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.