2012--Year One of the Silver Tsunami Comes to an End

2011 was a benchmark year for the Baby Boom generation. By the time the clock strikes mid-night and we welcome 2012, almost 4 million Baby Boomers will have turned 65 years of age. During the 365 days of 2011, ten thousand Americans turned 65 each and every day. 2012 is only the second of a twenty year journey where that pace continues annually until it ends with almost 80 million Baby Boomers crossing the threshold of age 65.

What other benchmarks occurred in 2011?

• MetLife exited the long term care insurance market, and additional departures from the market are anticipated this year;
• The CLASS Act was enacted and then killed in the midst of a Medicaid funding crisis to pay for costs of long term care across the United States;
• Medicaid spent $427 billion prompting CMS to summarily cut all long term care funding by Medicare and Medicaid across the board 11.1%;
• We saw equity in American homes drop to under 50% for the first time in our nation’s history to just under $10 trillion, and by comparison, in-force life insurance now stands at almost $30 trillion;
• NCOIL passed the Life Insurance Consumer Disclosure Model Law to attack the massive problem of seniors abandoning life insurance policies because they are unaware of alternative options;
• State legislatures started looking at how converting life insurance policies into long term care benefit plans could save tax payers money by extending the spend down period before Medicaid eligibility;
• The Florida Legislature introduced a first in the Nation consumer protection bill (HB 1055) that provides for conversion of a life insurance policy into a long term care benefit plan as a Medicaid eligibility requirement, use of accelerated death benefits to pay for nursing home (SNF) costs, and mandates the NCOIL Life Insurance Consumer Disclosure Model Law.

What we are seeing as we enter 2012, is a growing awareness that this $30 trillion pool of in-force life insurance policies is an asset base of immense proportions and a source for long term care funding solutions. But, the policies are in the hands of owners that for the most part have no understanding of their legal ownership rights and the variety of options available to use their property while still alive. Seniors in particular have been the most vulnerable to lack of information, and therefor disproportionately abandon life insurance policies in their final years.

This lack of information coupled with difficulty affording premium payments, disappearance of the original insurable interest when the policy was initiated (the children have grown up and/or lack of spouse), and life insurance ownership counting against Medicaid eligibility all conspire to push seniors to needlessly abandon policies. Consumer protection measures such as the NCOIL Model Law and Florida legislation, long term care funding options such as policy conversions, and education efforts spear headed by the assisted living and nursing home industry will have a major impact in 2012.

This is the year when policy owners will start to come out of the dark in large numbers. As they become better informed about their legal rights of ownership and alternatives to policy abandonment, they will realize that a life insurance policy they are about to discard can be put to much better use helping them pay for long term care. And based on the growing demographic tide, ongoing economic malaise, cuts by the government in Medicare and Medicaid (as well as elimination of programs like CLASS act), and the very challenging marketplace for long term care insurance-- the emergence of another private market funding solution for long term care services comes not a moment too soon.

If 2011 was the year of challenges and a search for solutions; 2012 will be the year of awareness and implementing solutions.

Making up the Difference

As Super Committee falters, mandated budget reductions creates further pressure on the funding of long term care

The Super Committee could not overcome partisan differences over spending cuts and new revenues (taxes) within their mandated deadline and conceded defeat. That unfortunate outcome triggers mandated reductions in the federal budget of $1.3 trillion that will have an immediate impact on Medicare and Medicaid. This will be particularly disruptive for seniors and long term care providers already trying to absorb the 11.1% rate reduction that CMS instituted in October, 2011. After the demise of the CLASS Act, the long term care funding infrastructure of the United States is facing extreme pressure. Lackluster sales, rate increases and carrier casualties in the LTCi market combined with additional entitlement cuts as a result of the Super Committee outcome will conspire to make an already precarious situation worse.

Side Bar 1
Most people do not plan for Long Term Care until it is too late:
- 13% actively plan for how they will live as they grow older and frailer
- 40% first begin to actively plan following a “near catastrophic” health event
- 47% must make long term care decisions in a very short period of time, usually while in the hospital
- 75% exhaust all of their savings and assets while still alive trying to pay for Long Term Care

Side Bar 2
Most people do not understand the costs of Long Term Care and how to pay:
- 92% incorrectly estimate the monthly cost of a nursing home
- 77% incorrectly estimate the monthly cost of an assisted living facility
- 45% incorrectly believe “Medigap” covers assisted living costs
- 52% incorrectly believe Medicare covers assisted living costs
- 59% incorrectly think Medicare will pay for extended nursing home stay

Further compounding the problem is the fact that 10,000 Baby Boomers started turning 65 on a daily basis this year and that pace will continue uninterrupted for the next 20 years. The availability of public dollars to pay is shrinking while demand for long term care services and the costs of care continues to rise annually.

According to the 2010 MetLife Mature Markets Institute Annual Study, costs for all forms of long term care services continue to rise:

- The national average cost of staying in a semi-private room in a nursing home grew to $198 per day / $72,279 annually and a private room at $229 per day / $83,585 annually.
- The national average cost of living in an Alzheimer’s unit is $228 per day / $83,220 annually.
- The national average cost of living in an assisted living facility reached $3,131 per month / $39,516 annually.
- The national average cost for private-pay home healthcare is now at $21 per hour.

People do not understand and are not prepared to pay the costs of long term care. In years past, seniors could rely either on the government, family, or equity in assets such as a home to offset a lack of savings. In today’s new economic reality, family members are struggling to take care of themselves, the government is making cuts and building barriers to entry for long term care coverage, and the value of assets such as a home have been eviscerated. In fact, today there is currently three times more in-force life insurance in the United States at almost $30 trillion (NAIC) than there is home equity with less than $10 trillion (Zillow Home Equity Index).

For the first time in American history there is more debt than equity in America’s homes. For seniors unprepared for long term care this new reality is a big problem. One of the most reliable sources of long term care funding for years has been home equity and then government backstops once assets have been depleted. This mix is now severely disrupted and a search for additional assets to help unprepared seniors pay for long term care is on.

One non-depreciating asset that has been getting more attention as a resource to help pay the costs of long term care is life insurance. Life insurance is legally recognized as personal property and the owner has the right to use this asset in a number of ways including converting the policy to pay for long term care while still alive. Policy owners 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 people are paying billions of dollars in premium payments for policies that in the end will be abandoned. The shame of this situation for the consumer is that there are numerous options for them to explore before surrendering or lapsing a policy.

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 specific alternatives to the lapse or surrender of a life insurance policy. 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 disclosure law is an important consumer protection victory for people requiring long term care because it will increase their awareness about the best use of a life insurance policy’s death benefit while still alive. The senior care industry and law makers are recognizing the opportunity to convert life policies into a method to pay for the high costs of senior housing and/or long term care. Among the options specifically included in the NCOIL Model Law is for a policy owner to “convert a policy into a long term care benefit plan”. For families unable or unwilling to keep their policy in-force by maintaining premium payments, the conversion option to pay for long term care is a much better choice than abandoning the policy.

