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?