Life Settlements and Long-Term Care: What You Need to Know (Episode 11)

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Darcy Grabenstein: Hello from SmartLinx Solutions! In today's podcast, we'll discuss life settlements and how they not only benefit those who may be in need of long term care, but the long-term care facilities as well. Our expert is Bryan Freeman, president of Habersham Funding LLC, which he founded in 2001. He has been a licensed life insurance agent for 30-plus years. Bryan has been honored by the Life Settlement Review as one of the ten most influential people in the settlement industry internationally. He served an unprecedented four terms as president of the board of the Life Insurance Settlement Association, which is the industry's premier trade organization. Welcome, Bryan.

Bryan Freeman: Good afternoon, Darcy. I'm glad to be with you.

DG: So, Brian, before we dive into today's topics, could you just tell us a little bit about the services that Habersham Funding offers? And do you focus strictly on life settlements, or do you offer other insurance services as well?

BF: Yes, I can, I'm glad to tell you about Habersham Funding. We focus solely on life settlements at Habersham Funding. Now we have a deep background in the life insurance business, but that just serves to give us insight into all the uses of life insurance. And all we do is assist people with exit options for life insurance to provide money for care, housing, or any other reason they want to use the money.

DG: Got it. So, tell us what exactly is a life settlement, and how it can be used to help someone who's seeking long-term care for themselves or for a loved one. And is that the only use for settlements, or are other uses permissible?

BF: Well, any use of the life settlement is permissible because a life insurance policy that you sell is a personal asset, so once you sell it you can use the proceeds for any reason. And a life settlement is used by seniors and by others. In fact, life settlements are used by seniors, and we're going to talk about a lot of those reasons today. But they're also used by younger people who are terminally ill, who sell their life insurance for a portion of the face value so that they can use the money to get to the end of their life with some dignity. And, of course, seniors, we'll talk a lot about them, why they might want to use it for housing and long-term care. Now, a life settlement is the sale of a life insurance policy for more than the cash surrender value, if your particular type of policy has a cash surrender value, but less than its face value. Typically, the settlement amount is four to eight times cash surrender value. But many times it's even 100 times greater than cash surrender value. So yeah, it can be quite large.

DG: Yes. So, Bryan, why do long-term care professionals, nurses, or others assisting consumers need to know about life settlements?

BF: Well, life settlements are just another financial option. They're an option to help people to provide a private solution for their care. Now, life settlements have been around for around a hundred years. In fact, there was a Supreme Court decision around — they didn't call it life settlements then — but in 1911 there was a Supreme Court decision around what we would now call life settlements. And they'd just been done between family and friends. But nearly for the last 30 years, we've done it as a commercial enterprise. So, you now have an option to come to companies like Habersham Funding and seek money for your life insurance policy.

Now, why should families know about it? Well, because clearly, knowing about a life settlement can make a world of difference to someone in a time of need. And, you know, for professionals who are in the long-term care business, they really need to know because it helps people who are trying to assess all their resources to get into long-term care facilities, to receive long-term care of any type, whether it's at home or in a facility, or in a family member's home to pay for the tremendous cost that we now call long-term care.

DG: So, are life settlements recognized in the industry and accepted in the long-term care industry?

BF: Well unfortunately, Darcy, life settlements are really not well known at all. Not only in the long-term care industry, but the public doesn't know. You know, we're in an evolution of the industry where people are still learning that this is an option. But life settlements can really make a big difference, because it helps to get into if you've got private funds, clearly it helps to get into the facility of your choice. So, if you're out looking for a place to go for long-term care, you're dependent upon the government, you're going to have certain options, but they're not nearly as wide, and many would say not nearly as good as if you had your own private resources to pay. So, understanding a life settlement not only can help get into a facility that you want to, maybe close to home, or one that you think can provide better care, but it can help you stay in a care situation that you want, too.

DG: Right. So, can anyone qualify for life settlement? Are there criteria? I know you mentioned that terminally ill patients can use life settlements. Is it based on life expectancy? How does that work?

BF: Yes, it is. In fact, life expectancy is a major part of the equation when you're looking at life settlements. So, the reason that terminally ill people can qualify is clearly, they have a shortened life expectancy. Of course, the same is for seniors, that the senior has a shortened life expectancy. It may not be really short. For example, people who are terminally ill may have a life expectancy of six months, nine months, 12 months, whereas a senior, we can buy policies from seniors up to 12, 13, 14 and sometimes 15 years life expectancy. So yes, you do have to qualify.

DG: So what kind of life insurance would someone need in order to conduct this settlement?

BF: Well if it's called life insurance there's a good chance that you can life settle the policy. Now, not all policies qualify but most do. Especially most policies that are held by seniors do qualify for life settlement.