States have been taking action in support of consumer rights to use life insurance policies to pay for long term care. In addition to those states adopting the NCOIL Consumer Disclosure Model Law; New York passed a law mandating that the owner of a policy with an accelerated death benefit (ADB) rider can trigger the benefit if they have been living in a nursing home for at least three months. There are 153 million owners of life insurance policies in the United States. Comparatively, there are 8 million owners of long term care insurance policies. With that disparity as a back drop, as many as a dozen other states are now looking at passing laws that combine conversion of a life insurance policy of any kind to a “long term care benefit plan”, the disclosure requirements of the NCOIL model, and the ADB trigger for nursing home residents.

The adoption of laws of this type in the states is a direct response to the explosion of Baby Boomers reaching retirement age, anaemic 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.

Providers of long term care services such as nursing homes, assisted living communities and home health agencies, as well as state governments, are realizing that there is tremendous value for the consumer in converting life insurance policies to help pay for the costs of long term care. By converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered by the monthly long term care benefit payout and the life insurance asset can be spent-down in a Medicaid compliant fashion.

“Our goal at Emeritus is to ensure that seniors are properly cared for, and part of that goal is to help families with the financial decisions and details involved in caring for their loved ones,” said Jayne Sallerson, EVP, Sales & Marketing at Emeritus Senior Living (NYSE: ESC), the largest assisted living provider in the world. “Many seniors and families are unaware that their life insurance policies are valuable assets and can be converted to pay for long term care, and as a result some let active policies lapse. We hope that we can help educate seniors about their resources, so that more seniors can have access to the long term care that they need.”

With traditional resources to pay for long term care on the decline, it will take creative private market solutions and the use of non-traditional assets to make up the difference.

Chris Orestis Interview at Senior Market Advisor VIDEO

Long term care funding options with Chris Orestis

Link to VIDEO: http://www.producersweb.com/r/pwebmc/d/contentFocus?pcID=8b6b962275920289cc1c2b4973480373#

By Paul Wilson, ProducersWEB

I recently sat down with Chris Orestis, a 15 year veteran of both the insurance and long term care industries. Chris spent several years representing the health and life insurance industry as Vice President and Senior Vice President respectively for the Health Insurance Association of America (HIAA) and the American Council of Life Insurers (ACLI). He is an expert on insurance and long term care issues, and is a frequent speaker, featured columnist and contributing editor to a number of industry publications.

His company, Life Care Funding Group, assists people in need of funds to cover the costs of senior housing and long term care. LCFG specializes in converting the death benefit of an in-force life insurance policy into a long term care benefit to cover the costs of skilled nursing home care, assisted living, home health care and hospice.

In the first part of the interview, Chris talks about the current state of the long term care insurance industry. He also discusses the "wake-up call" facing producers and carriers and details some of the challenges, opportunities and responsibilities resulting from the current economic climate. He goes on to explain his recent involvement in the passage of the National Conference of Insurance Legislator's (NCOIL) Life Insurance Consumer Disclosure Model Law, which ensures policy owners "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.”

In the second part of the video, Chris provides further detail about the NCOIL Model Law and its effects on the industry, and talks about his company's partnerships with assisted living communities and nursing homes to help clients convert their life insurance policies into long term care benefit plans. Finally, he looks into his crystal ball and gives his best guess as to the future of the life insurance industry, LTCI industry and disability insurance.

A Roundtable Discussion -- Consumer Disclosure Law: The Changing Face of Long Term Care Funding

Following the panel session entitled Consumer Disclosure Law: The Changing Face of Long Term Care Funding on August 25, 2011 at the Annual Senior Market Advisor Expo in Las Vegas, the panelists were all asked a series of follow up questions about the topic area discussed during the session.

Representatives from politics, senior living, insurance producers and private market funding solutions came together to discuss the crisis situation for seniors attempting to pay the costs of long term care in today’s environment.

Session Panelists:
• Chris Orestis, CEO of Life Care Funding Group as host and moderator
• Jayne Sallerson Executive Vice President of Emeritus Senior Living
• Rep. Rob Damron (KY) immediate past president of the National Conference of Insurance Legislators (NCOIL)
• David Kitaen, CLTC

Question- What are some of the factors changing the face of long term care funding today in the United States?

Answer- (Chris Orestis) Our country has begun a demographic sea change with 10,000 Baby Boomers turning 65 every day. This started on January 1st, 2011 and will continue uninterrupted for the next 20 years! The pressure this is creating in how we will pay for long term care led Federal Reserve Chairman Ben Bernanke to declare the aging population and exploding cost of health care as the #1 challenge facing the U.S. economy and government budgets.

Question- How has the government reacted to this demographic sea change?

Answer- (Chris Orestis) The current economic crisis could not have happened at a worse time and we see it in the news everyday. Just as the Baby Boomers started qualifying for Medicare and Social Security, this massive surge in the aging population is forcing the government to enact swift and draconian cuts to Medicare and Medicaid. There is not a budget proposal in Washington, DC without cutting hundreds of billions in Medicaid spending. CMS announced in August that as of October, 2011 they would institute an 11.1% across the board reduction in expenditures for all long term care related programs. This is an unprecedented reduction and the consumer is going to be forced to dig into their pockets to make up for it.

Question- As Executive Vice President for the largest assisted living company in the world, what do you see as key challenges families are facing in today’s environment when trying to pay for senior living and long term care?

Answer- (Jayne Sallerson) Equity in homes of most seniors has eroded and many can’t sell anyway, pensions and retirement plans have lost tremendous value, and most have not planned with products such as long term care insurance. Too few families plan for long term care or even understand the differences between assisted living and skilled nursing, Medicare and Medicaid, Medigap and Long Term Care Insurance and how all of it works. Unfortunately most families just don’t deal with long term care until they are in a crisis mode and have very little time and even fewer options. Many people are trapped in their homes and/or are getting insufficient or no care whatsoever based on their conditions and declining ability to live independently and safely.

Making matters worse, programs like Medicare and Medicaid are experiencing huge cuts and the responsibility to pay is being pushed back on the individual and their family. We are seeing more emphasis on families covering long term care expenses with private pay dollars, but most have no idea what their options are and where to turn for help.

Question- As one of the first and longest active LTCi producers in the country, how do you view the current state of affairs for seniors and long term care?

Answer- (Dave Kitaen) The combination of the toughest economy since the great depression, a growing senior population, and cuts to Medicare and Medicaid are making things very difficult for seniors and families confronting the need for long term care. This should be the boom years for LTCi with the highest sales levels on record, but sales have not been growing and companies like MetLife have left the market. MetLife leaving the market is like General Motors announcing they no longer will be selling cars.

The costs of long term care services rises every year but the ability of seniors to pay has been declining since the economic crash of 2008. Seniors need help understanding all of their financial options and how to get full use of any available assets.

Question- As president of the National Conference of Insurance Legislators (NCOIL), was this situation with long term care funding one of the factors contributing to passage of the Life Insurance Consumer Disclosure Model Law?

