MAGNA LIFE BLOG
A Wall Street Journal recent article entitled “Millions Bought Insurance to Cover Retirement Health Costs. Now They Face an Awful Choice”, discussed the recent trend of increases in rates for Long-Term Care insurance. The article discusses how many people were told that they would have level premiums to cover medical needs in the future. These consumers paid their premiums and kept their end of the bargain, only to be told that the insurance companies did not correctly estimate the costs and the risks.
This story is analogous to the recent trend in life insurance, where consumers were illustrated a premium stream at purchase. Later, when the insurance companies determined that they were not making the profit they had expected, they have sought to raise premiums after the fact to pass along this miscalculation to the insured.
This article quotes the president of Genworth Financial, Inc., a large seller of long term care insurance, as saying that the companies should never have priced the products as they did, and that the regulators should never have allowed it.
In both the life insurance and the long term care cases, consumers who believed what they were told, and paid their premiums, are now having the rug pulled out from under them. There were companies a decade ago who priced their policies correctly. These carriers suffered as consumers flocked to the more cheaply priced policies. Now the companies who priced the policies correctly do not need to change pricing, while those who undercut and mispriced policies are doing so.
This should not stand. If insurance companies, with scores of actuaries, price products incorrectly, they should stand by that pricing. When they are more profitable than expected, they don’t lower prices and give money back to the insured. Why should it work the other way?
Faced with this dilemma, American seniors must get creative about how to pay for long-term care or risk a major hit to their retirement funds.
The National Association of Insurance Commissioners (NAIC), the U.S. regulatory support organization created by the chief insurance regulators from all 50 states, formed a Long-Term Care Innovations Subgroup to study this issue. The group recently issued a report that identified some viable options for privately funding long-term care costs. Four specific options they laid out included the following:
• Single Premium Permanent Life Insurance Policies
• Annuity Long-Term Care Hybrid Policies
• Impaired-Risk Payout Annuities
• Life Settlements.
Of these long-term care financing options, a life settlement is the only one that does not involve seniors buying anything or spending any money out of their own pockets.
A life settlement is a proven strategy for generating cash from an unwanted or unaffordable life insurance policy. In a life settlement transaction, a senior sells his or her life insurance policy to a third-party investor for an immediate cash payment. The investor then takes over the premiums on the policy and collects the death benefit when the insured passes away.
We’re all now aware that recent tax reform law is the first major tax overhaul since 1986 when Ronald Reagan was President. Noteworthy provisions: the standard deduction has doubled, tax rates are lowered and fewer people deal with the alternative minimum tax. None of this will likely affect 2017 taxes. However, four less-publicized tax reform elements will encourage life settlement growth in an already robust environment.
- Taxes on a life settlement will reduce.
The new law simplifies and reduces taxes by allowing all premiums paid to be included as the cost basis. The previously unfavorable 2009-13 ruling required sellers to remove the cost of insurance (COI) from their premiums when calculating the cost basis. This not only increased tax due, but also made it very difficult to determine a policy’s COI.
- A great majority of Americans are exempt from estate tax.
Before tax reform, few estates were subject to the estate tax, which applies to the transfer of property after someone dies. Now, even fewer people have to deal with it. The amount of money exempt from the tax — previously set at $5.49 million for individuals, and at $10.98 million for married couples — has been doubled. Now less than 0.1% of all estates are expected to be subject to estate tax.
- There’s a new tax credit for non-child dependents, like elderly parents.
Taxpayers may now claim a $500 temporary credit for non-child dependents. This can apply to a number of people adults support, such as elderly parents.
- More medical expenses can be deducted.
For the next two years, filers can deduct medical expenses that add up to more than 7.5% of adjusted gross income. In the past, the threshold for most Americans was 10% of adjusted gross income.
A life settlement is the sale of a life insurance policy for a value in excess of the policy’s cash surrender value, but less than its face value, or death benefit. A policy owner receives a cash payment, while the purchaser of the policy assumes all future premium payments and receives the death benefit upon the death of the insured. According to the Life Insurance Settlement Association (LISA), “An astounding $100 billion+ in face value of life insurance is lapsed or voluntarily surrendered each year by seniors over the age of 65.”
