As we age, there’s less need for life insurance and more need for Long Term Care insurance. This guest article describes converting a life policy into long term care. Some say long term care is only justified if you have enough assets to protect. And can’t we rely on home healthcare instead of expensive institutional care? Let us know what you think in the comments below.
Wealth … Care Planning
Driven by crisis, alternative solutions emerge to pay for long term care
by Chris Orestis, Life Care Funding Group
On February 4th, 2011, Federal Reserve Chairman Ben Bernanke gave a dire warning in a speech before a gathering of top financial policy reporters at the National Press Club in Washington, D.C. “The two most important driving forces for the federal budget are the aging of the U.S. population and rapidly rising health-care costs,” said Bernanke. He warned that the costs of caring for the rapidly growing population of seniors in the U.S. will be an unsustainable burden for the U.S. budget and a constant impediment to economic recovery. As 10,000 Baby Boomers a day started turning 65 on January 1, 2011; the big three entitlement programs, Social Security, Medicare and Medicaid, are all in the red and creating havoc for government budgets at the federal and state levels. This has become the number one concern of the Federal Reserve about the U.S. economy.
Medicaid in particular has become a serious problem for the states. It funds at least 2/3 of all spending for nursing home care and is the primary payor for long term care services in the United States. Unlike Social Security and Medicare, seniors do not automatically qualify for Medicaid at age 65 and instead must qualify based on income and assets at indigent levels. Many seniors follow a “spend down” path to get rid of money and assets so that they can qualify. Since the economic crisis began three years ago, Medicaid rolls have increased while the available dollars to cover services have decreased. The current situation and future projections are so serious that both the Fed. Chairman and the Secretary of Health and Human Services (HHS), the body that runs Medicaid and Medicare, issued unprecedented high profile warnings on back-to-back days in early 2011.
Over 10 million Americans now require long term care annually and Medicaid is the primary payor of long term care services in the United States. In 2009, Medicaid spent $240 billion on long term care services accounting for 43% of total expenditures. By comparison, $45.6 billion or19% of long term care services was paid “out of pocket” by the consumer. States spent on average 16% of their annual budgets on Medicaid making it the second biggest budget item behind only education. A report tracking Medicaid spending going back over the last seven years showed that Medicaid underfunded payments for services to all patients by $14.17 everyday in 2009 and this alarming underfunding trend will get worse through 2011. The economic crisis has robbed state budgets of funds available to support Medicaid funded programs and as a result there was a national deficit of almost $5 billion.
Medicare and Medicaid are under so much stress that the cuts are coming fast and furious. The impact of all these aging Baby Boomers being added to the equation is now described as the “Silver Tsunami”. As this population surge starts looking to these programs to support their costs of long term care, there will be harsh push back from the government. It is simple economics that most people continue to ignore—too many people and not enough money will result in less services and higher hurdles to qualify for government programs.
An Alternative Solution Emerges
According to the NAIC, today there is $10 trillion of in-force life insurance in the hands of 153 million Americans. That is a huge population of asset owners who for the most part do not understand their legal rights of ownership and the various options available to them. The insurance industry prices and makes profits from the fact that millions of these people are paying billions of dollars in premium payments for policies that in the end will be abandoned. Too few policy owners’ posses the knowledge of how insurance works and when their original need for a policy has run its course, the vast majority of owners simply walk away from what may be one of the most valuable assets they own—for nothing in return.
The shame of this situation for the consumer is that there are numerous options for them to explore before surrendering or lapsing a policy. Life insurance is legally recognized as personal property and the owner has the right to use this asset in a number of ways including collateral as a loan (from the carrier or third party), assignment and transfer of ownership, or converting the policy to another use while still alive.
For many policy owners, life insurance is an illiquid asset that is easily abandoned. The vast majority of life insurance policies in-force will never pay a death benefit because they either expire, lapse or are surrendered for cash value. Legislative and market activities across the country point to the growing realization that life insurance policies are an asset well suited to help pay for long term care. Too few seniors realize their policy could be used for purposes other than a death benefit—but the word is rapidly spreading among policy owners and law makers.