Answer- (Rep. Rob Damron) Yes, we saw the billions of dollars in life insurance policies owned by seniors being abandoned by the owners ever year. These seniors did not understand their legal rights of ownership or available options to use these policies in a better way such as to help pay for their costs of long term care. The motivation behind this model law is to educate policy owners that they have options such as converting their life insurance policy to a long term care benefit plan that can be set up to help pay for their costs of long term care every month. We would rather see these policies being used by their owners to address their long tem care needs than be abandoned with the entire policy value going to the insurance company’s bottom line as profit.

Question- Life Care Funding Group has been an active supporter of the model law, what do you hope is accomplished as the model law is adopted in states around the country?

Answer- (Chris Orestis) We want to see the high lapse and surrender rate of life insurance policies by seniors reversed. We believe this will happen as they come to understand their legal ownership rights and options to use the policies as a tool to help them pay for long term care. Billions of dollars in life insurance could be converted instead of abandoned and then used to help pay for long term care costs. By giving the consumer access to information about their legal rights and options as a policy owner they can make informed decisions about best use of an asset they already own. In today’s environment it is important that consumers know they can convert a life insurance policy to a long term care benefit plan. It is a Medicaid qualified spend down of an asset they have been needlessly abandoning. Now instead of abandoning a policy they own and have paid premiums sometimes for decades, it can sustain a person’s long term care needs at private pay levels for months and years.

Question- What are LTC providers doing to educate and help consumers?

Answer- (Jayne Sallerson) Emeritus has been promoting “Financial Solutions” to the consumer to help pay for costs of housing and care for many years. We educate the consumer at each of our over 550 communities across the United States about the availability of options and the importance of being financially capable. We have partnered with companies like Life Care Funding Group, make this information available on our website, and we discuss it in the press and participate in public forums such as this on a regular basis. Despite our efforts and the efforts of many others, we find the vast majority of consumers are uninformed and unprepared when it comes to this point in their lives. We plan to be active supporters of the NCOIL model law so seniors understand they should not be abandoning life insurance policies when they could be converting them to an Assurance Benefit plan to help pay for senior housing and long term care.

Question- What more do advisors need to do help seniors in this situation?

Answer- (David Kitaen) LTCi still has a role to play in helping seniors pay for long term care but it is not a magic bullet and other solutions will be important as well. It is hard to ignore the fact that 153 million Americans own $10 trillion worth of life insurance and seniors are abandoning billions of dollars of policies every year. Converting life insurance policies into a long term care benefit plan is a Medicaid qualified spend down, it is written into the NCOIL law and senior care providers all over the country accept the benefit plan as a way to help pay for senior housing and long term care. An Assurance Benefit plan can address immediate needs quickly. Advisors need to be informing clients that if they have a life insurance policy they should not abandon them but instead hang onto the policy because they can convert it when they have a need to help pay for assisted living, home health and nursing home care.

Question- Is an Assurance Benefit plan an insurance policy?

Answer- (Chris Orestis) No, it is not LCTI, it is not a hybrid policy or annuity and it is not an accelerated death benefit. It is the conversion of an in-force life insurance policy to a benefit plan that is set up as a dedicated long term care account administered specifically to help pay monthly costs of assisted living, home healthcare and nursing home care. For families confronting a long term care crisis speed is of the essence, so the enrollment process is designed to be quick and uncomplicated for the policy owner bypassing the carrier all together with enrollment completed in 30-60 days.

Question- Can you tell us about your experience using the Assurance Benefit conversion for one of your clients?

Answer- (David Kitaen) I had an 81- year old male client with a $100,000 UL policy he was five days away from lapsing when I contacted Life Care Funding Group about enrolling him in the Assurance Benefit to pay for his long term care costs. Over about a 45 day period he was enrolled in the Assurance Benefit with a policy conversion amount of $35,000. My client is now receiving a $1,700 monthly benefit being sent to his care provider of choice for the next 15 months and has a $5,000 final expense benefit in place for funereal costs in the future. He is now receiving home healthcare as he starts making the transition to assisted living. When I was with the family the day we signed the enrollment papers, my client and his two sons all actually gave me hugs and thanked me for so quickly taking a policy they were about to throw away and instead turned it into a long term care benefit that is covering them today.

Question- What do you see as the momentum for passage of the Disclosure Law around the county in light of the current economic crisis to fund long term care and what can agents/advisors do to help?

Answer- (Rep. Rob Damron) Cuts to Medicare and Medicaid will make private pay options such as use of a life insurance to pay for long term care important. Remember, these are our tax dollars we are talking about, and for every person able to extend their ability to pay for long term care and stay off of Medicaid a little bit longer the tax payers of this country are saving money. The Life insurance industry opposes the Model Law because if less policies are abandoned it will cut into their profits

I’m not just an elected official and a tax payer; I am an agent/advisor myself. Every one of us needs to contact their state senate and legislators to express support for this model law so consumers can get access to information about their legal rights and options as a policy owner. Other industries such as the long term care providers support this model law and they will be actively lobbying to see measures that promote private pay options move forward. One of the requirements of the model law is that agents and advisors are part of the process to inform consumers about their options—and that creates an opportunity for every one of us supporting this measure.

Question- What is your prediction for where things are going?

Answer- (Chris Orestis) Baby Boomers started turning 65 this year at a pace of 10,000people every day and that will continue uninterrupted for the next 20 straight years.
That will cause a lot of stress on the system that programs like Social Security, Medicare and Medicaid will have difficulty handling and moves like NCOIL made will be more common. The responsibility to pay for senior housing and long term care will continue to shift back to the consumer and their family, but the economic crisis will make this a difficult challenge. The ability to tap into private pay options and billions of dollars every year in available life insurance policies will be an important part of the equation that consumers, the long term care providers and political leaders will not be able to ignore.

Healthcare Policy Synopsis: Super Committee holds fate of Medicare and Medicaid in its hands

“The two most important driving forces for the federal budget are the aging of the U.S. population and rapidly rising health-care costs.”
- Federal Reserve Chairman Ben Bernanke

Law makers from both sides of the aisle have come together to create a “Super Committee” comprised of six Democrats and six Republicans, half come from the House of Representatives and half come from the Senate. The members of the Super Committee are tasked with finding at least $1.5 Trillion in budget cuts over 10 years. The members of the Committee are Senators Murray (D-WA, Co-Chair), Kerry (D-MA), Baucus (D-MT), Toomey (R-PA), Portman (R-OH), Kyl (R-AZ); and from the House side, Representatives Hensarling (R-TX, Co-Chair), Upton (R-MI), Camp (R-MI), Van Hollen (D-MD), Clyburn (D-SC), Becerra (D-CA).

The Super Committee must present their recommendations to Congress by November 23 to face an up or down vote before Christmas. The question for Christmas this year is which groups will be visited by St. Nick and which will meet the Grinch. Some very tough decisions need to be made and no area is protected. Adding to the pressure of the situation is the fact that if Congress rejects the recommendations of the Super Committee then automatic cuts of $1.2 Trillion as well as possible tax increases will be enacted across the entire federal budget sparing no one.

