The COVID-19 pandemic has hit the nation’s seniors particularly hard and, for many, exacerbated what was already a dire financial situation. Even before the virus sickened Americans in every state, more than 7 million seniors were experiencing poverty. Millions and millions more were struggling to pay for healthcare. Writing for The Hill, Chris Orestis, argues that seniors need new, “creative ways” to access their assets and use them effectively. He calls on Congress to enact the Senior Health Planning Account Act (H.R. 5958). Introduced in late February, the bill enjoys bi-partisan sponsorship and would change the way life settlements are taxed.
The Value of Life Settlements
Many seniors don’t recognize that their life insurance policies are potentially among their most valuable assets. That’s probably because so many never see any benefits at all. “The great majority [of policies],” Orestis writes, “lapse.” When this happens, the policyholder receives nothing — no matter how much they’ve already paid in premiums.
Life settlements are a popular way for seniors to generate value from their life insurance policies without settling for less. In short, the process involves selling a life insurance policy on the open market. Eligible seniors who sell their policies receive a sizable lump sum and immediately eliminate the burden of premiums. This influx of cash empowers seniors, permitting them to take control of their finances. They might choose to cover medical expenses, travel, or anything else they’ve been putting off. However they use these funds, it’s always a preferable alternative to surrendering a plan or letting it lapse.
Why doesn’t everyone opt for a life settlement? It’s often simply a question of awareness. Bryan Nicholson, Executive Director of the Life Insurance Settlement Organization, hopes that H.R. 5958 will help more seniors learn what they’re missing. In a company press release, he wrote, “[H.R. 5958] will increase awareness that life insurance policies are an asset” and that seniors don’t need to lapse or surrender.
The Senior Health Planning Account Act
Currently, seniors who are chronically or terminally ill are entitled to tax-free life settlement payouts. For others, payouts are taxed in three phases:
- First, the buyer makes a tax-free payment equal to the policyholder’s total premium payments.
- Next, income tax is deducted from additional proceeds (up to the policy’s surrender value).
- Last, capital gains taxes are deducted from any additional proceeds.
Representatives Brian Higgins and Gregory Steube reached across the aisle in February to propose H.R. 5958. If passed, it would create a new tax-free way for seniors to sell their policies and reap the benefits — by making a tax-free investment in a healthcare savings account. Seniors could then access these funds as needed to address eligible healthcare costs.
Even when the economy is booming, millions of policies worth billions of dollars are lapsed or surrendered every year. Lapse rates spiked during the last economic crisis and they’re all but certain to spike again. The bill’s sponsors and advocates like Orestis believe it could not only help seniors regain financial independence, but also “generate substantial additional tax revenues.”
Do You Qualify for a Life Settlement?
With or without H.R. 5958, a life settlement could help you make the most of your assets and avoid costly premiums? Do you qualify? Apply for a quote today and find out.