Funding Long Term Care: New Legislation Supports Use of Life Policies to Pay for LTC

Cuts to Medicare and Medicaid funding specifically for long term care services coupled with the growing Boomer and senior population of this country are driving the need to fund more and more LTC costs through private pay dollars. Unfortunately, there is a lack of consumer awareness about how LTC funding works and the facts about private market funding options. There is more than $20 trillion of in-force life insurance in the United States (NAIC, 2010) but insurance carriers are resistant to inform policy owners about their legal rights of ownership, and a majority of these uniformed seniors allow their policies to lapse or surrender without ever being aware of other options to use life insurance to pay for long term care services.

Legislative Support for Private Pay Options

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 every year when they unanimously passed the Life Insurance Consumer Disclosure Model Act in November, 2010. The law’s intent is to make sure that insurance carriers disclose to their policy owners that they have alternative options to consider beyond lapse or surrender of a policy. NCOIL President Rob Damron (KY), upon adoption of the model, said, “It is imperative that policy holders understand that they have alternatives to merely to lapsing or surrendering their policy.” States are looking to private market funding solutions to help keep Medicaid expenditures down and help overcome the long term care funding crisis—and this is a big move in that direction.

Among the options in the law is the right to “convert a life insurance policy into a long term care benefit plan”. Any form of life insurance can qualify for a policy conversion to pay directly for the costs of long term care in a nursing home, assisted living and home healthcare. Life Insurance is an unqualified asset for Medicaid eligibility and the Assurance Benefit policy conversion is considered a “qualified spend down”. This option also allows the owner to preserve a portion of the death benefit throughout the spend down period, protecting it from Medicaid Recovery legal action against the estate.

Medicaid Spend Down of an Unqualified Asset

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.

A life insurance policy is legally recognized as an asset of the policy owner and it counts against them 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 towards cost of care before the owner will qualify for Medicaid. All Medicaid applications specifically ask if the applicant owns life insurance and full policy details. Failure to disclose and comply is fraud.
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. 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))

The Omnibus Budget Reconciliation Act (OBRA) of 1993 defines estate and requires each state to seek adjustment or recovery of amounts correctly paid by the state for certain people with Medicaid. The state must, at a minimum, seek recovery for services provided to a person of any age in a nursing facility or other medical institution. The State may at its option recover amounts up to the total amount spent on the individual's behalf for medical assistance for other services under the state's plan. For individuals age 55 or older, States are required to seek recovery of payments from the individual's estate for nursing facility services, home and community-based services, and related hospital and prescription drug services. States have the option of recovering payments for all other Medicaid services provided to these individuals.

Mandating Options to Help Seniors pay for Long Term Care

Millions more seniors own life insurance then LTCi and for many their policy is an unneeded, undervalued, and illiquid asset. Senior policy owners and their family prefer using the life insurance asset in a productive way to help solve their financial and healthcare challenge instead of lapsing or surrendering it-- and most would prefer to stay off of Medicaid if given the financial option.

With mandated access to information and resources, those most in need of financial solutions can make an informed decision about what is the more important priority for them— the value of a death benefit and keeping the policy in force, or the value of a living benefit and converting the policy to its present day value to pay for long term care.

By converting an existing life insurance policy to a long term care Assurance 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 Assurance Benefit 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% 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 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. Conversion of a life insurance policy to an Assurance Benefit allows for maximum choice of care options, and preservation of a partial death benefit instead of 100% abandonment.

Conclusion

People need to arm themselves with information about how the system works and what kind of funding options (and limitations) they have to work with. And, people need to stop waiting until the last minute to plan for their inevitable time in long term care. In one form or another, (home or facility based) as people age and/or become frail they will need someone to help care for them. That care will cost money and that money has to come from somewhere. As the government makes it harder and harder to access funding, people need to prepare to bear much of the financial burden on their own. To ensure quality of life and dignity when the time for long term care arrives; people must make the effort today to understand how the process works and what kind of private pay financial options are out there.

Federal and state budgets can only accommodate so much, and when dollars are shrinking while populations are growing it becomes pretty simple math to see that something has to give. If history is our guide, then it will be the individual who ends up giving the most. For people to come even close to meeting their expectations for a high level of senior housing and care it will require a firm grasp of the options available and a plan to take action before its too late. Now is the time to prepare by understanding the funding options that are available to help cover the costs long term care as the responsibility shifts more and more to the individual.