Converting Life Insurance Policies into Long Term Care Benefit Plans is a Consumer Protection

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 there are numerous options for them to explore before abandoning a policy. Life insurance is legally recognized as personal property, and the owner has the right to convert their policy to a private- market long term care benefit plan while still alive.

Medicaid Eligibility Issue

Life insurance is an unqualified asset for Medicaid eligibility, and billions worth of policies are regularly abandoned by uninformed seniors as they enter their “long term care years”. Converting a life insurance policy into a Long Term Care Benefit plan is a Medicaid qualified spend-down of the policy, and it extends the time a person remains “private pay” before going onto Medicaid. States are under tremendous budget pressure to keep pace with exploding demand to cover long term care needs with tax payer money, and they are quickly realizing the savings that can be found for their beleaguered budgets by delaying entry onto Medicaid through the use of Medicaid qualified Long Term Care Benefit conversions.

 It is in the better interest of seniors and their families to convert a death benefit into a long term care benefit, and then apply the maximum private market value of the policy towards their health care needs. If a policy can be converted into the means to cover the costs of long term care for an extended period, and keep the insured off of Medicaid that much longer, it is in their best interest and that of the state’s tax payers. The policy conversion option is a private sector solution that addresses the financial needs of the senior, and can also help stressed state budgets by extending the spend down period for a senior before they would go onto Medicaid.

Consumer Awareness

Consumers lack awareness and are unprepared for 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 requiring senior living and 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 today if they own a life insurance policy. Unfortunately they are unaware of their legal property ownership rights and available options such as the life insurance policy conversion to pay for senior living and long term care. 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.

Converting 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 an insurance company or restricted to life policies that contain a conversion or accelerated death benefit rider. 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. 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.

When a family learns about the Long Term Care Conversion option either through interaction with a long term care provider, an elder law attorney, a geriatric case manager, by reading about the conversion option in the media or online, or through an insurance agent or financial advisor; they are typically at the point that they are actively looking to pay for long term care services.  Any of these entities will inform the family that if they have a life insurance policy it is an unqualified asset for Medicaid but it is their legal right to convert it to a long term care benefit plan to help pay for the costs of home healthcare, nursing home care or assisted living .

Consumer Rights and Legislative Action

Middle class policy owners and their families are caught in the ironically unfortunate position of not being poor enough to automatically qualify for Medicaid, but they are not wealthy enough to access the care they need with enough out-of-pocket funds.  In America, the vast middle class market is financially punished for being caught “in the middle” when they reach the point that a loved one requires long term care.

When a family has a life insurance asset to work with, the ultimate decision for those we talk with is based upon: what is the best possible outcome for a life insurance policy in relation to the immediate needs of the loved one and family?

1- The policy owner could keep their policy in force and ultimately the named beneficiaries collect the death benefit which of course is tax free.  This option puts the policy owner and the family in the position to answer a couple of questions:

a. What is more important to the policy owner and family—continue to pay the premiums and collect a death benefit at an unknown time in the future, or;

b. Utilize the present day value of the policy to help pay for the costs of long term care for a loved one.

2- The answer to this question is often driven by one of two major factors:

a. Can the policy owner (and/or family) afford to keep a policy in-force by continuing to pay the premium obligations, and;

b. Can the policy owner (and/or family) afford for their loved one to receive the long term care services they require.

An additional factor that must be taken into account for Medicaid applicants is that life insurance is an “unqualified asset” for eligibility. 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. 

When evaluating the viability of the Long Term Care Benefit conversion option, families will assess their current needs and all available options are for them to consider maximizing the value of their policy, which typically would consist of the following:

·        Keep the policy in-force to collect the death benefit

·        Surrender the policy for any remaining cash value

·        Consider a policy loan (requires they keep the policy in-force and cover interest payments and fees)

·        Consider a life settlement (a policy less than $1M will get little to no interest in the secondary market and overall life settlement payouts offer a smaller percentage of face value than an Assurance Benefit conversion provides to fund senior living and long term care)

·        Consider an accelerated death benefit (if the policy has such a feature and then there are very specific requirements by life insurance companies to verify terminal diagnosis to get approval)

·        Consider converting the policy to a Long Term Care Benefit plan

When the National Conference of Insurance Legislators (NCOIL) passed the Life Insurance Consumer Disclosure Model Law in November, 2010 they provided for eight specific options that a life insurance policy owner would need to be made aware of as an alternative to lapse or surrender of a policy:

1.      Accelerated death benefit

2.      Assignment of policy as a gift

3.      Life settlement

4.      Policy replacement

5.      Maintenance pursuant to terms or riders

6.      Maintenance of policy through a loan

7.      Conversion from term to a permanent policy

8.      Conversion to LTCI or a Long Term Care Benefit Plan

Understanding the implications of billions of dollars in asset value that could be converted and spent on long term care instead of just being abandoned, state legislatures across the country have begun taking action to educate the consumer about their legal rights to convert a life insurance policy. 

·        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, Louisiana passed study bill SCR-66, “To establish an advisory work group within the Department of Insurance to examine options that may be available to allow an insured under a life insurance policy or contract holder of an annuity to fund long term care benefits.” The Louisiana work group has begun their meetings

·        In 2012, Hawaii introduced study bill, SB-2455 to “establish a task force to assess and make recommendations regarding the use of viatical settlements and accelerated death benefits as means of funding long-term care”. 

·        In 2012, the state of Florida passed HB 5001, to “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.” The Florida study group has begun their meetings.

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:

According to the NAIC, 153 million Americans own $27.2 trillion worth of in-force life insurance policy death benefits—that is triple the amount of home equity in the United States today!  The insurance industry prices and makes profits from the fact that millions of people are paying billions of dollars in premium payments for policies that in the end will be abandoned.  Too few policy owners’ possess the knowledge of how insurance works, and when their original need for a policy has run its course the vast majority of owners simply abandon what may be one of the most valuable assets they own—for nothing in return. 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 Long Term Care Conversion option is a much better choice than abandoning a policy. 

Providers of long term care services such as nursing homes, assisted living communities and home health agencies have been quick to embrace the Long Term Care Conversion option as an alternative form of long term care funding.  State governments too are realizing that there is tremendous value to be found by converting life insurance policies to help pay for the costs of long term care.  Media attention, as well as legislative and market activities across the country clearly point to the growing realization that life insurance policies are an asset well suited to help pay for long term care and it is in the best interest of the consumer to make sure they are educated about their legal rights to take advantage of the “Conversion to a Long term Care Benefit Plan” funding option.