As Medicare Liability Costs Surge, Life Insurance Emerges as a Strategic Financial Solution
- Barry Group
- May 29
- 6 min read
The financial strain posed by Medicare-involved liability claims has reached a critical level, with top insurers struggling to contain escalating costs. According to Verisk’s latest 2025 Benchmark Report, these liabilities are not only growing faster than general inflation, but they also reflect deeper systemic issues—legal representation, reporting delays, and settlement timing—that can significantly magnify an insurer’s total financial exposure.
In light of these growing challenges, many industry leaders are now re-evaluating how financial tools—particularly life insurance and structured annuities—can be used not only to mitigate risks but also to create long-term predictability and stability within the claims management process.
Verisk’s Findings: A Deepening Financial Burden for Insurers
The data from Verisk is striking:
Average TPOC up 52% since 2018: The Total Payment Obligation to Claimants (TPOC) rose 52% over a six-year period, nearly double the 25% growth in the Consumer Price Index over the same timeframe.
Legal Representation Increases Costs: Claims involving attorneys averaged $51,000—nearly 47% more than those settled without legal counsel ($34,700).
Delays in Reporting and Settlement Compound the Issue: A claim reported after 12 months carried an average TPOC of $139,900, while those reported within a month averaged just $33,500. Additionally, claims settled in under six months averaged $14,300, compared to $136,900 for those stretching beyond four years.
State-Level Variability Exacerbates Risk: In states like Michigan, average TPOCs have reached $95,600—driven largely by unique state insurance frameworks, such as Michigan’s unlimited Personal Injury Protection (PIP) system.
These trends make one thing clear: Medicare-related liability claims are becoming more expensive, more complex, and more difficult to manage—putting both commercial and personal insurers under unprecedented pressure.
The Compliance Challenge: Medicare Secondary Payer Requirements
Another contributing factor to rising costs is the regulatory environment. The Medicare Secondary Payer (MSP) Act requires insurers to consider Medicare’s interests when settling certain injury claims. This means they must fund Medicare Set-Aside Arrangements (MSAs)—accounts that are used to pay for future medical costs that would otherwise be covered by Medicare.
Failure to comply can result in fines, litigation, and Medicare denying future claims, which increases an injured party’s incentive to pursue additional compensation. For insurers, this represents both a legal and financial liability that is becoming increasingly hard to navigate without specialized planning tools.
How Life Insurance Can Help Manage This Risk
To address these issues, more insurers and legal professionals are turning to life insurance products and annuity structures—particularly structured settlements and permanent life insurance policies with living benefits. Here's how:
1. Structured Settlements with Life Insurance Annuities
Structured settlements funded by annuities—often backed by life insurance companies—allow insurers to spread large claim costs over time through periodic payments. This helps:
Reduce the need for large, upfront lump sum payouts.
Align payments with actual medical cost timelines.
Provide financial security for claimants while preserving insurer capital.
These annuity-backed solutions offer tax advantages and can be tailored to the claimant’s specific needs, including inflation adjustments and lifetime income options.
2. Funding MSAs with Life Insurance-Based Vehicles
When settling injury claims involving Medicare-eligible individuals, insurers and attorneys must often set aside a portion of the settlement to cover future medical expenses that Medicare would otherwise pay. This is known as a Medicare Set-Aside Arrangement (MSA). Failure to fund these properly can lead to penalties, claim denials by Medicare, or future lawsuits.
Traditionally, MSAs are funded with lump-sum cash reserves or standard annuities. But life insurance-based funding vehicles—particularly permanent life insurance and life-contingent annuities—are emerging as powerful tools to manage this obligation more effectively.
✅ What Is an MSA?
An MSA is a financial agreement used to reserve a portion of a personal injury settlement specifically for future medical costs related to the injury. These funds must be spent in accordance with Medicare’s guidelines, ensuring that Medicare is not the primary payer for those medical services.
💡 How Life Insurance Enhances MSA Funding
Permanent Life Insurance with Cash Value
Permanent life insurance (such as Whole Life or Indexed Universal Life (IUL)) can be used to fund an MSA in a tax-advantaged and interest-bearing way.
Key Benefits:
Tax-Deferred Growth: Cash value grows over time and can be accessed for medical expenses as needed.
