As Long Term Care Insurers abandon the marketplace what other options will step forward?

Less than twenty years ago there were dozens of major insurance companies selling long term care insurance (LTCi).  Today there are less than thirty.  The paradox is why just as Baby Boomers started turning 65 at a pace of 10,000 per day, the LTCi market is shrinking instead of “Booming”? 

Market Disruption

The list of companies that have abandoned the LTCi market is a who’s-who of insurance industry giants: MetLife, Prudential, AIG (American General), Guardian, UNUM, Allianz, and CNA to name just a few.  When MetLife announced they would be exiting the market it was a shock as if General Motors announced that they would no longer be selling automobiles.   But why would the companies that pioneered LTCi from the beginning abandon the market just as the 72 million Baby Boomers started entering their retirement (and prime long term care planning) years?  The reasons given boil down to some simple economic and demographic facts that we were not accounted for in the early years of selling this product.

Among the challenges that LTCi insurers faced is the simple fact that they sold the product at too low a price in the hunt for market share.  Without sufficient premium payments coming in, they could not weather unexpected developments like longer life expectancies than had been predicted requiring the insurers to continue making benefit periods for extended timeframes.  Also, unlike life insurance which has a high abandonment (lapse) rate, owners of LTCi held onto their policies and kept making premium payments until they could collect their promised benefits.  LTCi companies bet wrong when they priced their products by assuming people would live for shorter periods, and that a great many more would abandon their policies before they started collecting benefits.

 

The impact of these challenges has driven major insurers out of the market and forced others wishing to continue offering LTCi to raise rates not only on future sales; but for existing policies as well.  According to the 2012 LTCi Index, policy premiums have been increasing at an annual rate of 17%.  Two of the largest remaining insurers selling LTCi recently announced rate increases that would raise premiums on policies already sold in some cases by almost double.  John Hancock will raise rates between 40%-80% and Genworth announced increases between 25%-50%.  In a statement released by Genworth about the increases, Martin Klein, Genworth's acting CEO said, "We must rebuild value for shareholders."

In an article written by Dave Lieber for the Fort Worth Star-Telegram, he interviewed Anna Emmons, 75 years of age, who has owned a John Hancock LTCi policy for ten years.  The rate increase means her monthly policy premiums would go up 64% from $151 to $247.  If she can’t afford that increase, her choices for the policy going forward include abandoning it after ten years of premium payments or reducing the benefits she originally bought to keep the premiums at a lower level.

Private Market Alternatives

Despite these market realities, LTCi can still be a viable option to help people pay for future long term care needs.  Sales of hybrid policies that offer a combination of life insurance protection that can later be converted to LTCi benefits are on the rise.  There are a number of options along these lines and consumers need to fully understand the costs involved, if rates are subject to future increases, and if the level of benefits would be sufficient to cover long term care expenses years down the road.  For people in their peak earning years (30-60) this is certainly an option to consider, and obviously the younger/healthier one is when purchasing the policy the more affordable it will be. 

But what about the millions of Baby Boomers and seniors who bought traditional life insurance policies over the last thirty years and require the financial means to pay for long term care services today?

One option that is growing across the long term care industry is the conversion of existing life insurance policies into a private long term care benefit plan.  Life insurance is legally recognized as personal property of the owner with guaranteed rights to use the policy as a “living benefit” and not just a death benefit.  The problem is that far too many life insurance policies owned by seniors will never pay a death benefit because they are allowed to either expire, lapse or are surrendered for cash value. The shame of this situation for the consumer is that the option to convert a life policy into a long term care (Assurance Benefit) plan while still alive is readily available.

Converting an existing life insurance policy into a long term care Assurance Benefit plan is not to be confused with a long term care insurance policy, accelerated death benefit (ADB) rider, annuity, or a hybrid life/LTCi product.  This conversion option allows for the private, secondary market exchange of a life insurance policy for a long term care benefit plan at the time that care is needed.  The benefit plan is a private market long term care funding option and is not issued by an insurance company or restricted to life policies that contain a conversion or accelerated death benefit rider. 

Once a policy is converted by the owner (usually 30 days), the monthly long term care benefit payments begin immediately and the enrollee is relieved of any responsibility to pay any more premiums.  Every benefit account provides a final expense benefit to help cover funeral expenses, and if the insured should pass away before the benefit amount is exhausted, then any remaining balance is paid to the family or named beneficiary as a final lump sum payment.

For Medicaid applicants, life insurance is an “unqualified asset” for eligibility and it has been standard practice for years to abandon a life insurance policy if it is within the legally required five year look back spend-down period.  But, converting a life insurance policy into a long term care benefit plan is a Medicaid qualified spend-down.  Instead of abandoning the policy and going immediately onto Medicaid, the time a person remains private pay is extended while the present day value of the life insurance asset is spent-down in a Medicaid compliant fashion—all while preserving a portion of the death benefit for the family during the extended time period. 

Any form of life insurance can qualify for conversion: universal life, whole life, term life, and group life.  The benefit plan will pay for all forms of long term care: home health, assisted living, and nursing home care.  For families with the need to pay for long term care, but are unable or unwilling to keep their life insurance policy in-force by maintaining premium payments, the life policy Assurance Benefit conversion option is a much better choice than abandoning a policy. 

Conclusion

Consumers lack preparation and awareness of how they are going to cover the costs of long term care.  It is a subject typically ignored until a loved one is in immediate need of care.  Families that need long term care are in a particularly difficult position if they have not planned with savings or LTCi.  Unfortunately, that is how you would describe the vast majority of people who require senior housing and long term care today.  We need to do all we can to educate people on how to plan for their long term care futures.  But what about the majority of unprepared people that need access to long term care today?

It all starts with education and awareness.  Millions of seniors are holding a potential solution in their hands if they own a life insurance policy.  Unfortunately they are unaware of their legal rights and available options such as a policy conversion to a long term care benefit plan.  As the word spreads across long term care providers, advisors and with the consumer; the growing use of policy conversions will begin to have a measurable, positive impact on the long term care funding crisis in Florida and across the United States.

Converting Life Insurance Policies to Long Term Care Benefit Plans

Presented to the National Conference of Insurance Legislators

July 14, 2012

Introduction

 

With 10,000 Baby Boomers turning 65 every day for the next twenty years; the United States has officially crossed the tipping point into the long feared era of the “long term care funding crisis”.  At a time when LTCi sales should be exploding, the market instead has been suffering from significant disruption with rate increases on existing policies and major carriers such as MetLife and Prudential abandoning the business.  New approaches to fund long term care must be encouraged, and converting life insurance policies into a long term care benefit plan is an option quickly gaining ground. 

 

States are under tremendous budget pressure to keep pace with exploding demand to cover long term care needs with tax payer money.  They are quickly realizing the savings that can be found for their beleaguered budgets by delaying entry onto Medicaid through the use of life insurance policy conversions into long term care benefit plans. State legislative leaders across the country are taking action with consumer protection disclosure laws and legislation to encourage consumers to convert their life insurance to pay for long term care as an alternative to abandoning their policies. Policy owners are being encouraged to use their legal right to convert an in-force life insurance policy into a long term care benefit plan and direct payments to cover their senior housing and long term care costs. 

 

The Medicaid Problem Grows

 

When Medicaid was created on July 30^th, 1965, the entire GDP of the United States was $791.1 billion, and no one could have predicted that by 2009 the U.S. would spend over $2 trillion on health care in a single year.  Today, Social Security, Medicare and Medicaid are all in the red and creating havoc for government budgets at the federal and state levels.   According to Chairman Ben Bernanke, this has become the number one concern of the Federal Reserve about the U.S. economy. 

 

State budgets have been impacted particularly hard by shrinking tax dollars and growing Medicaid enrollment brought on by the economic crisis and an aging population.  Over 10 million Americans now require long term care annually and Medicaid is the primary source of coverage.  According to the Kaiser Family Foundation, Medicaid spent $427 billion in 2011, almost doubling since spending $240 billion in 2009.

 

A $30 Trillion Funding Source

 

According to the NAIC, there is $27.2 trillion of in-force life insurance in the hands of 152 million Americans.  Too few of these policy owners’ understand their legal rights of ownership and do not possess the knowledge of how insurance works.  When their original need for a policy has run its course, the vast majority of owners simply walk away from what may be one of the most valuable assets they own—for nothing in return.  Life insurance is legally recognized as personal property and the owner has the right to use their asset in a number of ways including converting the policy to a long term care benefit plan while still alive.

 

In 2009, Conning and Company analyzed the emerging use of life insurance policies to pay for long term care as part of their Strategic Research Series.  In the paper they surmised, “Both state governments and the long term care industry are working to find a solution to the budgetary threat to Medicaid created as aging Baby Boomers impoverish themselves in order to have the state pay for long term care.  What is new is the concerted effort to integrate life insurance policies and long term care providers.  This new source of funds represents a potential alignment of long term care providers and state governments”.

 

Legislative and market activities across the country point to the growing realization that life insurance policies can be converted to help pay for long term care.  A major challenge is that too few seniors realize their policy could be used for purposes other than a death benefit—but as Conning and Company predicted; word is spreading among policy owners, the long term care industry and law makers.

 

Consumer Rights: Converting Life Insurance to Pay Long Term Care

 

The Supreme Court case of Grigsby v. Russell (1911) established a life insurance policy owner’s right to transfer or convert the use of an insurance policy. This ruling placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as real estate, stocks and bonds. As with these other types of personal property, a life insurance policy is an asset and can be converted to another use or transferred at the discretion of the policy owner.

 

A policy owner’s legal right to convert an existing life insurance policy into a long term care benefit plan is not to be confused with a long term care insurance policy, accelerated death benefit (ADB) rider, annuity, or a hybrid life/LTCi product.  This conversion option allows for the private, secondary market exchange of a life insurance policy for a long term care benefit plan at the time that care is needed.  The benefit plan is a private market long term care funding option and is not issued by a carrier, not restricted to life policies that contain a conversion or accelerated death benefit rider, and conversion options for the owner are not restricted to only the issuing carrier. 

 

Once a policy is converted by the owner, the long term care benefit payments begin immediately and the enrollee is relieved of any responsibility to pay any more premiums.  The benefit plan is an irrevocable long term care funding account administered by a third party ensuring the funds are protected for the recipient of care, and the payments are made every month directly to the care provider.  Every benefit account also has the added protection for the enrollee of providing a final expense benefit to help cover funeral expenses.  Lastly, if the insured should pass away before the benefit amount is exhausted, then any remaining balance is paid to the family or named beneficiary as a final lump sum payment.

Any form of life insurance can qualify for conversion: universal life, whole life, term life, and group life.  The benefit plan will pay for any form of long term care: home health, assisted living, and nursing home care.  Life policy conversions to long term care benefit plans meet the IRS standard for tax deductible status based on the use of funds dedicated to pay for long term care services and can also meet the HIPAA standards for tax exempt status based on the physical and cognitive impairments of enrollees. 

For families with the need to pay for long term care, but are unable or unwilling to keep their life insurance policy in-force by maintaining premium payments, the life policy conversion option is a much better choice than abandoning a policy. 

 

Medicaid Eligibility: Life Insurance is a Disqualifying Asset

 

Because a life insurance policy is legally recognized as an asset of the policy owner, it is an unqualified asset and counts against them when applying for Medicaid.  For Medicaid applicants, 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.  Billions worth of in-force life policies are regularly abandoned by uninformed seniors as they enter their “long term care years”.  But now, by converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered as a private pay patient by the long term care benefit plan over an extended time frame. 

 

Converting a life insurance policy into a long term care benefit plan is a Medicaid qualified spend-down.  Instead of abandoning the policy and going immediately onto Medicaid, the time a person remains private pay is extended while the present day value of the life insurance asset is spent-down in a Medicaid compliant fashion—all while preserving a portion of the death benefit for the family during the extended time period. 

 

Long term care providers prefer private pay patients over Medicaid recipients.  A new report released by the American Health Care Association (AHCA) indicates that due to major state budget deficits and adjustments to Medicare and Medicaid reimbursements, long-term care facilities will see historically low Medicaid reimbursements.  It is estimated that unreimbursed Medicaid funds to nursing homes exceeded $6.3 billion in 2011 – a $19.55 shortfall per patient, per day on average. 

