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.