Long Term Care Benefit

There is the new alternative of a Medicaid life settlement. Unlike the traditional life settlement market, the “sweet spot” for this market is smaller face amount policies (less than $500,000).

The proceeds are put into a trust account that can only make disbursements for long-term care. To give policy owners an incentive to enter into this type of transaction, rather than surrendering the policy, upon their death, their beneficiaries would be entitled to receive 5 percent of the face amount or $5,000, whichever is less. Additionally, any unused settlement proceeds that remain in the account at her death would also go to her heirs.

Unlike Medicaid, which would require someone to be in a long-term care facility, they could use the proceeds in the trust account for in-home care. Even if it is determined that in-home care is not practical or desired, an individual could still be considered a “private pay” patient which might substantially increase his/her choices in picking a facility. In addition to leaving their heirs with some remaining death benefit, this approach also benefits the state and federal government by reducing their expenditures until the life settlement proceeds are consumed. It’s a win-win-win for the policy owner, the family and the taxpayers.

Tax implications should also be considered. Although some of the Medicaid life settlement laws would exempt those transactions from state income tax, the proceeds of a life settlement or a sale to a family member could be subject to federal income tax under Revenue Ruling 2009-13. Under this ruling, the sales proceeds could be taxed as a combination of capital gains and ordinary income.

There is one important exception to Revenue Ruling 2009-13, however, which is likely to apply to many Medicaid life settlement transactions. Under IRC Section 101(g), proceeds paid to a terminally or chronically ill insured may qualify as death proceeds and escape taxation entirely.

While the features of a Medicaid life settlement might be aimed at smaller policies, their owners, rather than those that are more affluent, represent a large and underserved segment of the population. When family members can’t or don’t want to buy the policy, a Medicaid life settlement could provide an important option for these policy owners and, at the same time, benefit the taxpayers who are footing the bill for Medicaid. With all these advantages, it is no wonder more and more states are considering Medicaid life settlement laws.

As always, before one of your senior clients lapses or surrenders a policy, it pays to explore all the options, as there just might be hidden value in their contract.