Obviously, paying less tax on a settlement will make it more attractive under the new tax reform, but we expect the other elements mentioned to also encourage policy owners and their advisors to actively consider life settlement options.
With respect to the estate tax exemption, many policy owners now recognize their modest estate no longer requires the tax planning provisions offered by their life insurance policy. For caregivers, the tax credit is likely to encourage more financial understanding of their elderly parents’ finances and the options life settlement affords them. Lastly, more medical deductions may incur more medical expenses which are often paid from proceeds of a life settlement.
Magna believes there is a tremendous opportunity to increase awareness, especially in light of the recent tax reform law increasing the federal estate tax exemption, which may eliminate the need for many policies purchased as an estate planning tool. In those cases, a life settlement may be a reasonable financial planning option. Try our Magna Life Settlement calculator to see if a life settlement is an option for you or your client. http://www.magnalifesettlements.com/calculator
David Serra, President of Magna Life Settlements said of the reform, “Policy owners are rapidly recognizing life settlements as a compelling alternative to surrendering unwanted life insurance policies. Now more than ever, there is a tremendous opportunity to increase awareness so that the potential untapped value of an unneeded life insurance policy can be maximized, especially in light of the recent tax reform law.”
About Magna Life Settlements and Vida Capital Management
Magna Life Settlements has been active in the life settlement industry since 2004 and was acquired by Vida Capital Inc. in 2010. Headquartered in Austin, TX, Vida Capital is an institutional asset manager with over $2.6 billion of assets under management focused exclusively on providing longevity-contingent investment solutions to institutions and individual investors. Vida specializes in the structuring, servicing, financing, and management of life settlements, synthetic products, annuities, notes, and structured settlements. Vida’s senior management team has over 100 years of life settlements and life insurance experience and extensive knowledge of alternative investing. For more information, please visit http://vidacapitalinc.com.
Clay Gibson, Managing Director, Policy Origination
AUSTIN, TX JANUARY 5, 2018 – Magna Life Settlements, a multi-billion dollar originator of life settlements, announces the promotion of industry veteran Clay Gibson to Senior Vice President, Origination and the hiring of Scott Harris as Chief Marketing Officer. Along with the key hires and promotions, the company is expanding its space and moving to downtown Austin.
Clay and Scott will report to Dave Serra, President of Magna Life Settlements (“Magna”), a wholly owned subsidiary of Vida Capital Inc.
Dave Serra, Senior Managing Director, said of the key hires, “We are excited to announce these new hires and promotions which will improve our focus and execution in both the secondary and direct markets to best serve the rigorous expectations of our policy owners.”
Clay will manage all secondary policy acquisitions from direct and indirect sources for Magna.
Scott Harris comes to Magna as Chief Marketing Officer. With 20+ years of experience, Scott was Co-Founder/CEO of Social Factor. Scott previously served in marketing leadership with Premiere Global Services, Dell, Austin Ventures, and Merck. At Vida, Scott’s primary focus will be on developing materials and programs to increase awareness and educate policy owners and influencers of the potential benefits of accessing the life settlement market. He has a BS in Engineering and an MBA from The University of Texas at Austin.
Magna believes there is a tremendous opportunity to increase awareness, especially in light of the recent tax reform law which raised the amount to be excluded from the federal estate tax, of policy owners who previously used insurance as an estate planning tool.
Jeff Serra, Vida Founder and CEO added, “Policy owners are rapidly recognizing life settlements as a compelling alternative to surrendering unwanted life insurance policies. For almost a decade, Magna has led the market in offering a fair market value to policy owners in every state while also delivering compelling returns to investors. With our new team members and changing responsibilities for our most experienced employees we hope to continue to serve the needs of our growing list of constituents.”
Healthcare costs are higher than they have ever been, and the increase doesn’t appear to be slowing anytime soon. Medicare covers only a portion of healthcare costs in retirement, leaving you on the hook for what will likely be a significant chunk.
You aren’t totally powerless against this expensive burden, however. There are strategies and lifestyle design choices that can lessen the effect that these rising costs will have on you. Let’s look at five ways to handle rising healthcare costs when planning your retirement.
