Settlements Are One Option For LTC Funding, But Not The Only One

Given the nature of LTC policies, in particular their pricing, policyholders would be best served by shedding unwanted life policies as soon as possible, Sweeney says. In purchasing LTC insurance, he explains, "the younger, the better. LTC insurance is cheaper the younger you are, unless you're seriously ill."

Once the funds from a settlement are in hand, Goldstein says, the individual has two general options. The first, according to Goldstein, is to purchase coverage using a single lump sum payment. There are not a lot of companies that offer that right now, but the number is growing," he says. Some of these policies offer a degree of flexibility, serving initially as an annuity that can be accelerated to cover LTC costs or even with an added life insurance element.

As laws governing annuities with LTC features change, Goldstein predicts, "You're likely going to see more of these." Currently, money taken out of an annuity to pay for LTC coverage is taxable, he explains, but under the Pension Protection Act, that will no longer be the case starting in 2010.

A second option, Goldstein says, would be simply to take the funds obtained in a settlement, invest it, and use the interest payments or dividends to pay the premiums for LTC coverage on an ongoing basis. This option would create greater flexibility and choice for the individual, who would face a wider array of coverage and pricing options that could be tailored to meet their specific needs, he says.

As with any financial move, there are inherent risks about which policyholders should be aware and potential alternatives that might be a better fit. "As with any financial transaction, individuals have to look at what is best for them," Goldstein points out, and they should consult with an expert to evaluate needs and opportunities.

Brad Feldman, a vice-president at Birmingham, Mich.-based Schechter Wealth Strategies, says the decision to sell a policy in a life settlement should be based upon a client's unique circumstances and objectives. "That's personal choice," he says, noting that selling a policy may carry unintended consequences that would not occur under other options.

"There are some risks that go along with selling a policy," Feldman says, specifically noting that income gained in the transaction could reduce the client's government entitlements or benefits which may have been contributing to their LTC funding in the first place. In addition, Feldman points out that proceeds from a settlement may be subject to taxation.

However, he adds, if the life policy, and the eventual death benefit, is truly unneeded, then a settlement may be the right solution for a client. "Depending on the client's health and need for life insurance, it could be a win-win," he says, noting a client may receive the liquidity from the life settlement to fund LTC needs as well as obtain a replacement life policy that is competitively priced.

Other options also exist, however. For example Feldman points to extra-contractual loans. These are lent based on the life policy's secondary market value, rather than cash value of a policy. These loans offer many of the same benefits of a settlement, such as immediate funds and elimination of the insured's needs to pay premiums, while leaving the policyholder at least some portion of the death benefit.

At least one notable insurer is starting to offer these extra-contractual loans, Feldman notes, and at least one lending firm has signaled its intent to enter the market.

"The thought is that this will be a competitor for traditional life settlements," he says, but he cautions that which choice is best for an individual will always differ from one person to the next.