Use Caution If Selling Your Life Insurance Policy to Pay for Long-Term Care

Use Caution If Selling Your Life Insurance Policy to Pay for Long-Term Care

A growing number of older Americans are selling their life insurance policies to help pay for retirement expenses and/or long-term care (LTC). These transactions are also known as “life settlements,” “senior settlements,” or “viatical settlements” if a person is terminally ill. While this may be an appealing option for some, people should use caution.

In a recent AARP article, Selling Your Life Insurance? Proceed With Caution, Bonnie Burns, our Training and Policy Specialist, comments that most people don’t realize: 1) there may be tax consequences to selling a policy, and 2) money from a life settlement could affect their ability to qualify for public assistance like Medicaid.

People also often aren’t aware that their personal health information can be shared widely during the application process. Once someone accepts a settlement, providers can often check up on a person’s health as well. As Bonnie says, people basically sign away their privacy.

Another factor to ponder is whether a person selling their life insurance policy would be able to buy another one later. Each person has a maximum amount for which their life can be insured, and depending on the policy sold, they may not have a substantial amount left to insure. Also, buying another policy when one is older may mean higher monthly premiums.

In addition, because commissions on sold life insurance policies can be as much as 30%, some, though not all, agents can be quite aggressive in their sales tactics.  To protect themselves, people should involve their children in their discussion and consult with a financial or tax adviser before making any choices. They can contact California Department of Insurance (CDI) to make sure the agent their working with is licensed and doesn’t have any complaints filed against him/her.

To learn more about how life settlements work, their history, what to watch out for, and some alternatives, see:

  1. The full AARP article, Selling Your Life Insurance? Proceed With Caution.
  2. Our newsletter article, Gambling on Death? Trends in the Buying and Selling of Death Benefits.

See our long-term care section for more information on options for financing LTC.

Karen Fletcher
Our blogger Karen J. Fletcher is CHA's publications consultant. She provides technical expertise, writing and research on Medicare, health disparities and other health care issues. With a Masters in Public Health from UC Berkeley, she serves in health advocacy as a trainer and consultant. See her current articles.