If you speak to a life settlement broker in the US, they will tell you that one of the most oft-cited reasons why an American senior sells their life insurance policy is to help towards funding their medical care in older age.
That medical care is, when compared to the rest of the world, expensive. In December last year, a survey conducted in 10 countries – Australia, Canada, France, Germany, the Netherlands, New Zealand, Sweden, Switzerland, the United Kingdom, and the United States – by the Commonwealth Fund found that Americans pay more and are more likely to postpone or skip needed care because of costs than their counterparts in most other wealthy countries.
“This study highlights how vital Medicare is for older adults in the US, but it also underscores the challenge of affording needed care. Rising costs are forcing many older Americans to pay more out of pocket, leading to delayed care, poorer health, and higher long term spending,” said Gretchen Jacobson, Vice President, Medicare at The Commonwealth Fund in the accompanying press release.
Selling a life policy is one way for seniors to cover the expenses of health care and long-term care. When a policyholder does sell their policy, however, the taxman can come knocking. If they make gains over and above the premiums they have already paid, it is taxed in two ways; one tranche is taxed as ordinary income, and another as capital gains (different criteria apply to each). These sorts of tax consequences can serve to dissuade policyholders from even considering selling their policy.
Imagine, then, if there was a way that an American Senior could sell their life insurance policy to help them with their healthcare costs without having to worry about calculating or paying these taxes?
Five years ago this month, H.R.5958 – Senior Health Planning Account Act (SHPAA), was introduced by Representative Brian Higgins (D-NY) and Representative Gregory Steube (R-FL) which would have provided exactly that. (Representative Kenny Marchant had introduced a similar bill the prior Congress in 2018).
The SHPAA would have allowed seniors to put the proceeds of a life settlement into a tax-deferred/tax-free savings account for the senior and their family to use for health care and long-term care expenses. Advocates for the legislation, including the Alliance for Senior Health Care Financing (ASHCF), an industry-supported advocacy organization founded and led by Michael Freedman, CEO of Lighthouse Life Solutions, said that millions of seniors would be able to access billions of tax-free dollars to pay for their own health care, saving individuals, families and the government from paying these costs themselves.
“The SHPAA helps seniors make the most effective use of valuable, but often overlooked, asset they already own – their life insurance policy – to fund their health care, rather than relying on loved ones or taxpayers,” Freedman said at the time.
A federally approved, tax-free mechanism such as the SHPAA would, arguably, make a big difference to many Americans.
“Healthcare costs in America are incredibly high. Already, many seniors cannot afford to move into a senior care home, which is forcing them to ‘age in place’, where they retrofit their home according to their individual needs,” said Rob Haynie, Managing Director at Life Insurance Settlements.
“Often, seniors move in with their adult children or the adult child is forced to leave the workforce to care for their aging parents. So, a life settlement without the worry of taxes would benefit the senior and the child in caring for their parent,” Haynie added.
Indeed, the life settlement industry was quick to throw its support behind the legislation. In early March 2020, the Life Insurance Settlement Association (LISA) supported the introduction of the SHPAA. LISA cited long-standing precedent in federal law that incentivised working Americans to save and invest in their health care with deferred income payments.
But then Covid-19 came along, and in mid-March 2020 the US began to lockdown, putting the country’s legislative agenda – along with almost every other part of the economy and society – on pause. Consequently, bills such as the SHPAA essentially had no chance of being considered as the federal and state governments tried to figure out how to manage the impacts of the pandemic.
Representative Higgins tried to resurrect the bill in August 2021, but it never went anywhere. Since Rep. Higgins resigned in 2024 and the ASHCF disbanded, the legislation does not seem to have any advocates anymore.
Making the case for the benefits of a life settlement – i.e., an American Senior selling their life insurance policy for a sum greater than the cash surrender value of said policy – to offset the high cost of healthcare in the US pre-date the SHPAA, however.
For instance, in July 2017, the National Association of Insurance Commissioners (NAIC), the collective body of US state insurance regulators, recommended that American seniors consider a life settlement to pay for long-term care.
“Policyowners who sell their policies receive a lump sum payment that is generally four or more times greater than if they lapsed or surrendered their policy,” the NAIC wrote, citing various independent studies, in their report entitled Private Market Options for Financing Long-Term Care Services.
In the 1990s, the US Congress enacted a federal tax law (Internal Revenue Code Section 101(g)) that made life settlement proceeds tax-free for individuals with terminal or chronic illnesses. This law allowed people affected by AIDS and HIV to pay for their hospital and other healthcare costs.
So, there is clearly precedent and support in state and federal governments for the use of a life policy to help Americans generate their own resources to pay for their costs of care.
But as with all bills affecting US taxes, a significant consideration is the cost to the US government. If H.R.5958 were to pass, would it be a cost or benefit to the American public?
According to the ASHCF, the Senior Health Planning Account Act would actually benefit the US government. In a 2018 report issued by the organisation, the SHPAA would generate more than $2bn in additional tax revenue for the US Federal Government from the increase in transactions would have been $2.149bn and the impact on Federal Outlays would have been $2.042bn, so the US Government would have been marginally in profit if it were to have enacted this bill.
Additionally, the SHPAA would have been something of a silver bullet for the life settlement industry. The tax relief, while helpful for some, would have arguably been transformational for the industry as it would have created significant awareness that a life insurance policy can generate income for seniors in retirement.
“Passing the Act would have led to greater understanding and acceptance about life settlements among tax advisors like CPAs, as well as individual policyowners,” said Haynie.
“Too many seniors already surrender or lapse their policies for little or nothing in return, after years of premium payments. This legislation would have positively impacted millions of American seniors for years to come, whether they used the proceeds for healthcare or not.”
Concerns about lack of consumer awareness is an issue that life settlement market participants consistently cite as one of the biggest barriers to growth of the market. Industry groups like LISA and the European Life Settlement Association, publisher of Life Risk News, promote consumer awareness as much as they can. Many settlement providers and brokers engage in marketing and advertising, which also brings “eyeballs and clicks” from thousands of consumers each month.
The SHPAA would, therefore, have made a significant contribution to the life settlement market, and those in it remain hopeful that it has not seen the end of this ‘silver bullet’.
“It would be an incredibly powerful tool for public awareness if the Senior Health Planning Account Act were to become law,” said Michael Freedman, CEO at Lighthouse Life.
“Congress hopefully will consider enacting this legislation, which is a private sector solution that would benefit millions and millions of seniors and their families.”
