Texas Medicaid law : A Watershed moment for Life Settlements ?

Traditionally, to enroll in Medicaid, individuals needed to be in dire situation. In the past, many people spent down or surrendered their assets (including life insurance) in order to become eligible for this needed medical coverage.  The new law in Texas, however, enables individuals with a life insurance policy to enter the Medicaid program provided they obtain a life insurance settlement and use the proceeds specifically for long-term care.

On June 14, Texas Governor Rick Perry signed into law a bill that lets Texas state Medicaid officials tell policyholders applying for Medicaid assistance that they can sell their contracts to a life settlement company to cover custodial healthcare expenses. Those who do so could receive Medicaid when the settlement funds are used up. 

The significance of the law can be gauged from the fact that it is being replicated in other states. California, Kentucky, Florida, Louisiana, Montana, North Carolina and New Jersey have crafted similar bills to be considered by their legislatures. By next year, many of the largest states could expand the use of life settlements through legislation. The ramifications for the life insurance industry are enormous to say the least.

  Moody's Investor Service recently stated that the Texas law "will pressure life insurers' profitability as life settlements keep in force policies that would otherwise have been surrendered.

“[The law] is credit negative for life insurance companies because the state’s endorsement and potential expansion of life settlements will pressure life insurers’ profitability as life settlements keep in force policies that would otherwise have been surrendered,” Moody’s states in its report. “This will result in life insurers ultimately paying death benefits to investors instead of a much smaller surrender value amount to policyholders.

“With similar bills in seven other states pending, an expansion of life settlements on a large scale would produce fewer lapses and more covered deaths than life insurers originally priced for, hurting their profitability,”

  This will result in life insurers ultimately paying death benefits to investors instead of a much smaller surrender value amount to policyholders."  the report adds. 

One of the major pricing assumptions in Insurance companies is that majority of the policies will lapse- that is individuals pay their premiums for decades but then surrender their policy or allow it to lapse. Billions of $s of profit have been made due to the lapsing of the policy.