Annuity with Rising Income
It’s common knowledge that annuities are a tried-and-true method of funding a retirement. For the uninitiated, an annuity is a long-term contract between an individual and an insurance company which guarantees that in exchange for a lump-sum premium or a series of premiums the insurance company will guarantee an income stream that can last for a certain number of years – or even for an entire life.
What many people may not realize is that some annuities offer income streams that can increase over time. Generally, these incomes increase by a certain percentage per year, offsetting the effects of rising costs.
Are you paying monthly premiums on a life insurance policy that you no longer need? Maybe you’re “over-insured”, or for some other reason, your loved ones aren’t as financially dependent on you as they once were. What you may not know is that you can be relieved of those expensive premium payments, and make money doing so.
A life settlement involves selling your life insurance company to a company who will take over as owner and beneficiary. The settlement company will continue paying the policy premiums until your death, and in exchange, they will pay you a lump sum of cash, which you can use for whatever you see fit – including saving for healthcare costs.
Downsize your Home
Many retirees have the advantage of being free from mortgage payments by living in a home that is paid off. If you’re living in the home in which you raised your family, though, do you really need all that space? Even if you have no mortgage payment, a lot of your budget can be eaten up by property taxes, insurance, repairs and utilities.
For some, selling their home and downsizing is the answer. This can provide extra cash that you can invest or simply save for those inevitable medical costs which aren’t getting any cheaper.
There’s no rule that says you have to retire at a certain age, and many people are finding that working into their later years is rewarding and keeps them feeling young. Delaying retirement gives your assets more time to grow, and every year that you remain in the workforce lessens the burden on your portfolio to take you through your final years.
You don’t have to continue working full-time, either. Some employers allow workers to ease into retirement by going from full-time to part-time. You may also find a new “side-hustle” that gives you pleasure and brings in some extra money in the process. Reaching retirement age doesn’t necessarily signify the end of your money-making years.
Stay active and healthy
You may not have control over the cost of healthcare, but the extent to which you need it can be determined in part by your lifestyle choices. Staying active, eating a nutritious diet, and limiting unhealthy behaviors can help keep you out of the doctor’s office and hospital. This means less of your retirement dollars going to medical bills, freeing up cash for what you choose to do with it.
Retirement is a big deal for virtually everybody. Those fortunate enough to live into their golden years have often spent decades upon decades mapping out how they’d save their money. However, once one reaches retirement, it’s impossible to go back in time and plan for retirement more appropriately.
As such, it’s important to plan for retirement far ahead of schedule. Unfortunately, the majority of United States citizens aren’t taught how to manage their money, especially for retirement – making sense of 401(k) retirement accounts, IRAs, reverse mortgages, and the like is often extremely difficult.
Let’s glance over six pitfalls every upcoming retiree should avoid when planning for retirement – pay attention, take notes, and remember – you’ll be planning one before you know it.
Pitfall No. 1: Underestimating Your Future Cost of Living
Too many seniors underestimate their future cost of living. Doing so can cause you to deplete your saved-up stores of cash too quickly. If anything, overestimate what living for the next thirty to forty years will cost, and adhere to such a plan.
Pitfall No. 2: Not Maximizing Employer-Sponsored Retirement
A majority of employer-sponsored retirement plans feature employer matching up to a certain portion of your income. For example, if an employer offers matching up to 8% of earnings, and you earn an income of $100,000, you could put away $8,000, with your employer matching another $8,000.
That’s free money in the amount of $8,000! While you typically can’t withdraw such retirement income without significant penalties, it’s silly of you to turn down such extra payment.
Pitfall No. 3: Actively Investing Retirement Funds
Investing, in its simplest form, involves converting currency into commodities, bonds, stocks, mutual funds, and other assets that may fluctuate in value. If the overall value of such assets rises over time, some investors would tend to think their investing strategy is good enough to operate their portfolio in real-time, without holding them for several weeks, months, or years. Almost always, active investing is a mistake, often resulting in substantial losses due mostly to human judgment error and making bad decisions thanks to cognitive biases.