Reports are that the Committee is struggling to meet its goal because they are facing deadlocks over how to handle a mix of cuts and taxes to bolster two of the biggest budget areas of our country—Medicare and Medicaid. Republicans want to enact deep cuts to these programs without any increased revenues offset by taxes. Democrats will not agree to any changes to these popular programs without new revenues as part of the comprise package. Democrats view this as a matter of fairness particularly for the most vulnerable populations such as seniors, the poor and the disabled. Republicans view the situations as a matter of principle and are united behind their steadfast refusal to include raising taxes as part of any package to get the nation’s budget and debt problems under control.

The Super Committee is looking at examples from other efforts to address this problem that have been undertaken over the last couple of years. Alan Simpson and Erskine Bowles co-chaired a bi-partisan commission and released their recommendations in 2010 on how to reduce the nation’s budget deficit and accumulating debt crisis by $4 Trillion through 2020. They recommended a series of aggressive cuts and new tax revenues. Restructuring and significant cuts to Medicare and Medicaid funding for long term care services was a major element of their plan, and it is expected it will be as well for the Super Committee. Coupled with the recently enacted 11.1% across the board reduction in reimbursements enacted by CMS for all long term care expenses, seniors are looking at shouldering a significant portion of any reductions.

Families already under enormous economic pressure will find it even more difficult to pay for long term care services for loves ones. Government dollars will pay for less and it will become more difficult to qualify. It has become more important than at any time in our nation’s history to prepare for the costs of long term care and make use of programs such as long term care insurance, life insurance policy conversions to long term care benefit plans, and other financial vehicles to ensure sufficient private pay dollars are available when the time comes.

The view of health policy experts on the Super Committee’s efforts speaks to the major influence healthcare spending has on our nation’s budget and economic future:

Nina Owcharenko, Director of the Center for Health Policy Studies at The Heritage Foundation: "[i]f the goal is producing $1.2 trillion to $1.5 trillion in 10-year savings, the Joint Select Committee on Deficit Reduction must think big and produce recommendations with real substance. Medicare faces a flood of more than 77 million baby boomers joining the program over the next 20 years. The Medicare trustees' annual report continues to warn of the program's unsustainable and unfunded obligations. Meanwhile, Medicaid is draining state budgets, taking more resources away from other important programs such as education and transportation. Nothing could be truer than dealing with the health care savings component. ... They should make measurable progress in restructuring the health care system toward a sustainable, consumer-based model -- not just meet a fiscal target and call it reform."

David Kendall, senior fellow for health and fiscal policy at Third Way, a think tank that creates and advances moderate policy and political ideas: "The rising cost of health care is squeezing the federal budget, making it a common enemy. Over the next 40 years, the cost of Medicare will roughly double in real terms and the number of beneficiaries also will double, while the number of taxpayers will grow by only one-third. For Republicans, spiraling costs have placed them in the increasingly untenable position of proposing steep Medicare cuts in order to avoid tax increases in their budget proposals. Democrats are looking at a budget where health care spending crowds out other progressive priorities such as education, housing and public investments in general. The best way to save money in Medicare and Medicaid is to lower costs throughout the health care system. In the comics, super heroes and their rivals occasionally enter an uneasy alliance against a common enemy. In the face of a looming fiscal crisis, can the two parties use the super committee to follow suit?"

The Super Committee has until Thanksgiving to submit their recommendations to Congress and it must be acted upon within a month’s time. When the Super Committee concept was established, a punitive measure was put in place to make sure partisan bickering and gridlock could not conspire to snuff out this effort. The specter of the $1.2 trillion mandated cuts that will immediately impact every budget area of this country, including defense spending and entitlement programs, was intended to be so harsh that it would force Washington, DC to get out of its own way and allow the Super Committee to accomplish its mission. No one wants to see the looming cuts automatically enacted if the Super Committee fails and/or Congress votes down its recommendations before the end of the year.

As a nation, we have truly arrived at the point where we can no longer kick the can down the road. We have all been enjoying a fantastic dinner party for years but the check is now on the table and everyone has to get out their wallets to help pay. The question for seniors and families faced with long term care expenses—have you prepared for this day (are you even paying attention!?) and do you understand all of your available options to help cover the costs?

Funding Long Term Care: New Legislation Supports Use of Life Policies to Pay for LTC

Cuts to Medicare and Medicaid funding specifically for long term care services coupled with the growing Boomer and senior population of this country are driving the need to fund more and more LTC costs through private pay dollars. Unfortunately, there is a lack of consumer awareness about how LTC funding works and the facts about private market funding options. There is more than $20 trillion of in-force life insurance in the United States (NAIC, 2010) but insurance carriers are resistant to inform policy owners about their legal rights of ownership, and a majority of these uniformed seniors allow their policies to lapse or surrender without ever being aware of other options to use life insurance to pay for long term care services.

Legislative Support for Private Pay Options

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 every year when they unanimously passed the Life Insurance Consumer Disclosure Model Act in November, 2010. The law’s intent is to make sure that insurance carriers disclose to their policy owners that they have alternative options to consider beyond lapse or surrender of a policy. NCOIL President Rob Damron (KY), upon adoption of the model, said, “It is imperative that policy holders understand that they have alternatives to merely to lapsing or surrendering their policy.” States are looking to private market funding solutions to help keep Medicaid expenditures down and help overcome the long term care funding crisis—and this is a big move in that direction.

Among the options in the law is the right to “convert a life insurance policy into a long term care benefit plan”. Any form of life insurance can qualify for a policy conversion to pay directly for the costs of long term care in a nursing home, assisted living and home healthcare. Life Insurance is an unqualified asset for Medicaid eligibility and the Assurance Benefit policy conversion is considered a “qualified spend down”. This option also allows the owner to preserve a portion of the death benefit throughout the spend down period, protecting it from Medicaid Recovery legal action against the estate.

Medicaid Spend Down of an Unqualified Asset

When an individual applies for Medicaid, the State conducts a "look back" to find transfers of assets for 60 months prior to the date the individual is institutionalized or, if later, the date he or she applies for Medicaid. All transfers made by the applicant or the applicant’s spouse subsequent to January 1, 2010, whether from an individual or to an individual or from a trust or to a trust, have a five year look-back period.

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.
Transferring ownership of a life insurance policy for less than its fair market value would be a violation of Medicaid’s asset transfer and look back requirements. A policy can be surrendered for its cash value to be spent down on care or a policy can be converted for its market value and the benefit of that conversion can be used to pay for long term care as a qualified spend down. If a transfer of assets for less than fair market value is found, the State must withhold payment for nursing facility care (and certain other long-term care services) for a period of time referred to as the “penalty period”.

