Chris Orestis Publication's Library

Florida legislature introduces consumer protection disclosure bill (HB1055) for life insurance owners to convert policies to long term care benefit plans

2012-01-23T20:35:00.001-08:00

Center for Economic Forecasting and Analysis (CEFA) estimates annual savings from policy conversions over $150 million to Florida Medicaid and Tax Payers

Since the National Conference of Insurance Legislators (NCOIL) unanimously passed the Life Insurance Consumer Disclosure Model Law in 2010, states all across the country have been looking at the cost savings impact on stressed Medicaid budgets by converting life insurance policies into long term care benefit plans. The policy conversion option was one of the consumer protection disclosure requirements included in NCOIL’s model law, and the nursing home and assisted living industries have been quick to adopt this funding option to help beleaguered families struggling with the costs of long term care across the United States. Life Insurance is an unqualified asset for Medicaid eligibility and it has been standard practice to lapse or surrender a policy as part of a Medicaid spend down plan. With billions in face value being abandoned, NCOIL and state law makers have come to realize that a better option for seniors, the long term care industry, and tax payers would be to convert these policies instead.

According to The Center for Economic Forecasting and Analysis (CEFA): In Florida, the Department of Elder Affair’s “Comprehensive Assessment and Review for Long-Term Care Services (CARES) Program” determines medical eligibility, and the Department of Children and Families “Economic Self-Sufficiency (ACCESS) Program” determines financial eligibility. On registering for Medicaid with ACCESS, applicants have to disclose assets and income. In particular, all Medicaid applicants are specifically asked if they own life-insurance policies, and if so, they have to disclose the full policy details. A failure to disclose and comply is fraud. A life-insurance policy is legally recognized as an asset of the policy owner (with all rights of personal property ownership) and it counts against the owner when qualifying for Medicaid. If a policy has more than a minimal amount of cash value (usually in the range of $2,000) it must be liquidated and that money is to be spent towards cost of care before the owner will qualify for Medicaid.

According to the Florida Legislature’s Office of Program Policy Analyses and Government Accountability: A life-insurance policy can be surrendered for its cash value to be spent down on care, or a policy can be converted for its fair market value and the full benefit of that conversion can be used to pay for long-term care as a qualified spend down. The owner of one or more policies has a variety of options to consider:
• A policy with more than a minimal amount of cash value must be surrendered back to the insurance company with the proceeds spent down on care.
• A policy with no cash value does not need to be liquidated but the death benefit will be subject to federally required Medicaid recovery efforts to return the amount of money spent on care.
• Many states will exempt a small “final expense” policy if the full death benefit value is assigned to a funeral home.

Medicaid budgets in every state are under extreme pressure to balance shrinking revenues and the demands of a growing elderly population requiring long term care services. Compounding this problem are across the board cuts of 11.1% for all long term care related expenditures the Center for Medicare and Medicaid Services (CMS), the federal government agency which manages the two entitlement programs, instituted for 2012.

Medicaid already reimburses at rates 1/3 lower than private pay rates, and this cut by CMS is an additional 11.1% reduction to the bottom line of every long term care service provider in the United States. Yet demand for services is increasing at an alarming rate. Ten thousand baby boomers a day started turning 65 on January 1, 2011-- and that pace will continue uninterrupted for twenty more years. The government and the long term care industry are desperately looking for innovative, private market solutions to help bridge this widening chasm.

With the introduction of HB1055 in 2012, the Florida legislature has taken the consumer disclosure protections first introduced by NCOIL a little over a year ago to its next logical steps. According to CEFA, the bill introduced in both the Florida House and Senate, would require: a) use of an accelerated death benefit (ADB) rider, if present, to pay for nursing home care, b) required disclosure to the consumer of the National Conference of Insurance Legislators (NCOIL) Model Law, (which deals amongst others with unclaimed property policies), and c) would allow policy conversions as an extended spend down Medicaid eligibility requirement.

The objectives of the sponsors of the bill are twofold, namely;
• To protect consumers by giving policy owners as much information as possible about their legal rights on life-insurance policy ownership; and
• To save taxpayers money by utilizing the value of life-insurance policies and to delay the need for a citizen becoming dependent on Medicaid.

CEFA’s economic impact study released in January, 2012, measures the cost saving implications of private market policy conversions for Florida tax payers and the state Medicaid budget through passage of HB1055. According to the CEFA study entitled, Conversion of Life Insurance Policies to Long Term Care Benefit Plans in Florida: The objective of this research project is to examine the impacts of the objective of House Bill 1055, specifically the opportunities for utilizing life-insurance policy assets as an available means whereby private funding may pay for long-term health care needs. Medicaid expenses on long-term health care services for residents may be offset by… $157.4 million on conversion of their life-insurance policies into long-term health care benefit plans per year.

The CEFA economic impact study does not take into account the tax advantaged status of policy conversions into long term care benefit plans for the consumer, nor did it explore the impact of new tax revenue for the state. By adding new taxable revenue being received by the long term care facilities in the form of extended private pay dollars that otherwise would not have existed, the state could not only be saving over $150 million annually but adding as much as $50 million in new revenue taxed at the corporate rate.

Pressure on the Medicare and Medicaid safety nets are growing daily (literally by 10,000 people per day) and it is imperative that private market alternatives are embraced as quickly as possible. The primary champion for this consumer protection disclosure law has been the Florida Health Care Association representing nursing homes and assisted living communities throughout the state. They recognize that it is in the better interest of the consumer to be fully informed of their options to use a life insurance policy to help pay for long term care as an alternative to abandoning the policy. It is also in the best interest of tax payers to extend the spend down period of a life insurance policy by converting it to its fair market value, allowing someone to remain private pay for as long as possible.

Informing the consumer of their legal right to use their own property (a life insurance policy) to its maximum utility as a means to pay for long term care is an irrefutable positive. As numerous states prepare to introduce similar legislation to Florida’s HB1055; it appears that the option to convert life insurance policies into long term care benefit plans is growing rapidly into a favored option for funding long term care in the United States.

2011-12-30T09:11:00.001-08:00

2012--Year One of the Silver Tsunami Comes to an End

2011 was a benchmark year for the Baby Boom generation. By the time the clock strikes mid-night and we welcome 2012, almost 4 million Baby Boomers will have turned 65 years of age. During the 365 days of 2011, ten thousand Americans turned 65 each and every day. 2012 is only the second of a twenty year journey where that pace continues annually until it ends with almost 80 million Baby Boomers crossing the threshold of age 65.

What other benchmarks occurred in 2011?

• MetLife exited the long term care insurance market, and additional departures from the market are anticipated this year;
• The CLASS Act was enacted and then killed in the midst of a Medicaid funding crisis to pay for costs of long term care across the United States;
• Medicaid spent $427 billion prompting CMS to summarily cut all long term care funding by Medicare and Medicaid across the board 11.1%;
• We saw equity in American homes drop to under 50% for the first time in our nation’s history to just under $10 trillion, and by comparison, in-force life insurance now stands at almost $30 trillion;
• NCOIL passed the Life Insurance Consumer Disclosure Model Law to attack the massive problem of seniors abandoning life insurance policies because they are unaware of alternative options;
• State legislatures started looking at how converting life insurance policies into long term care benefit plans could save tax payers money by extending the spend down period before Medicaid eligibility;
• The Florida Legislature introduced a first in the Nation consumer protection bill (HB 1055) that provides for conversion of a life insurance policy into a long term care benefit plan as a Medicaid eligibility requirement, use of accelerated death benefits to pay for nursing home (SNF) costs, and mandates the NCOIL Life Insurance Consumer Disclosure Model Law.

What we are seeing as we enter 2012, is a growing awareness that this $30 trillion pool of in-force life insurance policies is an asset base of immense proportions and a source for long term care funding solutions. But, the policies are in the hands of owners that for the most part have no understanding of their legal ownership rights and the variety of options available to use their property while still alive. Seniors in particular have been the most vulnerable to lack of information, and therefor disproportionately abandon life insurance policies in their final years.

This lack of information coupled with difficulty affording premium payments, disappearance of the original insurable interest when the policy was initiated (the children have grown up and/or lack of spouse), and life insurance ownership counting against Medicaid eligibility all conspire to push seniors to needlessly abandon policies. Consumer protection measures such as the NCOIL Model Law and Florida legislation, long term care funding options such as policy conversions, and education efforts spear headed by the assisted living and nursing home industry will have a major impact in 2012.

This is the year when policy owners will start to come out of the dark in large numbers. As they become better informed about their legal rights of ownership and alternatives to policy abandonment, they will realize that a life insurance policy they are about to discard can be put to much better use helping them pay for long term care. And based on the growing demographic tide, ongoing economic malaise, cuts by the government in Medicare and Medicaid (as well as elimination of programs like CLASS act), and the very challenging marketplace for long term care insurance-- the emergence of another private market funding solution for long term care services comes not a moment too soon.

If 2011 was the year of challenges and a search for solutions; 2012 will be the year of awareness and implementing solutions.

Making up the Difference

2011-12-23T17:32:00.000-08:00

As Super Committee falters, mandated budget reductions creates further pressure on the funding of long term care

The Super Committee could not overcome partisan differences over spending cuts and new revenues (taxes) within their mandated deadline and conceded defeat. That unfortunate outcome triggers mandated reductions in the federal budget of $1.3 trillion that will have an immediate impact on Medicare and Medicaid. This will be particularly disruptive for seniors and long term care providers already trying to absorb the 11.1% rate reduction that CMS instituted in October, 2011. After the demise of the CLASS Act, the long term care funding infrastructure of the United States is facing extreme pressure. Lackluster sales, rate increases and carrier casualties in the LTCi market combined with additional entitlement cuts as a result of the Super Committee outcome will conspire to make an already precarious situation worse.

Side Bar 1
Most people do not plan for Long Term Care until it is too late:
- 13% actively plan for how they will live as they grow older and frailer
- 40% first begin to actively plan following a “near catastrophic” health event
- 47% must make long term care decisions in a very short period of time, usually while in the hospital
- 75% exhaust all of their savings and assets while still alive trying to pay for Long Term Care

Side Bar 2
Most people do not understand the costs of Long Term Care and how to pay:
- 92% incorrectly estimate the monthly cost of a nursing home
- 77% incorrectly estimate the monthly cost of an assisted living facility
- 45% incorrectly believe “Medigap” covers assisted living costs
- 52% incorrectly believe Medicare covers assisted living costs
- 59% incorrectly think Medicare will pay for extended nursing home stay

Further compounding the problem is the fact that 10,000 Baby Boomers started turning 65 on a daily basis this year and that pace will continue uninterrupted for the next 20 years. The availability of public dollars to pay is shrinking while demand for long term care services and the costs of care continues to rise annually.

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 healthcare is now at $21 per hour.

People do not understand and are not prepared to pay the costs of long term care. In years past, seniors could rely either on the government, family, or equity in assets such as a home to offset a lack of savings. In today’s new economic reality, family members are struggling to take care of themselves, the government is making cuts and building barriers to entry for long term care coverage, and the value of assets such as a home have been eviscerated. In fact, today there is currently three times more in-force life insurance in the United States at almost $30 trillion (NAIC) than there is home equity with less than $10 trillion (Zillow Home Equity Index).

For the first time in American history there is more debt than equity in America’s homes. For seniors unprepared for long term care this new reality is a big problem. One of the most reliable sources of long term care funding for years has been home equity and then government backstops once assets have been depleted. This mix is now severely disrupted and a search for additional assets to help unprepared seniors pay for long term care is on.

One non-depreciating asset that has been getting more attention as a resource to help pay the costs of long term care is life insurance. Life insurance is legally recognized as personal property and the owner has the right to use this asset in a number of ways including converting the policy to pay for long term care while still alive. Policy owners 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 people are paying billions of dollars in premium payments for policies that in the end will be abandoned. The shame of this situation for the consumer is that there are numerous options for them to explore before surrendering or lapsing a policy.

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 policy holders above the age of 60, or with a terminal or chronic condition, that there are specific alternatives to the lapse or surrender of a life insurance policy. NCOIL President Rob Damron (KY), upon unanimous passage said, "It is imperative that policy holders understand that they have alternatives to merely lapsing or surrendering their policy."

The disclosure law is an important consumer protection 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 law makers 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 specifically 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 to pay for long term care is a much better choice than abandoning the policy.

States have been taking action in support of consumer rights to use life insurance policies to pay for long term care. In addition to those states adopting the NCOIL Consumer Disclosure Model Law; New York passed a law mandating that the owner of a policy with an accelerated death benefit (ADB) rider can trigger the benefit if they have been living in a nursing home for at least three months. There are 153 million owners of life insurance policies in the United States. Comparatively, there are 8 million owners of long term care insurance policies. With that disparity as a back drop, as many as a dozen other states are now looking at passing laws that combine conversion of a life insurance policy of any kind to a “long term care benefit plan”, the disclosure requirements of the NCOIL model, and the ADB trigger for nursing home residents.

The adoption of laws of this type in the states is a direct response to the explosion of Baby Boomers reaching retirement age, anaemic sales and significant disruption in the long term care insurance market, and a realization that billions of dollars worth of life insurance is abandoned every year by people who do not know their legal rights or options.

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 payout and the life insurance asset can be spent-down in a Medicaid compliant fashion.

“Our goal at Emeritus is to ensure that seniors are properly cared for, and part of that goal is to help families with the financial decisions and details involved in caring for their loved ones,” said Jayne Sallerson, EVP, Sales & Marketing at Emeritus Senior Living (NYSE: ESC), the largest assisted living provider in the world. “Many seniors and families are unaware that their life insurance policies are valuable assets and can be converted to pay for long term care, and as a result some let active policies lapse. We hope that we can help educate seniors about their resources, so that more seniors can have access to the long term care that they need.”

With traditional resources to pay for long term care on the decline, it will take creative private market solutions and the use of non-traditional assets to make up the difference.

Chris Orestis Interview at Senior Market Advisor VIDEO

2011-11-02T18:48:00.000-07:00

Long term care funding options with Chris Orestis

Link to VIDEO: http://www.producersweb.com/r/pwebmc/d/contentFocus?pcID=8b6b962275920289cc1c2b4973480373#

By Paul Wilson, ProducersWEB

I recently sat down with Chris Orestis, a 15 year veteran of both the insurance and long term care industries. Chris spent several years representing the health and life insurance industry as Vice President and Senior Vice President respectively for the Health Insurance Association of America (HIAA) and the American Council of Life Insurers (ACLI). He is an expert on insurance and long term care issues, and is a frequent speaker, featured columnist and contributing editor to a number of industry publications.

His company, Life Care Funding Group, 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 to cover the costs of skilled nursing home care, assisted living, home health care and hospice.

In the first part of the interview, Chris talks about the current state of the long term care insurance industry. He also discusses the "wake-up call" facing producers and carriers and details some of the challenges, opportunities and responsibilities resulting from the current economic climate. He goes on to explain his recent involvement in the passage of the National Conference of Insurance Legislator's (NCOIL) Life Insurance Consumer Disclosure Model Law, which ensures policy owners "will be informed that they have a number of options to consider first that could make a significant difference in their lives, and at a time when they need it most.”

In the second part of the video, Chris provides further detail about the NCOIL Model Law and its effects on the industry, and talks about his company's partnerships with assisted living communities and nursing homes to help clients convert their life insurance policies into long term care benefit plans. Finally, he looks into his crystal ball and gives his best guess as to the future of the life insurance industry, LTCI industry and disability insurance.

A Roundtable Discussion -- Consumer Disclosure Law: The Changing Face of Long Term Care Funding

2011-10-27T17:42:00.000-07:00

Following the panel session entitled Consumer Disclosure Law: The Changing Face of Long Term Care Funding on August 25, 2011 at the Annual Senior Market Advisor Expo in Las Vegas, the panelists were all asked a series of follow up questions about the topic area discussed during the session.

Representatives from politics, senior living, insurance producers and private market funding solutions came together to discuss the crisis situation for seniors attempting to pay the costs of long term care in today’s environment.

Session Panelists:
• Chris Orestis, CEO of Life Care Funding Group as host and moderator
• Jayne Sallerson Executive Vice President of Emeritus Senior Living
• Rep. Rob Damron (KY) immediate past president of the National Conference of Insurance Legislators (NCOIL)
• David Kitaen, CLTC

Question- What are some of the factors changing the face of long term care funding today in the United States?

Answer- (Chris Orestis) Our country has begun a demographic sea change with 10,000 Baby Boomers turning 65 every day. This started on January 1st, 2011 and will continue uninterrupted for the next 20 years! The pressure this is creating in how we will pay for long term care led Federal Reserve Chairman Ben Bernanke to declare the aging population and exploding cost of health care as the #1 challenge facing the U.S. economy and government budgets.

Question- How has the government reacted to this demographic sea change?

Answer- (Chris Orestis) The current economic crisis could not have happened at a worse time and we see it in the news everyday. Just as the Baby Boomers started qualifying for Medicare and Social Security, this massive surge in the aging population is forcing the government to enact swift and draconian cuts to Medicare and Medicaid. There is not a budget proposal in Washington, DC without cutting hundreds of billions in Medicaid spending. CMS announced in August that as of October, 2011 they would institute an 11.1% across the board reduction in expenditures for all long term care related programs. This is an unprecedented reduction and the consumer is going to be forced to dig into their pockets to make up for it.

Question- As Executive Vice President for the largest assisted living company in the world, what do you see as key challenges families are facing in today’s environment when trying to pay for senior living and long term care?

Answer- (Jayne Sallerson) Equity in homes of most seniors has eroded and many can’t sell anyway, pensions and retirement plans have lost tremendous value, and most have not planned with products such as long term care insurance. Too few families plan for long term care or even understand the differences between assisted living and skilled nursing, Medicare and Medicaid, Medigap and Long Term Care Insurance and how all of it works. Unfortunately most families just don’t deal with long term care until they are in a crisis mode and have very little time and even fewer options. Many people are trapped in their homes and/or are getting insufficient or no care whatsoever based on their conditions and declining ability to live independently and safely.

Making matters worse, programs like Medicare and Medicaid are experiencing huge cuts and the responsibility to pay is being pushed back on the individual and their family. We are seeing more emphasis on families covering long term care expenses with private pay dollars, but most have no idea what their options are and where to turn for help.

Question- As one of the first and longest active LTCi producers in the country, how do you view the current state of affairs for seniors and long term care?

Answer- (Dave Kitaen) The combination of the toughest economy since the great depression, a growing senior population, and cuts to Medicare and Medicaid are making things very difficult for seniors and families confronting the need for long term care. This should be the boom years for LTCi with the highest sales levels on record, but sales have not been growing and companies like MetLife have left the market. MetLife leaving the market is like General Motors announcing they no longer will be selling cars.

The costs of long term care services rises every year but the ability of seniors to pay has been declining since the economic crash of 2008. Seniors need help understanding all of their financial options and how to get full use of any available assets.

Question- As president of the National Conference of Insurance Legislators (NCOIL), was this situation with long term care funding one of the factors contributing to passage of the Life Insurance Consumer Disclosure Model Law?

Answer- (Rep. Rob Damron) Yes, we saw the billions of dollars in life insurance policies owned by seniors being abandoned by the owners ever year. These seniors did not understand their legal rights of ownership or available options to use these policies in a better way such as to help pay for their costs of long term care. The motivation behind this model law is to educate policy owners that they have options such as converting their life insurance policy to a long term care benefit plan that can be set up to help pay for their costs of long term care every month. We would rather see these policies being used by their owners to address their long tem care needs than be abandoned with the entire policy value going to the insurance company’s bottom line as profit.

Question- Life Care Funding Group has been an active supporter of the model law, what do you hope is accomplished as the model law is adopted in states around the country?

Answer- (Chris Orestis) We want to see the high lapse and surrender rate of life insurance policies by seniors reversed. We believe this will happen as they come to understand their legal ownership rights and options to use the policies as a tool to help them pay for long term care. Billions of dollars in life insurance could be converted instead of abandoned and then used to help pay for long term care costs. By giving the consumer access to information about their legal rights and options as a policy owner they can make informed decisions about best use of an asset they already own. In today’s environment it is important that consumers know they can convert a life insurance policy to a long term care benefit plan. It is a Medicaid qualified spend down of an asset they have been needlessly abandoning. Now instead of abandoning a policy they own and have paid premiums sometimes for decades, it can sustain a person’s long term care needs at private pay levels for months and years.

Question- What are LTC providers doing to educate and help consumers?

Answer- (Jayne Sallerson) Emeritus has been promoting “Financial Solutions” to the consumer to help pay for costs of housing and care for many years. We educate the consumer at each of our over 550 communities across the United States about the availability of options and the importance of being financially capable. We have partnered with companies like Life Care Funding Group, make this information available on our website, and we discuss it in the press and participate in public forums such as this on a regular basis. Despite our efforts and the efforts of many others, we find the vast majority of consumers are uninformed and unprepared when it comes to this point in their lives. We plan to be active supporters of the NCOIL model law so seniors understand they should not be abandoning life insurance policies when they could be converting them to an Assurance Benefit plan to help pay for senior housing and long term care.

Question- What more do advisors need to do help seniors in this situation?

Answer- (David Kitaen) LTCi still has a role to play in helping seniors pay for long term care but it is not a magic bullet and other solutions will be important as well. It is hard to ignore the fact that 153 million Americans own $10 trillion worth of life insurance and seniors are abandoning billions of dollars of policies every year. Converting life insurance policies into a long term care benefit plan is a Medicaid qualified spend down, it is written into the NCOIL law and senior care providers all over the country accept the benefit plan as a way to help pay for senior housing and long term care. An Assurance Benefit plan can address immediate needs quickly. Advisors need to be informing clients that if they have a life insurance policy they should not abandon them but instead hang onto the policy because they can convert it when they have a need to help pay for assisted living, home health and nursing home care.

Question- Is an Assurance Benefit plan an insurance policy?

Answer- (Chris Orestis) No, it is not LCTI, it is not a hybrid policy or annuity and it is not an accelerated death benefit. It is the conversion of an in-force life insurance policy to a benefit plan that is set up as a dedicated long term care account administered specifically to help pay monthly costs of assisted living, home healthcare and nursing home care. For families confronting a long term care crisis speed is of the essence, so the enrollment process is designed to be quick and uncomplicated for the policy owner bypassing the carrier all together with enrollment completed in 30-60 days.

Question- Can you tell us about your experience using the Assurance Benefit conversion for one of your clients?

Answer- (David Kitaen) I had an 81- year old male client with a $100,000 UL policy he was five days away from lapsing when I contacted Life Care Funding Group about enrolling him in the Assurance Benefit to pay for his long term care costs. Over about a 45 day period he was enrolled in the Assurance Benefit with a policy conversion amount of $35,000. My client is now receiving a $1,700 monthly benefit being sent to his care provider of choice for the next 15 months and has a $5,000 final expense benefit in place for funereal costs in the future. He is now receiving home healthcare as he starts making the transition to assisted living. When I was with the family the day we signed the enrollment papers, my client and his two sons all actually gave me hugs and thanked me for so quickly taking a policy they were about to throw away and instead turned it into a long term care benefit that is covering them today.

Question- What do you see as the momentum for passage of the Disclosure Law around the county in light of the current economic crisis to fund long term care and what can agents/advisors do to help?

Answer- (Rep. Rob Damron) Cuts to Medicare and Medicaid will make private pay options such as use of a life insurance to pay for long term care important. Remember, these are our tax dollars we are talking about, and for every person able to extend their ability to pay for long term care and stay off of Medicaid a little bit longer the tax payers of this country are saving money. The Life insurance industry opposes the Model Law because if less policies are abandoned it will cut into their profits

I’m not just an elected official and a tax payer; I am an agent/advisor myself. Every one of us needs to contact their state senate and legislators to express support for this model law so consumers can get access to information about their legal rights and options as a policy owner. Other industries such as the long term care providers support this model law and they will be actively lobbying to see measures that promote private pay options move forward. One of the requirements of the model law is that agents and advisors are part of the process to inform consumers about their options—and that creates an opportunity for every one of us supporting this measure.

Question- What is your prediction for where things are going?

Answer- (Chris Orestis) Baby Boomers started turning 65 this year at a pace of 10,000people every day and that will continue uninterrupted for the next 20 straight years.
That will cause a lot of stress on the system that programs like Social Security, Medicare and Medicaid will have difficulty handling and moves like NCOIL made will be more common. The responsibility to pay for senior housing and long term care will continue to shift back to the consumer and their family, but the economic crisis will make this a difficult challenge. The ability to tap into private pay options and billions of dollars every year in available life insurance policies will be an important part of the equation that consumers, the long term care providers and political leaders will not be able to ignore.

Healthcare Policy Synopsis: Super Committee holds fate of Medicare and Medicaid in its hands

2011-10-27T17:32:00.000-07:00

“The two most important driving forces for the federal budget are the aging of the U.S. population and rapidly rising health-care costs.”
- Federal Reserve Chairman Ben Bernanke

Law makers from both sides of the aisle have come together to create a “Super Committee” comprised of six Democrats and six Republicans, half come from the House of Representatives and half come from the Senate. The members of the Super Committee are tasked with finding at least $1.5 Trillion in budget cuts over 10 years. The members of the Committee are Senators Murray (D-WA, Co-Chair), Kerry (D-MA), Baucus (D-MT), Toomey (R-PA), Portman (R-OH), Kyl (R-AZ); and from the House side, Representatives Hensarling (R-TX, Co-Chair), Upton (R-MI), Camp (R-MI), Van Hollen (D-MD), Clyburn (D-SC), Becerra (D-CA).

The Super Committee must present their recommendations to Congress by November 23 to face an up or down vote before Christmas. The question for Christmas this year is which groups will be visited by St. Nick and which will meet the Grinch. Some very tough decisions need to be made and no area is protected. Adding to the pressure of the situation is the fact that if Congress rejects the recommendations of the Super Committee then automatic cuts of $1.2 Trillion as well as possible tax increases will be enacted across the entire federal budget sparing no one.

Reports are that the Committee is struggling to meet its goal because they are facing deadlocks over how to handle a mix of cuts and taxes to bolster two of the biggest budget areas of our country—Medicare and Medicaid. Republicans want to enact deep cuts to these programs without any increased revenues offset by taxes. Democrats will not agree to any changes to these popular programs without new revenues as part of the comprise package. Democrats view this as a matter of fairness particularly for the most vulnerable populations such as seniors, the poor and the disabled. Republicans view the situations as a matter of principle and are united behind their steadfast refusal to include raising taxes as part of any package to get the nation’s budget and debt problems under control.

The Super Committee is looking at examples from other efforts to address this problem that have been undertaken over the last couple of years. Alan Simpson and Erskine Bowles co-chaired a bi-partisan commission and released their recommendations in 2010 on how to reduce the nation’s budget deficit and accumulating debt crisis by $4 Trillion through 2020. They recommended a series of aggressive cuts and new tax revenues. Restructuring and significant cuts to Medicare and Medicaid funding for long term care services was a major element of their plan, and it is expected it will be as well for the Super Committee. Coupled with the recently enacted 11.1% across the board reduction in reimbursements enacted by CMS for all long term care expenses, seniors are looking at shouldering a significant portion of any reductions.

Families already under enormous economic pressure will find it even more difficult to pay for long term care services for loves ones. Government dollars will pay for less and it will become more difficult to qualify. It has become more important than at any time in our nation’s history to prepare for the costs of long term care and make use of programs such as long term care insurance, life insurance policy conversions to long term care benefit plans, and other financial vehicles to ensure sufficient private pay dollars are available when the time comes.

The view of health policy experts on the Super Committee’s efforts speaks to the major influence healthcare spending has on our nation’s budget and economic future:

Nina Owcharenko, Director of the Center for Health Policy Studies at The Heritage Foundation: "[i]f the goal is producing $1.2 trillion to $1.5 trillion in 10-year savings, the Joint Select Committee on Deficit Reduction must think big and produce recommendations with real substance. