Too often when seniors and their families contact their life insurer about their old policies, they are given only three options: surrender the policy for its cash value(if it has any), pay the premium or let it lapse.
Most people who receive a lapse notice have a policy with no cash value because it has already been drained by the carrier to make premium payments. That typically leaves a final option of paying the premium or walking away. The number of seniors allowing this to happen to a policy after paying premiums, sometimes for decades, is scandalously high. State law makers around the country have noticed this situation and are now taking action to make sure policy owners are informed of their options before they abandon a life insurance policy.
Consumer Disclosure
As of this writing, the states of California, Kentucky, Maine, New Hampshire, Oregon, Washington State, 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 and it will be introduced in state legislatures around the country in 2011.
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. The eight options for consumers to be made aware of in the Model Law include:
- Accelerated death benefit
- Assignment of policy as a gift
- Life Settlement
- Policy replacement
- Maintenance pursuant to terms or riders
- Maintenance of policy through a loan
- Conversion from term to a permanent policy
- Conversion to LTCI or a Long Term Care Benefit Plan
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. Insurance departments are taking action as well and have been implementing and policing the disclosure law in their states—and some have created consumer friendly brochures to reach out to policy owners and help make them aware of their rights and options.
Industry Opposition
The life insurance companies are not happy about this disclosure law and have been gearing up their considerable lobbying machine to fight it in the states. They have been unsuccessful so far and now NCOIL has drafted and approved a Model Law for the rest of the nation to adopt despite the objections of ACLI and companies such as MetLife, Mass Mutual and Prudential. 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. 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, I offered the following:
“Our case workers hear from seniors and their families every day who have been paying premiums for years and are getting ready to abandon their policy. These are middle class Americans without insurance expertise and the typical size of their policy is well under $500,000. They are being told by their insurance company that their only option is to pay or walk away. With this Consumer Disclosure law, policy owners will not make decisions based on a lack of information and instead will be informed that they have a number of options to consider first that could make a significant difference in their lives, and at a time when they need it most.”
NCOIL declared that final passage of the Life Insurance Consumer Disclosure Model Law is intended to be "a strong stand for life insurance policy owners and would empower consumers through education about their options."
NCOIL President Rob Damron (KY), upon unanimous passage 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."
Death Benefit to Living Benefit
Another reason that the disclosure law is such an important victory for the consumer is that for people requiring long term care, such as seniors and those suffering from terminal or chronic conditions, this will increase their awareness of opportunities to get the best use of their life insurance policy’s death benefit while still alive. There are millions of people every year requiring long term care and lack the means to pay for it. For those that qualify, Medicare and Medicaid can pick up some of those costs. Others may have a long term care policy. But what about the vast middle market that won’t qualify for government assistance and do not own LTCI? Millions of those people do own a life insurance policy, and both the senior care industry and law makers are recognizing the opportunity to convert those policies into a method to pay for the high costs of senior housing and/or long term care.
A newer option among the eight that is included in the Law is for a policy owner to “convert a policy into a long term care benefit plan”. This option differs from hybrid policies that can be converted into LTCI (which is also included in the list of eight). This option allows for the actual exchange of a life insurance policy for a long term care benefit plan. Not to be confused with an insurance policy, the 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. 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.
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.
Conclusion
With the consumer disclosure law spreading across the country, life insurance policy owners are going to learn about converting their policy and the other options for getting more out of their asset than just abandoning it. As it is specified in the Law, agents and advisors are going to play an important role in educating their clients about these options. In the midst of an ongoing economic malaise, policy owners will become more challenged to remain in force and many will be looking at abandoning their asset as they struggle to make ends meet. By offering people information and access to a variety of options to get the most out of their policy as a living benefit, agents and advisors will be giving polices and their owners a second life.
Monday, February 7, 2011
Tuesday, February 1, 2011
Life Insurance Consumer Disclosure Law: A Life Boat in the Eye of the Storm
January 1, 2011: The Silver Tsunami Hits with a BANG!