The length of the penalty period is determined by dividing the value of the transferred asset by the average monthly private-pay rate for nursing facility care in the State. Example: A transferred asset worth $90,000, divided by a $3,000 average monthly private-pay rate, results in a 30-month penalty period. There is no limit to the length of the penalty period. (Section 1917(c) of the Social Security Act; U.S. Code Reference 42 U.S.C. 1396p(c))

The Omnibus Budget Reconciliation Act (OBRA) of 1993 defines estate and requires each state to seek adjustment or recovery of amounts correctly paid by the state for certain people with Medicaid. The state must, at a minimum, seek recovery for services provided to a person of any age in a nursing facility or other medical institution. The State may at its option recover amounts up to the total amount spent on the individual's behalf for medical assistance for other services under the state's plan. For individuals age 55 or older, States are required to seek recovery of payments from the individual's estate for nursing facility services, home and community-based services, and related hospital and prescription drug services. States have the option of recovering payments for all other Medicaid services provided to these individuals.

Mandating Options to Help Seniors pay for Long Term Care

Millions more seniors own life insurance then LTCi and for many their policy is an unneeded, undervalued, and illiquid asset. Senior policy owners and their family prefer using the life insurance asset in a productive way to help solve their financial and healthcare challenge instead of lapsing or surrendering it-- and most would prefer to stay off of Medicaid if given the financial option.

With mandated access to information and resources, those most in need of financial solutions can make an informed decision about what is the more important priority for them— the value of a death benefit and keeping the policy in force, or the value of a living benefit and converting the policy to its present day value to pay for long term care.

By converting an existing life insurance policy to a long term care Assurance Benefit plan, the owner is spending down the asset towards their cost of care in a Medicaid compliant manner while still preserving a portion of the death benefit. If the insured passes away while spending down via their Assurance Benefit enrollment, any remaining death benefit would pay out to the designated beneficiary without being subject to Medicaid recovery. Enrollees able to now use non-Medicaid dollars are allowing themselves to access the best level of care and options by remaining a “private pay” patient for as long as possible (private pay rates are at higher levels of 30% or more than Medicaid and is preferred by long term care providers). Medicaid reimbursements are less than the actual cost of care and are restrictive in what is allowed for coverage. Assisted living is not covered at all and home health coverage is limited and subject to change. The primary source of care for a Medicaid patient is a nursing home. Conversion of a life insurance policy to an Assurance Benefit allows for maximum choice of care options, and preservation of a partial death benefit instead of 100% abandonment.

Conclusion

People need to arm themselves with information about how the system works and what kind of funding options (and limitations) they have to work with. And, people need to stop waiting until the last minute to plan for their inevitable time in long term care. In one form or another, (home or facility based) as people age and/or become frail they will need someone to help care for them. That care will cost money and that money has to come from somewhere. As the government makes it harder and harder to access funding, people need to prepare to bear much of the financial burden on their own. To ensure quality of life and dignity when the time for long term care arrives; people must make the effort today to understand how the process works and what kind of private pay financial options are out there.

Federal and state budgets can only accommodate so much, and when dollars are shrinking while populations are growing it becomes pretty simple math to see that something has to give. If history is our guide, then it will be the individual who ends up giving the most. For people to come even close to meeting their expectations for a high level of senior housing and care it will require a firm grasp of the options available and a plan to take action before its too late. Now is the time to prepare by understanding the funding options that are available to help cover the costs long term care as the responsibility shifts more and more to the individual.

As large Medicaid cuts loom, states look to convert life insurance polices to long term care benefits to fill the financial gap

As the debate over how to balance the budget and whether to raise our nation’s debt ceiling rages on in Washington DC, we are seeing clearly that one of the fattest targets on the radar screen is Medicaid. Our nation’s Governors from both parties spoke out during the National Governor’s Association (NGA) annual meeting held in July and said they are “most worried that both President Obama and Congressional Republicans wanted to cut Medicaid payments to the states by $100 billion over the next decade.” House Republicans have taken things even further proposing more than $700 billion in Medicaid cuts, largely by converting federal funds into block grants for states. “There has been an unsettling silence around Medicaid — even from members of my own party,” said Sen. Jay Rockefeller (D-WV). “Medicaid suddenly looks like the sacrificial lamb.”

Medicaid is the primary payor of long term care services in the United States. Over 10 million Americans now require long term care annually, and 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.

Medicaid and state budgets have been impacted particularly hard by shrinking tax dollars and growing Medicaid enrollment brought on by the economic crisis and an aging population. There is a combined budget shortfall of $121 billion across 46 states for fiscal year 2011. States are legally required to operate with balanced budgets every year, and draconian cuts as well as federal assistance have become necessary. Although Medicaid cuts were not part of the Federal budget and deficit ceiling compromise agreement (for now), on August 1, 2011 CMS enacted an unprecedented across the board reduction in LTC reimbursements from Medicare and Medicaid of 11.1% for 2012.

To keep pace with these paralyzing budget problems and growing demand for long term care services, states have begun looking for alternative ways to stimulate private dollars to help pay for the costs of long term care and reduce the pressure on Medicaid budgets. One example has been the unanimous passage by the National Conference of Insurance Legislators (NCOIL) of the Life Insurance Consumer Disclosure Model Law requiring that life insurance companies inform policy owners they have a number of options to consider instead of abandoning an in-force policy. Among the options in the law is the right to “convert a life insurance policy into a long term care benefit plan”.

Any form of life insurance can qualify for a policy conversion to pay directly for the costs of long term care in a nursing home, assisted living and home healthcare. Life Insurance is an unqualified asset for Medicaid eligibility and the Assurance Benefit policy conversion is considered a “qualified spend down”. This option also allows the owner to preserve a portion of the death benefit throughout the spend down period, protecting it from Medicaid Recovery legal action against the estate.

Sources

Kaiser Family Foundation, Medicaid Fact Sheet, March 2011 and State Fiscal Condition and Medicaid Report, October 2010

National Conference of Insurance Legislators (NCOIL), Life Insurance Consumer Disclosure Model Law, November 2010

A Growing Strategy: Paying for Long-Term Care with Life Policies

Medicaid was signed into law in 1965 by President Lyndon Johnson as a safety net to provide health care to the indigent and disabled. Over the years it has also become the major payer of long-term care services for the elderly in the United States: More than 10 million Americans now require long-term care annually and Medicaid funds at least two-thirds of all spending for nursing home care today. In 2009, $240 billion was spent on long-term care services, and Medicaid accounted for 43 percent of total expenditures. By comparison, just $45.6 billion, or 19 percent, of long-term care services was paid “out-of-pocket” by consumers. The current Republican proposal would cut $750 billion over ten years by transforming Medicaid into a block grant program that would provide $11,000 per year for each enrollee. And now a crushing blow for both long term care providers and seniors-- on August 1, 2011 CMS enacted an unprecedented across the board reduction in LTC reimbursements from Medicare and Medicaid of 11.1% for 2012.

Costs of Long-Term Care on the Rise

Further compounding the problem is the fact that 10,000 baby boomers started turning age 65 on a daily basis this year, and that pace will continue — uninterrupted — for the next 20 years; the demand for long-term care services grows steadily, but the availability of public dollars to pay for this demand is shrinking. According to the 2010 MetLife Mature Markets Institute Annual Study, costs for all forms of long term-care services continue to rise:

 The national average cost of staying in a semi-private room in a nursing home grew to $198 per day ($72,279 annually) and a private room at $229 per day ($83,585 annually).
 The national average cost of living in an Alzheimer’s unit is $228 per day ($83,220 annually).
 The national average cost of living in an assisted-living facility reached $3,131 per month ($39,516 annually).
 The national average cost for private-pay home health care is now at $21 per hour.

Life Insurance Consumer Disclosure Law

According to the National Association of Insurance Commissioners (NAIC), there are153 million Americans who own a collective $10 trillion of in-force life insurance. 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, only will be abandoned. The shame of this situation for the consumer is that there are numerous options for them to explore before surrendering or allowing a policy to lapse. 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.

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 policyholders older than 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 Law 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 the penalties established by state law.

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 policyholders 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."

Life Insurance is an Unqualified Asset for Medicaid Eligibility

A life insurance policy is legally recognized as an asset of the policy owner and it counts against them when applying 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 seek full policy details. Failure to disclose and comply is fraud.

Medicaid recovery units have become much more forceful about looking for life insurance policy death benefits (declared and undeclared) that have paid out to families after the death of a Medicaid recipient. Medicaid budgets are now facing extreme pressure and asset recovery efforts can be very aggressive. Recovering the entire cost of care through legal actions against the estate and surviving family to go after the death benefit payment are common.

When an individual applies for Medicaid, the State conducts a "look back" to find transfers of assets for 60 months prior to the date the individual is institutionalized or, if later, the date he or she applies for Medicaid. All transfers made by the applicant or the applicant’s spouse subsequent to January 1, 2010, whether from an individual or to an individual or from a trust or to a trust, have a five-year look-back period. These provisions apply when assets are transferred by individuals in long-term care facilities or receiving home- and community-based waiver services, or by their spouses, or someone else acting on their behalf. At state option, these provisions can also apply to various other eligibility groups.

Transferring ownership of a life insurance policy for less than its fair market value would be a violation of Medicaid’s asset transfer and look-back requirements. A policy can be surrendered for its cash value to be spent down on care, or a policy can be converted for its market value and the benefit of that conversion can be used to pay for long-term care as a qualified spend-down. If a transfer of assets for less than fair market value is found, the State must withhold payment for nursing facility care (and certain other long-term care services) for a period of time referred to as the penalty period.

The length of the penalty period is determined by dividing the value of the transferred asset by the average monthly private-pay rate for nursing facility care in the state. For example, a transferred asset worth $90,000, divided by a $3,000 average monthly private-pay rate, results in a 30-month penalty period. There is no limit to the length of the penalty period. (Section 1917(c) of the Social Security Act; U.S. Code Reference 42 U.S.C. 1396p(c))

By converting an existing life insurance policy to a long-term care benefit plan, the owner is spending down the asset towards their cost of care in a Medicaid-compliant manner while still preserving a portion of the death benefit. If the insured passes away while spending down via their policy conversion enrollment, any remaining death benefit would pay out to the designated beneficiary without being subject to Medicaid recovery. Enrollees able to now use non-Medicaid dollars are allowing themselves to access the best level of care and options by remaining a “private-pay” patient for as long as possible (private-pay rates are at higher levels of 30 percent or more than Medicaid and is preferred by long-term care providers).

Medicaid reimbursements are less than the actual cost of care and are restrictive in what is allowed for coverage. Assisted living, for example, is not covered at all and home health coverage is limited and subject to change. The primary source of care for a Medicaid patient is a nursing home. However, your clients can avoid that fate with this simple fact: Conversion of a life insurance policy to a long-term care benefit allows for maximum choice of care options, as well as preservation of a partial death benefit instead of 100 percent abandonment.

Converting a Death Benefit into a Life Care Benefit

As is the case with any product or service, the more options and benefits that the consumer understands to be 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. It is your job as the advisor to ensure they understand their rights and options.

What's more, the disclosure law is an important victory for people requiring long-term care because it will increase their awareness about the best use of a life insurance policy’s death benefit while still alive. The senior care industry and lawmakers are recognizing the opportunity to convert life policies into a method to pay for the high costs of senior housing and/or long-term care. Among the options included in the NCOIL Model Law is for a policy owner to “convert a policy into a long term care benefit plan.” For families unable or unwilling to keep their policy in-force by maintaining premium payments, the conversion option is a much better choice than abandoning the policy.

This conversion option differs from life/LTCI hybrid policies that can be exchanged for LTC insurance because it allows the owner to access the present-day value of a life insurance policy and use it to help pay for long-term care. Not to be confused with an insurance policy, such a plan is not issued by an insurance company, is not restricted to polices that contain a conversion rider and is not limited to the issuing carrier. The policy conversion can be done for any form of individual or group life insurance, and is not subject to premium payments or the same limitations and wait periods as LTCI. The entire conversion process can be completed in under 30 days, and then a third-party benefit administrator makes 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.

Providers of long-term care services such as nursing homes, assisted living communities and home health agencies, as well as state governments, are realizing that there is tremendous value for the consumer in converting life insurance policies to help pay for the costs of long-term care. By converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered by 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.

Private funding solutions for LTC

For years experts have discussed Baby Boomers reaching retirement age in the future and the impact it would have on long-term care, Medicaid and Medicare. As of January 1, 2011, 10,000 Boomers a day began qualifying for Social Security and Medicare. With the arrival of this generation en masse now upon us, it is safe to say that the future has arrived.

Unlike the economic prosperity and high quality of life Boomers grew to expect, the new reality for many will be an inability to afford the costs of senior housing and long-term care. Some will have the financial means to afford the best and others will qualify for social programs to care for them; but what about the vast middle class population caught in between? More than 10 million Americans now require long-term care annually and Medicaid is the primary payor of long-term care (LTC) services in the United States. In 2009, Medicaid spent $240 billion on LTC services, accounting for 43% of total expenditures. By comparison, $45.6 billion or 19% of LTC 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.

Medicare and Medicaid are under so much stress that the cuts are coming fast and furious. As the Boomer 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.

PRIVATE FUNDING OPTIONS
In recent years the senior care industry has been making more use of private funding options to help people overcome financial shortfalls. The urgency to use these “funding solution” programs has been elevated by the ongoing economic crisis. And what are some of the programs available to help families access more private-pay dollars? Among the programs are the Veterans Administration Aid & Attendance benefit, senior living lines of credit and a newly emerged option that allows seniors to convert a life insurance policy into a LTC benefit plan.

This conversion option, known as an assurance benefit plan, is not an LTC insurance policy. It is an actual benefit plan that a life insurance policy owner can enroll in by converting his or her death benefit into a living benefit to help pay for the costs of senior housing and long-term care. Any type of life insurance will qualify and once the 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.

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 the individual 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 toward cost of care before the owner will qualify for Medicaid. All Medicaid applications specifically ask if the applicant owns life insurance and request full policy details. Failure to disclose and comply is fraud.

But instead of abandoning a life insurance policy, the policy owner can convert a life insurance policy while still alive to help pay for long-term care, and he or she is 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 doing so, a person enrolled in an assurance benefit plan would stay off of Medicaid while they were enrolled.

CONSUMER DISCLOSURE LAWS
States have begun passing laws mandating that life insurance companies inform their policyholders that these types of options exist as an alternative to lapsing or surrendering a policy. As of this writing, 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. In November 2010, the National Conference of Insurance Legislators (NCOIL) passed the Life Insurance Consumer Disclosure Model Act mandating consumer disclosure about options, such as the assurance benefit, to policy owners and it is being introduced in state legislatures around the country. As Medicaid budgets continue to be pressed, more efforts such as this to find private market solutions will be mandated as part of the landscape.

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 (Kentucky), upon unanimous passage 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 including…conversion to long-term care.”

During testimony at NCOIL's annual meeting to consider passing the Model Law, Life Care Funding Group offered the following example:

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.

We have had years to get ready for this crisis and it has arrived. The question now becomes: As an industry and as a country, are we ready to embrace these kinds of private market innovations to tackle the LTC funding crisis?

Driven by crisis, alternative solutions emerge to pay for long term care

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.”

LTC funding crisis driving search for alternatives

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. There you have it folks from the top—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. 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. Just as 10,000 Baby Boomers a day started turning 65; this has become the number one concern of the Federal Reserve about the immediate and long term future of the U.S. economy.

Medicaid in particular has become a serious problem for the states. It is the primary payor for long term care services and will pay out approximately $200 billion to cover those costs for seniors in 2011. 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.

State law makers understand the situation and efforts throughout the country are underway to find alternative, private market solutions to help pay for long term care services. Ten years ago it looked like long term care insurance (LTCI) was going to be a major part of the solution. Unfortunately, growth in sales for the last decade actually declined and then serious market disruptions further hampered the product. The combined impact of MetLife leaving the market in 2010 and The Guardian leaving the market in 2011, multiple rate increases from Genworth and John Hancock, and state’s taking over entire blocks of business to ensure solvency has undermined consumer confidence. Additionally, the CLASS Act may be well meaning but entirely insufficient to address the magnitude of this problem. At this point it is all too clear that other solutions will be necessary.

Legislative leaders in the states have taken notice of the amount of life insurance in the hands of seniors and are focusing on opportunities for them to use it as a means to pay for long term care. According to the NAIC, there is $10 Trillion of in-force life insurance policies in the U.S. Of that amount, there is $100 Billion - $500 Billion in the hands of seniors annually who could potentially use their policy as a living benefit to help pay for long term care. In late 2010, the National Conference of Insurance Legislators (NCOIL) unanimously passed the Life Insurance Consumer Disclosure Model Law which requires that life insurance companies disclose to their policy owners that they have a number of alternative options to use their life insurance policies to consider instead of a lapse or surrender. Among the options legally required to be disclosed to policy owners is their ability to convert a policy’s death benefit into a long term care benefit plan.

NCOIL declared that final passage of the Life Insurance Consumer Disclosure Model Law "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, listing eight available options, including accelerated death benefits, conversion to long term care, and the possibility of a life settlement."

State law makers understand that there is billions of dollars worth of life insurance policies at play and a massive amount is abandoned every year because the owners are uninformed about their legal rights and options. By educating the public about alternative uses for their asset, those policies could be put to work to help pay for the costs of long term care. As an example of disparity between products, there are 400,000 long term care policies in-force in New York State compared to 9,000,000 life insurance policies. If states can successfully delay the need for someone to go onto Medicaid by extending the spend down period of a life insurance policy through converting its use, they are improving the circumstances of both the individual and the provider of long term care services, and reducing the tax payer’s burden to bail out Medicaid and Medicare.

Medicaid in Crisis

Treatment of Life Insurance as an unqualified asset for Medicaid eligibility

Over 10 million Americans now require long term care annually. Medicaid is the primary payor of long term care services in the United States. The national average cost of a nursing home is $72,000 per year, for assisted living it is $38,000, and for home healthcare services it is $21 per hour. Most people will drain all personal savings and assets paying for long term care in their first year of usage.

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.

Medicaid and state budgets have been impacted particularly hard by shrinking tax dollars and growing Medicaid enrollment brought on by the economic crisis and an aging population. There is a combined budget shortfall of $121 billion across 46 states for fiscal year 2011. States are legally required to operate with balanced budgets every year, and draconian cuts as well as federal assistance have become necessary. The federal government passed a temporary increase in federal matching payments (FMAP) for Medicaid of $87 billion in 2009. Over 2010 and 2011, the FMAP was extended at reduced levels by half and then by half again, and will be eliminated in 2012. As the FMAP assistance winds down and ultimately concludes, state spending will need to increase by at least 25% to keep pace—and at a time when the dollars are not available.

States have begun looking for alternative ways to stimulate private dollars to help pay for the costs of long term care and reduce the pressure on Medicaid budgets. One example has been the unanimous passage by the National Conference of Insurance Legislators (NCOIL) of the Life Insurance Consumer Disclosure Model Law requiring that life insurance companies inform policy owners they have a number of options to consider instead of abandoning an in-force policy. Among the options in the law is the right to convert a life insurance policy into a long term care benefit plan.

An Assurance Benefit will convert any form of life insurance to pay directly for the costs of long term care in a nursing home, assisted living and home healthcare. It is considered a “qualified spend down” of a life insurance policy asset for Medicaid eligibility. This option also allows the owner to preserve a portion of the death benefit throughout the spend down period, protecting it from Medicaid Recovery legal action against the estate.

Sources:

Kaiser Family Foundation, Medicaid Fact Sheet, March 2011 and State Fiscal Condition and Medicaid Report, October 2010

National Conference of Insurance Legislators (NCOIL), Life Insurance Consumer Disclosure Model Law, November 2010


Medicaid Eligibility Q&A

Q: Does ownership of a life insurance policy count against an applicant for Medicaid eligibility?

A: 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.

Some states allow for a final expense policy to be kept or transferred to a funeral home (but the funeral home would keep the entire death benefit). Medicaid recovery units have become much more forceful about looking for life insurance policy death benefits (declared and undeclared) that have paid out to families after the death of a Medicaid recipient. Medicaid budgets are now facing extreme pressure and asset recovery efforts can be very aggressive. Recovering the entire cost of care through legal actions against the estate and surviving family to go after the death benefit payment are common.

Q: What options do owners’ of a life insurance policy have when attempting to qualify for Medicaid?

A: Medicaid rules are very clear that a life insurance policy is an unqualified asset and counts against Medicaid eligibility. The owner of one or more policies has a variety of options to consider:
• A policy with more than a minimal amount of cash value (usually $1,500 or more depending on the state) must be liquidated with the proceeds spent down on care.
• A policy with no cash value does not need to be liquidated but the death benefit will be subject to Medicaid recovery efforts to return the amount of money spent on care.
• Many states will exempt a “final expense” policy if the full death benefit value is assigned to a funeral home.
• Assignment of a life insurance policy for less than its fair market value is a violation of asset transfer rules if done within the 60 month look back period.
• A policy owner has the legal right to convert a life insurance policy into a long term care benefit plan at its fair market value and extend their spend down period by covering cost of care while preserving a portion of the death benefit until exhausted.

Q: How does a policy conversion work?

A: By converting an existing life insurance policy to a long term care Assurance Benefit plan, the owner is spending down the asset towards their cost of care in a Medicaid compliant manner while still preserving a portion of the death benefit. If the insured passes away while spending down via their Assurance Benefit enrollment, any remaining death benefit would pay out to the designated beneficiary without being subject to Medicaid recovery. Enrollees able to now use non-Medicaid dollars are allowing themselves to access the best level of care and options by remaining a “private pay” patient for as long as possible (private pay rates are at higher levels of 30% or more than Medicaid and is preferred by long term care providers). Medicaid reimbursements are less than the actual cost of care and are restrictive in what is allowed for coverage. Assisted living is not covered at all and home health coverage is limited and subject to change. The primary source of care for a Medicaid patient is a nursing home. Conversion of a life insurance policy to an Assurance Benefit allows for maximum choice of care options, and preservation of a partial death benefit instead of 100% abandonment.

Sources:

Health and Human Services (HHS) Center for Medicare and Medicaid Services (CMS) (www.hhs.gov)

United States Government Accountability Office (GAO) report to the United States Congress, “Medicaid Long Term Care” report, March, 2007


Medicaid Eligibility Fact Sheet

What is Medicaid: Medicaid is health insurance that helps many people who can't afford medical care pay for some or all of their medical bills. Medicaid is available only to people with limited income. You must meet certain requirements in order to be eligible for Medicaid.

Who qualifies for Medicaid: Many groups of people are covered by Medicaid. Even within these groups, though, certain requirements must be met. These may include your age, whether you are pregnant, disabled, blind, or aged; your income and resources (like bank accounts, real property, life insurance, or other items that can be sold for cash); and whether you are a U.S. citizen or a lawfully admitted immigrant. The rules for counting your income and resources vary from state to state and from group to group. There are special rules for those who live in nursing homes and for disabled children living at home.

Who qualifies for Long Term Care to be covered by Medicaid: In addition to financial eligibility, States determine if an individual meets the functional criteria by assessing the limitations in an individual’s ability to carry out activities of daily living (ADL) and instrumental activities of daily living (IADL). The Medicaid statute requires states to use specific income and resource standards in determining eligibility; these standards differ based on whether an individual is married or single. If a state determines that an individual has transferred assets for less than “fair market value” (FMV), the individual may be ineligible for Medicaid coverage for long term care for a period of time. Individuals who incur high medical costs may “spend down” into Medicaid eligibility because these expenses are deducted from their income. Spending down may bring their income below the state determined income eligibility limit.

What type of assets count against Medicaid eligibility: Income and Assets are both calculated to determine Medicaid eligibility. Income from work, investments, and entitlements such as Social Security all need to be reported by the applicant. Assets such as cash, stocks, bonds, trusts, annuities, real estate, vehicles and life insurance all must be reported and are calculated for eligibility. States determine their own specific eligibility standards within federally mandated parameters.

How is life insurance counted as an unqualified asset: Ownership of any in-force life insurance policies must be reported by the applicant when determining eligibility for Medicaid and failure to report is fraudulent. Specific limitations vary by state, but any policy with cash value in the range of $1,500 to $2,500 must be liquidated and the proceeds spent down on care before eligibility is approved. Exemptions are allowed for final expense policies if the entire policy is assigned to a funeral home. Term policies that do not have cash value are also exempt, but the death benefit and estate is subject to legal action and liens by the Medicaid department to recover all money spent on care for the deceased.

Life insurance is an unqualified asset and counts against the Medicaid applicant’s eligibility to qualify. Any amount of money derived from ownership of a life insurance policy must be either spent down on care (cash value or monetary value available while alive) or the death benefit is subject to legal action against the estate as part of Medicaid’s required asset recovery procedures.

What are the rules for Medicaid Recovery actions: The Omnibus Budget Reconciliation Act (OBRA) of 1993 defines estate and requires each state to seek adjustment or recovery of amounts correctly paid by the state for certain people with Medicaid. The state must, at a minimum, seek recovery for services provided to a person of any age in a nursing facility, intermediate care facility for the mentally retarded, or other medical institution. The State may at its option recover amounts up to the total amount spent on the individual's behalf for medical assistance for other services under the state's plan. For individuals age 55 or older, States are required to seek recovery of payments from the individual's estate for nursing facility services, home and community-based services, and related hospital and prescription drug services. States have the option of recovering payments for all other Medicaid services provided to these individuals.

People with Medicare are notified of the Medicaid estate recovery program during their initial application for Medicaid eligibility and annual redetermination process. Individuals in medical facilities (who do not return home) are sent a notice of action by their county Department of Social Services informing them of any intent to place a lien/claim on their real property. The notice also informs them of their appeal rights. Estate recovery procedures are initiated after the beneficiary's death.

Can ownership of a life insurance policy be transferred to keep the policy in the family: When an individual applies for Medicaid, the State conducts a "look back" to find transfers of assets for 60 months prior to the date the individual is institutionalized or, if later, the date he or she applies for Medicaid. All transfers made by the applicant or the applicant’s spouse subsequent to January 1, 2010, whether from an individual or to an individual or from a trust or to a trust, have a five year look-back period.

These provisions apply when assets are transferred by individuals in long-term care facilities or receiving home and community-based waiver services, or by their spouses, or someone else acting on their behalf. At state option, these provisions can also apply to various other eligibility groups.

Transferring ownership of a life insurance policy for less than its fair market value would be a violation of Medicaid’s asset transfer and look back requirements. A policy can be surrendered for its cash value to be spent down on care or a policy can be converted for its market value and the benefit of that conversion can be used to pay for long term care as a qualified spend down.

Are there penalties or delays to qualify for Medicaid based on violations of asset transfers and reporting: If a transfer of assets for less than fair market value is found, the State must withhold payment for nursing facility care (and certain other long-term care services) for a period of time referred to as the penalty period.
The length of the penalty period is determined by dividing the value of the transferred asset by the average monthly private-pay rate for nursing facility care in the State. Example: A transferred asset worth $90,000, divided by a $3,000 average monthly private-pay rate, results in a 30-month penalty period. There is no limit to the length of the penalty period.
(Section 1917(c) of the Social Security Act; U.S. Code Reference 42 U.S.C. 1396p(c))

Sources:

Health and Human Services (HHS) Center for Medicare and Medicaid Services (CMS) (www.hhs.gov)

United States Government Accountability Office (GAO) report to the United States Congress, “Medicaid Long Term Care” report, March, 2007