A new U.S. House bill that has bipartisan support would provide a way for seniors to help cope with escalating health-care expenses. H.R. 5958, the Senior Health Planning Account Act, would enable older Americans to do a tax-free rollover of some or all of the proceeds from the sale of their life insurance policies to fund senior health planning accounts (SHPAs).
The accounts would operate much like health savings accounts (HSAs), which are mostly offered through employers and aren’t available to individuals who are enrolled in Medicare. Seniors would be able to use the accounts and any earnings that accumulate in them to pay for qualified medical expenses, including long-term care.
Seniors—the population with the highest health-care costs—are the only group of Americans that have no tax incentive to save for their health care in retirement, said Michael Freedman, CEO of Lighthouse Life, a life insurance settlement company, and chair of the public policy council at the Life Insurance Settlement Association (LISA).
According to Fidelity Investments data cited by LISA, a 65-year-old couple retiring in 2019 can expect to spend $285,000 on health-care costs during their retirement.
The new bill, which Freedman helped spearhead, would enable seniors to create income in retirement and “provide resources for seniors to pay for a wide and deep list of health-care costs that they might otherwise have to ration or forgo,” he said.
He thinks the legislation could also raise public awareness that life insurance policies can be sold off like other pieces of property—a provision that he says dates back to a 1911 U.S. Supreme Court ruling.
“Most Americans don’t know they have an asset in their drawer that has as much value oftentimes as their most valuable asset, such as the equity in their home,” Freedman said. “If someone can sell their policy for tens of thousands of dollars or even more, that is a game changer,” he said, because it can help fulfill retirement objectives, maintain a standard of living and meet unforeseen needs.
Currently, only individuals who are already terminally ill or chronically ill can sell their life insurance policies without federal tax consequences, he noted, citing section 101(g) of the Internal Revenue Code.
Policyholders should keep their life insurance if they want it or need it, said Freedman. But the reality is that more than 90% of policies that terminated in 2018 were lapsed or surrendered to the insurance carrier, he said. Among seniors, the rate of lapsed policies (which don’t generate any proceeds) has increased by 40% in just the past five years, he added.
A big reason why many seniors drop their policies before they die is they can’t afford the increased premium costs, said Freedman. And sometimes the reason for having the policy no longer exists. A policyholder who has been widowed or divorced, or whose children have grown up, may no longer have a beneficiary, he said. Changes in the estate tax laws have also resulted in less need for life insurance for estate tax protection, he said.