Liquidity: The insured or trustee can withdraw or borrow funds in accordance with MSA guidelines.
Living Benefits: If the policy has a chronic or critical illness rider, additional funds may be accelerated and used for qualifying medical needs.
Control & Transparency: Ideal for long-tail claims where the injured party is younger and likely to have significant future medical costs.
Example:
A 45-year-old worker suffers a spinal injury in a job-related accident. A $200,000 settlement is structured to include a $100,000 MSA. Rather than placing the full amount in a non-interest-bearing account, a portion is used to fund a permanent life policy that builds value, while ensuring funds are available and compliant with CMS (Centers for Medicare & Medicaid Services) rules.
Structured Settlement Annuities from Life Insurers
Another powerful strategy is using life-contingent annuities issued by life insurance companies to fund MSAs.
How it works:
The insurer pays guaranteed annual amounts into the MSA over time.
Aligns with projected annual medical expenses, preserving excess funds.
If the claimant passes away early, future payments stop, reducing overfunding.
This structure can be approved by CMS and offers predictable budgeting for both the insurer and the claimant.
Why it’s better than a lump sum:
Prevents overspending early in the claim.
Eases cash flow burden for self-insured employers or smaller carriers.
Can be insured for longevity or cost-of-care increases.
🛡️ Why Use Life Insurance-Based Funding for MSAs?
Benefit | Impact |
Tax-Advantaged Growth | Helps keep up with medical inflation. |
Predictability | Annual payouts match projected medical expenses. |
Long-Term Control | Structured oversight, avoiding claimant misuse or depletion of funds. |
Regulatory Compliance | CMS approval possible when structured properly. |
Legacy Potential | Some policies allow transfer of remaining value to heirs. |
🧠 Who Should Consider This?
Attorneys and insurers handling large injury settlements with Medicare-involved claimants.
Claimants under age 65 expected to have long-term medical expenses.
Self-insured employers looking for efficient settlement tools.
Injury victims or workers comp recipients seeking tax-advantaged, secure coverage for future costs.
3. Leveraging Life Insurance for Legal and Reporting Risk Mitigation
Life insurance companies are inherently skilled at managing longevity and health risk, making them natural partners in claims that stretch over years or decades. Their actuarial expertise allows for:
Better underwriting of long-tail risk exposures.
Efficient capital allocation to meet future obligations.
Use of reinsurance to further minimize loss volatility.
For example, insurers may offer Key Person Insurance or Executive Bonus Plans to protect against the sudden loss of employees involved in risk management and claims processing—ensuring continuity and control even when cases span multiple years.
Expanding the Vision: Life Insurance for Individuals in Medicare Age
While this analysis has focused primarily on how life insurance products help insurance carriers mitigate liability risk, it's important to note that these tools are just as valuable on an individual level, especially for those approaching or already enrolled in Medicare.
Permanent life insurance with living benefits can help seniors cover out-of-pocket healthcare costs not addressed by Medicare, such as long-term care, non-covered prescriptions, or home health services.
These policies offer tax-free access to cash value, allowing retirees to avoid liquidating investments or drawing down retirement accounts to pay for sudden health-related costs.
For those with limited long-term care coverage, certain life insurance policies include chronic illness riders, providing lump-sum or monthly payments upon diagnosis of qualifying conditions.
Conclusion: A Financial Shift Toward Sustainability
The data from Verisk highlights a harsh reality: Medicare-related liability claims are becoming a formidable financial burden for insurers, driven by complex factors including legal involvement, regulatory compliance, and claim duration. As the traditional liability claims framework struggles under this weight, life insurance solutions—particularly structured settlements, permanent policies, and annuity-based products—are proving to be not just alternatives, but financially essential strategies.
By integrating these products into claims management processes, insurers can gain predictable cost control, improved compliance, and a more sustainable approach to rising healthcare liabilities.
For individuals, families, and businesses, the same tools can be tailored to ensure healthcare resilience, preserve wealth, and provide financial peace of mind.
Want to explore how structured life insurance can protect your future or your business from rising healthcare costs?📞 Call Barry Group & Associates at 866-540-9122 or visit www.barrygroup.net to schedule your free Discovery Session with an elite insurance advisor.
Comments