RESEARCH Business Government

INSURANCE
Seniors selling own life-insurance policies need safeguards

Mark Reutter, Business Editor
(217) 333-0568; mreutter@uiuc.edu

3/1/03

CHAMPAIGN, Ill. — An increasingly popular option for elderly or terminally ill people faced with high medical costs is to sell their life-insurance policies to investors in return for lump-sum payments. The current issue of the Elder Law Journal examines the pros and cons of these "senior settlement" or "life settlement" contracts.

The agreements are unique in that they offer immediate benefits to people whose life expectancy is typically limited, but may range up to five years. They have been promoted as a good way to get "quick cash" for seniors who no longer want, need or can afford paying for their life-insurance policy coverage.

Seniors who sell their life-insurance policies – typically at 50 to 80 percent of the policy’s face value – are relieved of paying future premiums on the policy. The investors pay the premiums and are also entitled to the full insurance payout upon the seller’s death. A closely related type of transaction, known as the "viatical settlement," is offered to victims of deadly diseases, notably AIDS.

So how safe and reliable are these policies?

The record is decidedly mixed, according to Jessica Maria Perez, managing editor of the journal, which is published by the University of Illinois College of Law. After a spate of financial scandals a decade ago, the industry has become more respectable and better regulated. Florida and California have taken steps to improve safeguards for both senior and viator claimants.

But in many states, regulation remains poor, Perez noted. Illinois, for example, does not license senior settlement agents or place any regulations on the transactions, which leave the elderly open to dealings with unscrupulous parties
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The journal advocates better protections for seniors living in nursing homes. According to Perez, "A nursing home that is paid more by private patients than by Medicaid has a strong financial incentive to pressure patients to enter into senior settlement agreements, in effect benefiting the nursing home’s best interests and not necessarily the policyholders’ best interests."

Another potential conflict of interest arises if doctors or other care providers purchase the insurance policies of their patients. This means that the rate of return on their investments "would be linked to the length of their patients’ lives," Perez wrote.

Protecting against fraudulent cash settlements with sick or confused policyholders as well as safeguarding the confidentiality of the elderly’s medical records are other areas of concern that need to be addressed by state legislatures.

"This article does not recommend that the elderly sell their life-insurance policies. But as an alternative to allowing a policy to lapse or to obtaining the cash surrender value of the policy, senior settlements offer the elderly a viable financial alternative for long-term care."