Consumer Disclosure Law Spreads Across the Country
The National Conference of Insurance Legislators (NCOIL) understood the implications of billions of dollars of life insurance policies in the hands of seniors being discarded annually when they unanimously passed the Life Insurance Consumer Disclosure Model Act in November, 2010. The law requires that life insurance companies inform policy holders above the age of 60, or with a terminal or chronic condition, that there are eight approved alternatives to the lapse or surrender of a life insurance policy. As of this writing, the states of California, Connecticut, Kentucky, Maine, New Hampshire, Oregon, Washington State, Virginia, and Wisconsin already have passed or are now considering life insurance consumer disclosure laws for their states.
NCOIL declared that final passage of the Life Insurance Consumer Disclosure Model Law is intended to be “a strong stand for life insurance policy owners and would empower consumers through education about their options.” NCOIL President Rob Damron (KY), upon unanimous passage said, “It is imperative that policy holders understand that they have alternatives to merely lapsing or surrendering their policy. The model would require a clear notice to consumers including… conversion to long term care.”
The adoption of this law in the states is a direct response to the explosion of Baby Boomers reaching retirement age, anemic sales and significant disruption in the long term care insurance market, and a realization that billions of dollars worth of life insurance is abandoned every year by people who do not know their legal rights or options. Expect more legislative action like this to escalate rapidly throughout the country.
Helping Families Pay for Long Term Care
Too often our company encounters seniors and their family who have owned a life insurance policy for many years that are about to lapse or surrender it for minimal value. They have contacted their life insurance company to ask them what they can do. The life insurance company will inform them that they really only have two options if they don’t pay their premium: surrender the policy for its cash value (if it has any) or let it lapse. Most people that receive a lapse notice have no cash value because it has already been drained by the carrier to make premium payments. That typically leaves the final option of pay or go away. The number of seniors that allow this to happen to a policy after paying premiums, sometimes for decades, is scandalously high. State law makers around the country have taken notice of this situation and are now taking action to make sure policy owners are informed of their options before abandoning their life insurance.
The life insurance companies are not happy about this disclosure law and have been gearing up their considerable lobbying machine to fight it in the states. They have objected on the grounds that too much information will confuse policy owners and may create unrealistic expectations for them. They also object to the idea that they “are advertising” other options that do not directly benefit them. Lastly, they object to the costs of sending notices to policy holders, but that argument is somewhat fungible because they will be sending notices through existing mailings such as lapse notices or premium statements.
It has been difficult for the carriers to argue against the simple concept that consumers are better off with more information and not less. The law’s intent is to make sure that insurance carriers disclose to their policy owners that they have multiple options to consider beyond lapse or surrender. It also emphasizes that “policy owners should contact their financial advisor, insurance agent, broker or attorney to obtain further advice and assistance.” Violation of the law is considered an unfair trade practice and subject to penalties established by state law.
It is common sense that the best interest of policy holders is to make decisions with full disclosure of rights and options—and not in a vacuum. In today’s stressed economic environment, policy owners need to understand that a life insurance policy is more than just a death benefit. It is an asset that can help them in a number of ways and simply walking away from their policy is their worst possible option.
During testimony before NCOIL as they considered final adoption of the Model Law on November 19, 2010, Life Care Funding Group offered the following:
“Just two weeks ago we heard from a family with a $95,000 life insurance policy entering its grace period. Their mother is in the process of making the move into long term care and they could not afford the monthly expenses. They called their insurance company to ask what they could do with their policy and they were told their only option was to pay the premiums or let it lapse. Then they contacted us. And now instead of allowing the policy to lapse, we are converting it into a long term care benefit plan that will help cover her costs of care and keep her off of Medicaid for at least the next two years.”
Life Insurance Policy Conversion
This conversion option, known as an Assurance Benefit Plan, is not a long term care insurance policy. It is an actual benefit plan that a allows the owner of any form of life insurance to use their policy to pay for long term care life insurance by converting their death benefit into a living benefit to help pay for the costs of senior housing and long term care such as assisted living, home healthcare, and nursing home care. Any type of life insurance will qualify and once their policy is converted the family is no longer responsible for premium payments, there is no wait period, and the entire process can be completed in less than 30 days. Once enrolled, the benefit plan is administered on behalf of the family and the benefit payments are made directly to the facility on a monthly basis.
This conversion option differs from hybrid policies sold by carriers that can be converted into LTCI. This option allows for the actual exchange of a life insurance policy for a long term care benefit plan at the time that care needs to be paid for. Not to be confused with an insurance policy, the benefit plan is not issued by a carrier and is not restricted to polices that contain a conversion rider and is not restricted to the issuing carrier. Unlike long term care insurance there are no wait periods to receive benefit payments. Once a policy is converted by the owner benefits are immediate and they are relieved of any responsibility to pay premiums and there are no fees.
The policy conversion can be done for any form of individual or group life insurance and is not subject to the same limitations and wait periods as LTCI. The entire conversion process can be done in under 30 days, and then a third party benefit administrator makes benefit payments on a monthly basis to the long term care provider for the duration of the benefit period. If the insured should pass away before the benefit period is exhausted, then any remaining benefit amount is paid to the family or named beneficiary as a final expense payment. Families with the need to pay for long term care that are unable or unwilling to keep their life insurance policy in-force by maintaining premium payments, the conversion option is a much better choice than abandoning the policy.
Providers of long term care services such as nursing homes, assisted living communities and home health agencies have been quick to embrace this alternative form of payment. State governments too are realizing that there is tremendous value to be found by converting life insurance policies to help pay for the costs of long term care. Life insurance is an unqualified asset for Medicaid applicants and it has been standard practice to abandon a life insurance policy if it is within the legally required five year look back spend-down period. But now, by converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered by the long term care benefit plan and the life insurance asset can be spent-down in a Medicaid compliant fashion—while preserving a portion of the death benefit during the extended time period.
Qualified Spend Down of an Unqualified Asset
The Assurance Benefit conversion option is considered a “qualified spend down” of a life insurance policy asset for Medicaid eligibility. A life insurance policy is legally recognized as an asset of the policy owner and it counts against them when qualifying for Medicaid. If a policy has anything more than a minimal amount of cash value (usually in the range of $2,000) it must be liquidated and that money spent towards cost of care before the owner will qualify for Medicaid. All Medicaid applications specifically ask if the applicant owns life insurance and full policy details. Failure to disclose and comply is fraud.
But, instead of abandoning a life insurance policy as part of a Medicaid eligibility process, the policy owner can convert a life insurance policy while still alive to help pay for long term care, and they are able to preserve a portion of the death benefit in the process. In turn, the care facility is able to quickly help someone in need of financial assistance for long term care and receive the private pay funds directly from the benefit plan.
There are also advantages for one other party paying attention to these kinds of programs– state governments and their maxed out Medicaid budgets. Policy owners that convert their life policies instead of allowing them to lapse or be surrendered represent an opportunity to extend the spend down period of this asset. In so doing, a person enrolled in an Assurance Benefit plan would stay off of Medicaid while they were enrolled.
An Informed Consumer is an Empowered Consumer
As is the case with any product or service, the more options and benefits that the consumer understands is available to them the more empowered they are to make a well informed buying decision. In the case of life insurance, the vast majority of consumers do not understand their legal rights of owning this asset. Many policy owners mistakenly believe the insurance company owns the policy and that they “rent” the death benefit through premium payments. In fact, life insurance is legally recognized as personal property with the same ownership rights as any other asset such as a home, stock or a vehicle.
The fact that they are in control of their policy and have multiple options available to them beyond just a death benefit opens up many new possibilities for how a policy is valued by the consumer. Its’ death benefit is just one level of value because the policy also has “present day value” and the owner is in control of how and when that is accessed.
On November 19, 2010, during testimony at NCOIL’s annual meeting to consider passing the Consumer Disclosure Model Law, Life Care Funding Group offered the following observation:
“The intersection of a growing senior and Baby Boomer population and economic bust is creating a crisis for how seniors will fund their retirements and eventually long term care expenses. Our case workers hear from seniors and their families every day who have been paying premiums for years and are getting ready to abandon their policy. These are middle class Americans without insurance expertise and the typical size of their policy is well under $500,000. This disclosure law will help consumers understand they have a number of options to consider before discarding a policy, including converting their policy into a long term care benefit plan that holds the potential to address their financial shortfalls.”