DG: So, I'm sure listeners would like to know, how much does it cost to conduct a life settlement, and how long does that process take?

BF: Well, you really shouldn't be out of pocket when you look at life settlements. The life settlement provider that you're dealing with should absorb that cost — collecting your medical records, getting the information from your insurance company, assessing your life expectancy. They will absorb cost and you shouldn't be out of pocket to do that.

DG: And what happens to a life insurance policy if someone doesn't transact the life settlement?

BF: Well interestingly enough, and really a big surprise to most people, is the fact that most life insurance policies are abandoned prior to. It's very interesting. And, of course, insurance companies know this, and that most policies lapse. And so, in fact, Milliman company, which is a large international actuarial firm, just a few years ago looked at a particular type of policy called universal life. And what they found is that 88 percent of all universal life policies are abandoned prior to paying a death claim. And what's more interesting is that, when you look at term insurance, it's closer to 98-99 percent of those policies lapse without paying any form of claim. So, most policies disappear.

DG: So, Bryan, what are the tax ramifications of conducting a life settlement? And are the heirs left without any death benefit at all? Are they left high and dry?

BF: Well, let me answer the second part of that question first. The heirs, when the policy is brought to market to sell, these are custom transactions. So, they can be structured within the confines of the wishes of the people who are selling them, the policy owner. So typically, the policy owner wants cash up front, and so if that's the case and they want all cash, then when they die there is no death benefit. But most people save some money to take care of their end-of-life needs of when that becomes something that you need to handle. Now, on the other hand, if a policy seller wishes to receive a death benefit at death, we can structure the settlement that way also.

Now, as for taxes, taxes is a very interesting topic when it comes to life settlements, because there's been a recent change that's been very, very good.

But before I go into that, I'd like to tell you a little bit about the government and everybody from the federal government to the states all around the country who have looked at life settlements. Usually, when a legislative body has looked at life settlements, they want to make life settlements more available to the public. And in fact, starting in 1993-1994 was the first time that the National Association of Insurance Commissioners started looking at life settlements, and you saw New York and California start regulating life settlements. Since that time, we've had the U.S. government look at life settlements a number of times. And every time that the legislators look at this, they want to make them more accessible to people. And in fact, in 1996 they made some life settlements tax-free, and those are for people who are terminally ill or people who are chronically ill. Now, many times, the people who are seniors, while they might not qualify for terminally ill, even though some do, they many times qualify as chronically ill. And even if they don't qualify as chronically ill to get the tax-free settlement, based on the new tax act that just came to law January 1 of 2018, the first part of this year, most settlements are going to be tax free as a result of that law. So, right now, it's a very good time if you have a policy to sell it, and the taxes are good.

Now I do want to tell you just another thing or two about long-term care and life settlements. The National Association of Insurance Commissioners, they always form committees to explore different topics that are in the public's interest. And one of the things that they've had a committee that they've studied life settlements. And their life settlement committee — excuse me, study long-term care, their long-term care committee — is that they've looked at many ways to provide money for people, private-pay and government-pay. And one of the things that they have come out endorsing is life settlements as one of those options.

DG: So, you've talked about regulation. I know our listeners know that the long-term care industry is highly regulated. In fact, some say it's only the nuclear energy field is more highly regulated. But how can consumers know if they're dealing with a reputable life settlement firm?

BF: Well life settlements are regulated on a state-by-state basis. So, you can always check with your state where you live to check on a particular company that you're considering dealing with. But I'm very proud of the regulation that our industry has. Now, when we first started, there was no regulation. In the late '80s, early '90s, there was no regulation. We've come a long way because now, roughly 44 states regulate life settlements. So, there's a good chance that you're going to live in a state that does regulate life settlements. And, of course, we were one of the big supporters of regulation all along the way, because we wanted to make sure that not only our industry was regulated, but to help make sure that people are treated appropriately when they went to settle a policy.

DG: Right. Bryan, could someone's attorney, accountant, or financial advisor help with the settlement?

BF: Absolutely. In fact, many times they do. A number of people come direct without any advisor, but it's not unusual to have an attorney or an accountant or a financial advisor or an insurance agent to represent the policy seller in the life settlement transaction.

DG: So, Bryan, last question. Is there any advice that you'd give to someone considering a life settlement?

BF: Absolutely. Make sure you don't abandon your life insurance policy. Because if you lapse it along the way, you won't have it, even as an option.

DG: Good advice. Well thank you, Bryan, for sharing your expertise with us today. And to all our listeners, thank you for tuning in. For more information on Habersham Funding and services, visit HabershamFunding.com. And if you'd like to learn more about SmartLinx Solutions and our fully integrated suite of workforce management solutions, visit us online at SmartLinxSolutions.com.