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.