In the December 2009 edition of Best's Review, Al Slavin wrote an article entitled "Settlement Strategies" in which the confusing state of life settlement regulation is made a bit clearer. There are helpful charts and tables setting out the differences between the NCOIL and NAIC models and indicating which states have gone in what directions. One thing he touches on, but does not focus on as much as I think he could, is the possible relationship between increasingly red state budgets, due to the recession, and the changing perspective of state regulators to sales of life insurance policies.
It is in quoting Scott Hawkins of Conning Research that this connection is made. He states: "Unfortunately, a lot of people will impoverish themselves in order to qualify for medicaid to have the state support them in the nursing homes...So to the extent that life settlements are one more option among many that a person may turn to at this point in their life, the states may be interested in expanding that discussion."
That seems to directly relate to the lead in Mr. Slavin's article where he describes ME and WA's new requirement that senior citizens and chronically ill individuals, who are about to surrender their policies, be told of the option to sell their life insurance policies to a third party. And that made me think a little differently about some of the issues presented. In addition to the tables and graphs mentioned above, two actual life settlements are sketched.
In one settlement a 54-year old in poor health settled his/her $928,526 face amount policy for $590,000 when the cash surrender value was $6,145. The article states that "The policy owner used the proceeds of the settlement to get out of personal bankruptcy and save her house." While no one wants to see someone lose their house while they are in poor health, the personal bankruptcy is what got my attention. How much of those proceeds are going to pay off creditors with unsecured claims? If any of those are health care related, a whole other set of public policy issues arise: Given the number of personal bankruptcy cases that are a direct result of health crises, that seems quite possible for a 54 year old. If the debts leading to the bankruptcy were not paid, what would have happened? Would any heirs have been responsible? Would s/he have been eligible for medicaid? If all the proceeds of the life insurance policy were used to pay these debts, what is left for the beneficiaries? Who are they and what are their needs?
I don't pretend to know what is right for this individual, or any other specific instance of a life settlement. And as a general rule, I am wary of paternalistic determinations of what is right for consumers. I don't usually support taking options away from individuals if they are capable of making reasonable decisions.
However, when issues converge as they do in life settlement cases like this one, it is very hard to be sure what any interested party's motives might be. And when medicaid and nursing home costs are involved, states are also interested parties. In the past, I would have been much more inclined to view this as a dispute between life settlement and life insurance companies than I do now after reading Mr. Slavin's article. I never thought these were simple issues, but I did not fully realize how truly complicated they can be.
