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LIFE

New Disclosure Requirements For Insurers

Too often when seniors and their families contact their life insurer about their old policies, they are given only three options: surrender the policy for its cash value (if it has any), pay the premium or let it lapse.

Most people who receive a lapse notice have a policy with no cash value because it has already been drained by the carrier to make premium payments. That typically leaves a final option of paying or walking away. The number of seniors allowing this to happen to a policy after paying premiums, sometimes for decades, is scandalously high. State lawmakers around the country have noticed this situation and are now taking action to make sure policy owners are informed of their options before they abandon a life insurance policy.

As of this writing, the states of California, Kentucky, Maine, New Hampshire, Oregon, Washington and Wisconsin already have passed or are now considering "life insurance consumer" disclosure laws. In November 2010, the National Conference of Insurance Legislators (NCOIL) passed the Life Insurance Consumer Disclosure Model Act, which will be introduced in state legislatures around the country in 2011. The law requires that life insurance companies inform policyholders 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. The eight options for consumers to be made aware of in the model law are as follows:

1. Accelerated death benefit

2. Assignment of policy as a gift

3. Life settlement

4. Policy replacement

5. Maintenance pursuant to terms or riders

6. Maintenance of policy through a loan

7. Conversion from a term to a permanent policy

8. Conversion to LTCi or a long-term care benefit plan

The law also emphasizes that "policy owners should contact their financial advisor, insurance producer, broker or attorney to obtain further advice and assistance." Violation of the law is considered an unfair trade practice and subject to the penalties established by state law. Insurance departments are taking action as well and have been implementing and policing the disclosure law in their states-and some have created consumer- friendly brochures to reach out to policy owners and help make them aware of their rights and options.

Industry Opposition

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. However, they have been unsuccessful so far, and now NCOIL has drafted and approved a model law for the rest of the nation to adopt, despite the objections of ACLI and companies such as MetLife, Mass Mutual and Prudential. Those companies have objected on the grounds that too much information will confuse policy owners and may create unrealistic expectations for them. The companies also object to the idea that they will be required to "advertise" other options that do not directly benefit them. Last, they object to the costs of sending notices to policyholders, 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. It is common sense that it is in the best interest of policyholders for them 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 a policy is their worst possible option. During testimony before NCOIL as the final adoption of the model law was being considered on Nov. 19, 2010, I offered the following:

"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. They are being told by their insurance company that their only option is to pay or walk away. With this consumer disclosure law, policy owners will not make decisions based on a lack of information but instead will be informed that they have a number of options to consider first that could make a significant difference in their lives, and at a time when they need it most."

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 of the law, said, "It is imperative that policyholders understand that they have alternatives to merely lapsing or surrendering their policy. The model would require a clear notice to consumers, listing eight available options, including accelerated death benefits, conversion to long-term care and the possibility of a life settlement."

Death Benefit to Living Benefits

Another reason that the disclosure law is such an important victory for the consumer is that for people requiring longterm care, such as seniors and those suffering from terminal or chronic conditions, there will be increased awareness of opportunities to get the best use of their life insurance policy's death benefit while they are still alive. There are millions of people every year requiring long-term care who lack the means to pay for it. For those who qualify, Medicare and Medicaid can pick up some of those costs. Others may have a long-term care policy. But what about the vast middle market who are unable to qualify for government assistance and don't own LTCi? Millions of those people do own a life insurance policy, and both the senior care industry and lawmakers are recognizing the opportunity to convert those policies into a method to pay for the high costs of senior housing and/or longterm care.

A newer option among the eight, which is included in the law, is for a policy owner to convert a policy into a long-term care benefit plan. This option differs from the option of hybrid policies being converted into LTCi (which is also included in the list of eight). This option allows for the actual exchange of a life insurance policy for a long-term care benefit plan. Not to be confused with an insurance policy, the Assurance Benefit Plan is not issued by a carrier and is not restricted to policies that contain a conversion rider and is not restricted to an issuing carrier. 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 is LTCi. The entire conversion process can be done in less than 30 days, and then a third-party benefit administrator makes payments on a monthly basis to the longterm 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.

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 are also 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 fiveyear look-back spend-down period. But now, by converting a life insurance policy instead of abandoning it, the policy owner can cover his or her care with the monthly long-term care benefit payouts, 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. Opportunities for Producers With the consumer disclosure law spreading across the country, life insurance policy owners are going to learn about converting their policy and the other options for getting more out of their asset rather than just abandoning it. As specified in the law, producers and advisors are going to play an important role in the education of their clients about these options. In the midst of an ongoing economic crisis, policy owners will be more challenged to keep their policies and many will be looking at abandoning their assets as they struggle to make ends meet. By offering people information and access to a variety of options to get the most out of their policy as a living benefit, agents and advisors will be giving polices and their owners a second life.

Chris Orestis is co-founder and president of Life Care Funding Group; a 15-year of both the life insurance and long-term care industries having worked for both HIAA and ACLI; a member of the advisory board to the 3in4 Need More Association; and a frequent speaker, featured columnist and contributing editor to a number of industry publications. Contact him at [email protected] [email protected].


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