Always, always, always hold your retirement portfolio as a passive investor. Any growth-stock mutual fund worth its weight in salt will generate substantial returns over the long-run. To clarify, passive investing means to place your assets in safe investments and hold them for years at a time, or at least rarely sell your holdings once they’ve been purchased.
Pitfall No. 4: Buying New Vehicles
Cars, trucks, boats, recreational vehicles (RVs), and other vehicles depreciate over time, meaning you’ll lose most money you put into such vehicles. As such, you should aim to own a used vehicle older than four years of age.
Pitfall No. 5: Not Having a Plan in the First Place
If you don’t have a plan, your retirement is in big trouble. Get a sensible, reasonable plan immediately.
Pitfall No. 6: Holding Substantial Stock from Past Employers
Employers often offer stock as compensation, which increases loyalty and drive in the workplace. However, once you retire, you should sell off such stock and diversify funds immediately.
Many people purchase life insurance. However, life insurance payouts can only prove advantageous if you pass away, meaning only others can benefit from the redemption of such policies. If you have a life insurance policy, consider setting up a life settlement, in which you sell it to a third party for more than the surrender value, but less than the net death benefit.
Viatical settlements are usually in reference to the sale of someone’s life insurance policy who has been diagnosed as terminally ill, with a life expectancy of 24 months or less. The person who is sick will sell their policy to a viatical settlement provider that is specifically licensed to do the transaction. The provider is usually executing the transaction on behalf an investor funding the viatical settlement. They will offer a lump-sum cash payment equivalent to a percentage of the face value of the life insurance policy. Some states have regulations regarding minimum settlement amounts, which can be as high as 80% of the face value of the policy for terminally ill “viators.” The main reason that people in this type of situation sell their insurance policies is because they need to use their money before they pass away instead of leaving it to a beneficiary. Some specific reasons many people do this is to pay for medical care, living expenses or to make memories before dying.
Another type of similar transaction is a life settlement. This transaction is virtually the same, only the “settlor” or seller of the policy has a greater than 24 month life expectancy. Settlement amounts are often 6-8 times higher than the cash surrender value that a carrier is willing to give. In many cases, people no longer needing or who are unable to afford their policies just stop paying on them, causing them to lapse into worthlessness. Life and viatical settlements enable the policy owner to realize value where they might have previously thought none existed, thereby improving their financial condition while they live.
Who Is Able To Buy Life Insurance Policies?
As stated earlier, policies are typically bought by viatical and life settlement providers. They are able to buy policies using funds provided by investors or loans from other financial institutions. According to the Internal Revenue Code, a provider of a viatical or life settlement is a person or business that regularly buys or takes ownership of contracts of life insurance policies. The purchaser will make a profit by getting the full face value of your policy once you pass away, even though they only paid you a portion of it. This is because they have to keep the policy in force by paying the premiums until it matures. It is important to note that once you sell your policy, your beneficiaries will no longer get a payout once you pass away. Most reputable viatical or life settlement providers require beneficiaries to acknowledge the settlement before any money is paid to the seller of the policy.
How Much Is My Life Insurance Policy Worth?
The amount you will actually receive is going to depend on a number of factors including how much your policy is worth, how much the company will spend on your insurance premiums, and your projected life expectancy. Typically, the longer you have left to live, the less you will be given for your policy.
How To Pick A Viatical or Life Settlement Company To Sell To?
Viatical and life settlement companies or individual providers need to be licensed or registered with a state’s department of insurance. Only 7 states in the U.S. are not regulated. However, settlements can still be effected in those states, and most providers use best practices where no regulations exist.
Before selling your policy to a provider, be sure they are licensed or registered, where applicable, to legally buy your life insurance policy in your state as well as what the state’s requirements may be. This is important for many reasons, not the least of which is because it may play a big role in whether or how the sale of your life insurance policy is treated for tax purposes. In addition, you need to be certain if there are any other fees involved with the sale after you sell it. Always consult a professional when considering the sale of your policy.
Should You Consider Selling Your Life Insurance Policy?
Selling your policy is a personal decision and there is no single correct answer. Below are some important factors to consider first:
•Are their any tax penalties for selling the policy?
•Are your beneficiaries aware of your need to sell your policy?
•Are there other ways to get the money you need for living expenses until you pass?