 

Legislative Action: Focus on use of Life Insurance to pay for Long Term Care

 

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 when they unanimously passed the Life Insurance Consumer Disclosure Model Act in November, 2010.  This consumer protection law requires that life insurance companies inform policy holders above the age of 60, or with a terminal or chronic condition, of approved alternatives to the lapse or surrender of a life insurance policy including “conversion to a long term care benefit plan”.  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 2011, the state of Connecticut introduced study bill SB-1153, as “an act establishing a task force to study life insurance policy and annuity conversions and the provision of certain notifications by life insurance companies”.  In 2012, the state of Florida passed HB-5001, to “establish a technical advisory workgroup by August 1, 2012, to examine methods to allow an insured under a life insurance policy or the contract holder of an annuity, to convert the policy or annuity to a long term care benefit.  The agency shall submit a report of findings and activities of the workgroup, including recommendations and proposed legislation, no later than January 15, 2013.” Also, so far this year Louisiana passed study bill SCR-66 and Hawaii introduced study bill SB-2455, both similar measures to the Connecticut and Florida study bills.  More states are preparing to take similar action.

 

In January, 2012, the Center for Economic Forecasting and Analysis (CEFA) of Florida State University analyzed the tax savings impact of converting life insurance policies into long term care benefit plans on the Florida Medicaid budget.  In their analysis, CEFA “scored” the annual savings for Florida’s tax payers at approximately $150 million.  The savings come from extending the time Medicaid applicants with a life insurance policy can remain private pay, delaying entry onto Medicaid by first converting their policy to a private, long term care benefit account. 

 

Conclusion: Information and Choice is Consumer Protection

 

Consumers lack preparation and awareness of how they are going to cover the costs of long term care.  It is a subject typically ignored until a loved one is in immediate need of care.  Families that need long term care are in a particularly difficult position if they have not planned with savings and insurance/annuities.  Unfortunately, that is how you would describe the vast majority of people who require senior housing and long term care today.  We need to do all we can to educate people on how to plan for their long term care futures.  But what about the majority of unprepared people that need to access long term care today?

 

It all starts with education and awareness.  Millions of seniors are holding a potential solution in their hands if they own a life insurance policy.  Unfortunately they are unaware of their legal rights and available options such as a policy conversion to a long term care benefit plan.  It is common sense that the best interest of policy holders is to make decisions with full disclosure of their rights and options.  Addressing this simple fact, states are now taking action to tackle this lack of consumer awareness.  As the word spreads across long term care providers, advisors and with the consumer; the growing use of policy conversions will begin to have a measurable, positive impact on the long term care funding crisis in the United States.

About Life Care Funding Group

Founded in 2007, Life Care Funding Group (LCFG) assists people in need of funds to cover the costs of senior housing and long term care. LCFG specializes in converting the death benefit of an in-force life insurance policy into a long term care benefit plan to cover the costs of skilled nursing home care, assisted living, home health care, and hospice.

Thousands of assisted living communities, nursing homes, retirement communities, home healthcare providers and senior care advisors offer the LCFG program to families' every day. LCFG's national education campaign has brought awareness about the important financial options for long term care to millions of people across the United States.

Sources

Health and Human Services (HHS) Center for Medicare and Medicaid Services (CMS) (www.hhs.gov)

United States Government Accountability Office (GAO) report to the United States Congress, “Medicaid Long Term Care” report, March, 2007
Met Life Mature Markets Institute, 2009 and 2010

Kaiser Family Foundation, Medicaid Fact Sheet, March 2011 and State Fiscal Condition and Medicaid Report, October 2010

National Conference of Insurance Legislators (NCOIL), Life Insurance Consumer Disclosure Model Law, November 2010

American Council of Life Insurers (ACLI) tabulation of annual data by the National Association of Insurance Commissioners (NAIC), Life Insurers Fact Book 2011, December 2011

Center for Economic Forecasting and Analysis, University of Florida, Conversion of Life Insurance Policies to Long Term Care Benefit Plans in Florida, January, 2012

The Health Insurance Portability and Accountability Act of 1996 (HIPAA), Public Law 104-191

Life Care Funding Group, LLC, Success Story Bulletins, 2011