“Senior boom begins amidst economic bust” (USA Today 11/14/10). We see it in the headlines almost every day-- between the senior population already in the long term care system and Baby Boomers now hitting Social Security and Medicare age at a rate of over 10,000 people a day, it is now safe to say that the long term care funding crisis has arrived. The crux of the dilemma is the most basic of economic principles: Supply and Demand. Amidst the most persistent economic downturn since the Great Depression, “demand” of seniors that need (or will need) long term care is growing at a much faster rate than the “supply” of resources to pay for their care. This demographic-economic disconnect will force the government to raise barriers to entry for the three primary entitlement programs: Social Security, Medicare and Medicaid. It will also result in reduced benefit levels and push more of the responsibility to fund retirement and long term care back on the individual (and their family).
Seniors and their families are already struggling with the costs of every day living, if you add the costs of long term care to the picture it is a back breaking scenario for most Americans. Statistics show that the majority of people do not understand the various forms of long term care, the different means to pay for it, and most do not plan for long term care until they are beset by a health care crisis.
For the wealthy, the costs of long term care can be absorbed. For the poorest, government subsidized care is available. But what about the Middle American who does not fit either of these descriptions? A small percentage of people have had the foresight and resources to prepare at some degree through long term care insurance. Unfortunately, sales have been in decline for years (just when they should have been sky rocketing) and the market has been severely disrupted by rate increases and carriers exiting the market. A much larger number of people in this category own life insurance, and the use of that asset as a means to pay for long term care is an option readily available to them. But, over 90% of life insurance polices lapse or are surrendered and most middle market policy owners are unaware that their life insurance policy’s death benefit can be used as a “living benefit”.
Life Insurance Consumer Disclosure Law
State governments have started to recognize the dilemma of policy owners who do not understand the variety of options available to them when they are considering surrendering or lapsing their life insurance. There are literally millions of seniors who have been paying premiums for years and then abandon their policies at the time when it could be of most use to them. Efforts have been underway to address that lack of information for policy owners. A number of states including California, Kentucky, Maine, New Hampshire, Oregon, Washington State, 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, and despite opposition by the life insurance industry, it will be introduced into state legislatures across the country starting in 2011.
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. The eight options for consumers to be made aware of in the Model Law include:
- Accelerated death benefit
- Assignment of policy as a gift
- Life Settlement
- Policy replacement
- Maintenance pursuant to terms or riders
- Maintenance of policy through a loan
- Conversion from term to a permanent policy
- Conversion to LTCI or a Long Term Care Benefit Plan
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 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."
The timing of this disclosure law could not be better. The Silver Tsunami explosion has begun, economic conditions remain in turmoil with no significant recovery in sight, and the LTCI market is in disarray. Consumers are looking for solutions to their problems and they may be able to find it in their life insurance policy.
Policy Conversion
One of the newer options for policy owners included in the Model Law is to “convert a life insurance policy into a long term care benefit plan.” This option differs from hybrid policies that can be converted into LTCI (which is also included in the list of eight). This option allows for the actual exchange of a life insurance policy for a long term care benefit plan. Not to be confused with an insurance policy, the 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. 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.
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 for an extended period and the life insurance asset can be spent-down in a Medicaid compliant fashion—while preserving a portion of the death benefit.
On November 19, 2010, during testimony at NCOIL’s annual meeting to consider passing the Model Law, I 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.”
Life insurance policies with long term care riders are available in the market, but it is a newer product and it will be some years before a substantial percentage of policy owners are using this option to fund their needs. Recently, the concept of using life settlements as a way to monetize a life insurance policy for long term care began to spread, but the challenge there is that the focus of life settlement companies is on high net worth individuals with large face policies. For the vast majority of the senior population with life insurance under $500,000, a life settlement is not a likely scenario.
For the vast majority of Middle Class Americans that require long term care today and own a life insurance policy, the conversion option is one that merits serious consideration. The conversion of a life insurance policy’s death benefit to a “living benefit” is an alternative to abandoning a policy and making the best use of it to help pay for the escalating costs of long term care.
