered into by a relatively healthy person in late middle age who doesn’t really need the life insurance anymore and could use the proceeds to fund retirement activities, such as travel and hobbies. In this case, the buyer takes over the policy premiums, if any, and becomes the owner of the policy. Upon death, the proceeds would be paid to the buyer or their designated beneficiaries. The insured receives a lump sum much greater than the cash value payout would have been.
A viatical settlement is more difficult to arrange, since the insured must be terminally ill with a life expectancy of less than 24 months, and medical records must be produced to verify their condition. The policy usually has to have a face amount of at least $70,000 to be considered, although some companies will consider lesser amounts. It is not unusual to receive a payout of 40% of the death benefit.
Both life settlements and viatical settlements can be arranged with term, whole life or universal life policies. Term policies generally do not develop cash values, but the fact that the death benefit will be paid within a certain number of years is what gives these policies worth in a settlement situation.Term policies are almost always convertible to whole life contracts, which would give the policy permanence and allow the death benefit to be paid out on a guaranteed basis, no matter how long the insured lives.
It is always best to check with several companies before deciding on one to do business with, and it is highly recommended to work with a licensed settlement broker, as laws vary from state to state.
One downside of these settlements is that your beneficiaries may receive nothing if the whole policy is put into the settlement. So, in your deliberations, be sure to factor in their feelings, and perhaps find an alternative method of giving them a sentimental inheritance of some type.
A second consideration would be final expenses. One of the ways you could think about is to prepay these expenses with a portion of the settlement you receive.
There are several ways to provide for final expenses. One way would be to fund a small policy or annuity earmarked for final expenses that would be paid on death. There are guaranteed issue policies which don’t require a person to be healthy. No medical questions are asked on the application.
Another way would be to go to the funeral home directly and prepay there. This could be a little risky, due to the fact that the funeral home could go out of business, or family members might have a different idea of how to handle the funeral arrangements.
A third way is to designate a bank account to be paid on death to a trusted family member, with the understanding that the money would be used for the final expenses.
There is now a new twist on these settlements. Under the right circumstances there can be a portion of the death benefit that remains with the insured. For example, let’s say the policy has a face value of $3,000,000. The insured could keep $1,000,000 of coverage and still receive a payout for the amount sold, with no more premiums due. This may be the most attractive option for those with a hefty amount of life insurance.
One more factor to note: you don’t have to worry that the new owner will hire a hit man to send you to an early grave, in order to collect. These policies are grouped together so your anonymity is protected.
Lastly, you would want to consult your tax advisor to make sure you are not creating a tax liability for yourself by receiving more money than you paid into the policy.
Can I take a loan from my life insurance policy?
Every whole life and universal life policy has a policy loan provision. The insured can borrow the cash value and pay nominal interest on the loan, without incurring taxation. This loan will reduce the death benefit, but as long as the policy stays in force, the loan doesn’t have to be repaid. This is a painless way to raise quick cash, but the risk the insured runs is that the policy may lapse if premiums are missed. In this case, taxes may be due on the cash borrowed from the policy.
One caveat: the insured needs to make sure the policy is not a MEC (Modified Endowment Contract). Otherwise taxes will be assessed on the loan. A MEC is established when a policy is overfunded according to government guidelines established in 1988.
Will Lenders take my Life Insurance as Collateral Loan for a loan?
Finally, an insured may use the cash value in a policy as collateral for a bank loan. This way the insured can keep the policy intact, knowing that the bank loan will be paid back. The MEC requirements apply to bank loans as well.
The Future of Life insurance.. New Kids on the Block
New forms of life insurance have been surfacing of late, as the needs of insureds change with modern life. One such form is the Accelerated Death Benefit, which incorporates within the policy a way to fund nursing home, assisted living and home care.
If you have one of these newer policies, it can be set up to allow you to take a large portion of the death benefit to pay for needed care. If you never need care, then the death benefit and cash value remain intact, and the entire death benefit goes to the beneficiaries. It is becoming more common that this type of policy is used instead of a standard long term care policy. This way, the death benefit proceeds will be used either as payment for needed end of life care, or as payouts to beneficiaries.
The probability is that both of these types of payouts will happen. The more money that is paid out for care, the less the beneficiaries will receive upon your death. With a long term care policy, if care is not needed, nothing is paid out. Thus, the standard long term care policy is becoming less popular, with its use-it-or-lose-it terms.
Another wrinkle, although it is not life insurance, will fund your care using an annuity. The catch here is that you must have a considerable amount of money to invest – say, $100,000 to $300,000. You may be able to use a life or viatical settlement to fund this annuity, giving you the best of both worlds.
Because the long term care market is evolving in response to consumer demand, more options may be available later, but the approval of such policies often is tied to the state of the policy owner’s health. Therefore, it is best not to delay the purchase, lest your health decline and you are unable to qualify.
Does Medicaid pay for long term care?
THE PAYOR OF LAST RESORTS –There is another consideration when deciding how to pay for long term care. Very few Americans can shell out upwards of $7000 a month ($84,000 a year) for several years without running out of money. Even if the patient has a long term care policy, there is a limit to how long it will pay and how much it will pay.
Enter Medicaid, the payor of choice when the money runs out. It’s important to know that there is a safety net. They don’t throw you out of the nursing home when you run out of money.
One very important consideration, however, is that you need to have enough money to start with so that you can choose the nursing home that best serves your needs, and be able to pay for it for at least a year or so.
Medicaid, also known as Title 19, was established at the same time as Medicare, within the same piece of legislation, in fact. The difference between Medicare and Medicaid is that Medicare is qualified for by age, disability or survivorship. Medicaid is qualified for by income, or rather the lack of income. The less income and/or assets you have, the more likely you are to qualify. Medicaid doesn’t pay the whole cost of a nursing home stay, but the nursing homes are willing to accept what they can get.
Best Way to pay for long term care?
The answer is, then, that there are several ways to pay for long term care, and life insurance cash value is certainly one of them. Now that you know cashing in life insurance is but one of many choices, we strongly advise you to consult a professional to help you choose the best one.