• Does your policy include a living benefit rider or an accelerated death benefit rider?
Income Tax Penalty Considerations
In a lot of cases, if you are terminally ill and have less than two years to live, you can sell your life insurance policy without any tax penalties. In other cases, if you have been diagnosed as chronically ill and not terminally ill, the funds you receive may only be tax free if you use them to pay for qualified long-term care services.
Again, always consult a professional if you have a policy you do not need or cannot afford, and you wish to realize its true value while you live.
You’ve worked hard for decades. You’ve put in the hours and saved diligently, and it’s now time to reap the rewards. Starting retirement isn’t as easy as simply stopping going to work and watching the checks roll in, though. You want to maximize your retirement experience. These are your years, and you need to live them on your terms. Here are four ways how:
Trade in that expensive life insurance policy for a settlement
Are life insurance premiums eating up your cash? If you have a life insurance policy you no longer need, a life settlement could be a good option for you. Cashing in your life policy with the insurance company may not give you a large sum, but there are companies out there that will buy your policy from you for a significantly higher amount than the cash value offered by the insurer. They will take over as owner of the policy, while you will walk away with a big check and the comfort in knowing you won’t be paying the insurance company another dime. Being relieved of paying expensive premiums can free up cash that you can use for other purposes, while also giving you a sum of money that you can do whatever you please with.
Guarantee income for your life with an annuity
No matter how much you have accumulated in retirement savings, the risk of outliving your income can be a real threat to living in retirement on your own terms. Annuities are unique in that they can mitigate this risk by offering a stream of income guaranteed to last as long as you do. In simple terms, an annuity is a long-term contract between you and an insurance company. In exchange for a lump sum of money or a series of payments, the insurance company will provide income to you for your entire life. The income can begin immediately, or you can defer income for several years, allowing your investment to grow at a set interest rate or based upon the performance of the market. Income can be for your life, the lives of you and your spouse, a certain number of years, or a combination of these features. That can provide some serious peace of mind.
Maximize your Social Security benefits
Knowing you are eligible for Social Security benefits is very rewarding, especially after spending your working life seeing the deductions for those benefits being taken out of your paychecks. What some people don’t know, though, is that it can pay to wait as long as possible before taking Social Security income. Early benefits are typically available at age 62, but the full benefit age is 66 for people born in 1943-1954. Gradually, the full retirement age will rise to 67 for those born in 1960 or later. Don’t leave money on the table. In order to maximize your retirement income, it pays to wait as long as possible.
Truly living in retirement on your own terms means not being beholden to anyone but yourself. A great way to do that is to reduce or eliminate debt. Mortgages, auto loans, credit cards – these are all common types of debt that keep us trapped. Paying off a mortgage or a car may sound extreme, but why not throw a few extra dollars down toward the principal each month? Starting retirement on the right financial foot is paramount, and doing it with as little debt as possible will relieve a great burden of stress.
What does your ideal retirement look like? We hope that these four ideas will help you transform that vision into a reality.
In the 1911 U.S. Supreme Court case of Grigsby v. Russell, the Court ruled in favor of Dr. Grigsby after the physician was denied the rights to a life insurance policy that he acquired from a patient in exchange for medical attention. The individual sold Grigsby his policy for $100, and the doctor continued to pay premiums on the policy until the patient’s death.
Unfortunately, Grigsby was denied the benefits of the plan after the patient’s death because the executor of the deceased’s estate deemed the transfer of ownership as an unlawful wager on life, and therefore against public policy. Dr. Grigsby took his claim to the Supreme Court which ultimately ruled in favor of the doctor and affirmed a policyholder’s property interest in a life insurance policy and corresponding right to assign benefits as he or she pleases.
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A life insurance policy is designed to remain in place for decades, providing you and your loved ones with peace of mind. This is because death benefits can provide loved ones with financial support after you pass away. However, your personal finances can change drastically over time, and you may be in a situation where your life insurance premium is no longer affordable for your budget. You could simply cancel your policy in an effort to save money, but a better idea may be to sell it for cash.
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Magna’s Valerie Coffey having some fun on Austin’s Lake Travis! Stay tuned for more of the #Magna team and their adventures around Austin!