“Senior boom begins amidst economic bust” (USA Today 11/14/10). We see it in the headlines almost every day-- between the senior population already in the long term care system and Baby Boomers now hitting Social Security and Medicare age at a rate of over 10,000 people a day, it is now safe to say that the long term care funding crisis has arrived. The crux of the dilemma is the most basic of economic principles: Supply and Demand. Amidst the most persistent economic downturn since the Great Depression, “demand” of seniors that need (or will need) long term care is growing at a much faster rate than the “supply” of resources to pay for their care. This demographic-economic disconnect will force the government to raise barriers to entry for the three primary entitlement programs: Social Security, Medicare and Medicaid. It will also result in reduced benefit levels and push more of the responsibility to fund retirement and long term care back on the individual (and their family).
Seniors and their families are already struggling with the costs of every day living, if you add the costs of long term care to the picture it is a back breaking scenario for most Americans. Statistics show that the majority of people do not understand the various forms of long term care, the different means to pay for it, and most do not plan for long term care until they are beset by a health care crisis.
For the wealthy, the costs of long term care can be absorbed. For the poorest, government subsidized care is available. But what about the Middle American who does not fit either of these descriptions? A small percentage of people have had the foresight and resources to prepare at some degree through long term care insurance. Unfortunately, sales have been in decline for years (just when they should have been sky rocketing) and the market has been severely disrupted by rate increases and carriers exiting the market. A much larger number of people in this category own life insurance, and the use of that asset as a means to pay for long term care is an option readily available to them. But, over 90% of life insurance polices lapse or are surrendered and most middle market policy owners are unaware that their life insurance policy’s death benefit can be used as a “living benefit”.
Life Insurance Consumer Disclosure Law
State governments have started to recognize the dilemma of policy owners who do not understand the variety of options available to them when they are considering surrendering or lapsing their life insurance. There are literally millions of seniors who have been paying premiums for years and then abandon their policies at the time when it could be of most use to them. Efforts have been underway to address that lack of information for policy owners. A number of states including California, Kentucky, Maine, New Hampshire, Oregon, Washington State, 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, and despite opposition by the life insurance industry, it will be introduced into state legislatures across the country starting in 2011.
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. The eight options for consumers to be made aware of in the Model Law include:
- Accelerated death benefit
- Assignment of policy as a gift
- Life Settlement
- Policy replacement
- Maintenance pursuant to terms or riders
- Maintenance of policy through a loan
- Conversion from term to a permanent policy
- Conversion to LTCI or a Long Term Care Benefit Plan
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 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."
The timing of this disclosure law could not be better. The Silver Tsunami explosion has begun, economic conditions remain in turmoil with no significant recovery in sight, and the LTCI market is in disarray. Consumers are looking for solutions to their problems and they may be able to find it in their life insurance policy.
Policy Conversion
One of the newer options for policy owners included in the Model Law is to “convert a life insurance policy into a long term care benefit plan.” This option differs from hybrid policies that can be converted into LTCI (which is also included in the list of eight). This option allows for the actual exchange of a life insurance policy for a long term care benefit plan. Not to be confused with an insurance policy, the 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. 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.
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 for an extended period and the life insurance asset can be spent-down in a Medicaid compliant fashion—while preserving a portion of the death benefit.
On November 19, 2010, during testimony at NCOIL’s annual meeting to consider passing the Model Law, I 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.”
Life insurance policies with long term care riders are available in the market, but it is a newer product and it will be some years before a substantial percentage of policy owners are using this option to fund their needs. Recently, the concept of using life settlements as a way to monetize a life insurance policy for long term care began to spread, but the challenge there is that the focus of life settlement companies is on high net worth individuals with large face policies. For the vast majority of the senior population with life insurance under $500,000, a life settlement is not a likely scenario.
For the vast majority of Middle Class Americans that require long term care today and own a life insurance policy, the conversion option is one that merits serious consideration. The conversion of a life insurance policy’s death benefit to a “living benefit” is an alternative to abandoning a policy and making the best use of it to help pay for the escalating costs of long term care.
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