The past four years have seen a growing public awareness that life insurance is an asset policy owners can use to pay for long-term care. Home health care companies, assisted living communities, nursing homes and geriatric care providers have been on the front lines of this issue, educating seniors about the availability of this option.
The National Council of Insurance Legislators’ (NCOIL) 2010 model disclosure law became the basis for legislation to ensure that policy owners are informed of their legal rights to “convert a life insurance policy into a long-term care benefit plan.” This legislation has been spreading across the nation. The concept that seniors can sell a life insurance policy they already own in order to fund a dedicated benefit plan that will keep them off Medicaid has proven too powerful for state governments to ignore.
Now the federal government is paying attention as well. The Congressional Commission on Long-Term Care has studied this option as part of its deliberations. In addition, Medicare has posted a page to its website
(www.Medicare.gov) to inform people that, “You might be able to sell the life insurance policy for present value. The money from the sale can be used to pay for your long-term care needs. If you don’t qualify for long-term care insurance, this may be an option to pay for your long-term care needs.”
2013 a ‘Watershed’ Year
In 2013, nine states (California, Florida, Kentucky, Louisiana, Maine, Massachusetts, New Jersey, New York and Texas) introduced Medicaid life settlement legislation as a way to encourage greater use of private-pay dollars for home care, assisted living and skilled nursing through the conversion of a life insurance policy into a long-term care benefit plan. Among these states, Texas was the first in the nation to enact this into law.
What does this mean? It means that now states are passing laws endorsing life settlements as a means to pay for long-term care services. States are realizing the important service life settlement companies provide and the importance of unlocking the hidden value in life insurance policies before the owner allows the policy to lapse or surrenders it. The option to convert a life insurance policy to pay for long-term care is available in all states. Now these notification laws are being introduced and passed to make sure state Medicaid agencies are informing people that this program is an accepted part of a Medicaid spend-down.
The new Medicaid life settlement law does two things:
Grants authority to Medicaid agencies to inform and educate citizens of their legal right to convert their life insurance policies into a Medicaid-qualified long-term care benefit plan so that they can remain on a private-pay basis. Policy owners also have the right to choose any form of long-term care they want instead of abandoning a life insurance policy to go straight onto Medicaid.
To qualify, the long-term care benefit account must be an irrevocable account, insured by the Federal Deposit Insurance Corp. (FDIC), that makes payments directly to the care provider. The insured person must be able to choose the form of care they want. A funeral benefit must be preserved. If there is any unpaid account balance when the person dies, the funds must go to the designated account beneficiary.
According to the most recent National Association of Insurance Commissioners (NAIC) annual report, almost $28 trillion of life insurance is in force in the U.S. Billions of dollars’ worth of these policies will be abandoned by seniors who are navigating a Medicaid spend-down path. Life insurance is a disqualifying asset for Medicaid eligibility. A 2007 Government Accountability Office study found that 38 percent of Medicaid applicants owned a policy that had to be surrendered or allowed to lapse inside the look-back period in order to qualify for Medicaid.
State regulatory bodies such as NCOIL have led the way by passing a model disclosure law to mandate that policy owners be made aware of their legal right to convert the use of a life insurance policy death benefit into a living benefit that can be used to pay for any form of senior care service. In January 2013, the Florida State University Center for Economic Forecasting and Analysis released a study finding that converting life policies to pay for long-term care would result in $150 million in annual tax savings.
Long-Term Care Funding Crisis
Medicaid continues to be the second-largest budget item (behind education) in every state. Adding to this pressure is the fact that, every day, an additional 10,000 baby boomers turn 65. Demographic and economic pressures almost doubled Medicaid expenditures between 2009 and 2011. In Washington, D.C., and in every state capital, Medicaid spending is one of the biggest issues policymakers are trying to handle.
During hearings held this year by the Congressional Commission on Long-Term Care, the panel members assessed the financial crisis facing the country and seniors in need of care.
“Medicare and Medicaid have become the major source of long-term care and cannot continue at the current pace,” said G. William Hoagland of the Bipartisan Policy Center. Americans should be encouraged to increase their retirement savings so that these programs are relied on as a last resort.
In addition, using long-term care insurance to pay expenses is not an option for many Americans, as premiums rise and companies that can’t make a profit leave the market, said Marc Cohen, an industry consultant. Most of the long-term care policies available are sold by only 12 insurers, he said.
“We know that 70 percent of people over the age of 65 will need some form of long-term services and support,” said Dr. Bruce Chernof, the commission’s chairman. Although government programs provide a significant portion of long-term care, none offers the full range of services people need, said Kirsten Colello, a health and aging policy specialist at the Congressional Research Service.
“The fact is that each of us will need these services and supports at some point in our lifetimes,” said Sen. Jay Rockefeller, D-W.Va. “The question is whether most Americans can afford to pay for them.”
What Is a Long-Term Care Benefit Plan?
As long-term care service providers, political leaders and the public embrace the conversion of life insurance policies into a long-term care benefit plan, it is important to understand the unique nature of this financial vehicle. A long-term care benefit plan is the conversion of an in-force life insurance policy into a prefunded, irrevocable benefit account that is professionally administered, with payments made monthly on behalf of the individual receiving care.
Any type of life insurance policy (term, whole, universal, group) death benefit can be converted into a living benefit that will cover the costs of senior care in any form (home care, assisted living, nursing home, memory care or hospice). The policy transaction conforms to the secondary market regulations that govern life settlements/viaticals, and the benefit is administered specifically to be a Medicaid-qualified spend-down of the asset proceeds. The funds are protected in an irrevocable bank account that can be administered only by a third party to pay for long-term care services. The long-term care benefit plan is a regulated and Medicaid-qualified financial vehicle designed to help cover the costs of long-term care.
Inherent in the structure of the long-term care benefit plan are multiple layers of consumer protections:
The transfer of ownership of life insurance policies conforms to the rigorous regulatory standards that govern life settlements in each state.
The irrevocable, FDIC-insured benefit account is held by a nationally chartered bank and trust company and must conform to federal and state banking regulations.
Because the account is irrevocable and can be spent only on long-term care services, the benefit plan is administered as a Medicaid-qualified spend-down.
Consumer Rights = Consumer Choice
Despite all the legislative support and media attention attracted by this issue, the vast majority of policy owners across this country are unaware of this option and they abandon policies needlessly every year. Seniors often walk away from a life insurance policy in their final years because they cannot afford to continue the premium payments, or they surrender the policy to qualify for Medicaid. But when a family converts a policy instead, they have made the informed decision that securing a portion of the death benefit today to help them with the immediate costs of long-term care is better than lapsing or surrendering a policy on which they have paid premiums for years.
Policy owners should not abandon their life insurance, because the same policy can instead be sold for 25-65 percent of the face value, with the funds placed in a protected account that will preserve their money and make monthly payments toward their chosen form of senior care. At a time when families are struggling with the costs of long-term care and the nation is looking for private market solutions to this growing crisis, it is no longer possible to ignore billions of dollars in death benefit value owned by seniors that can be used as a private-pay option for long-term care services.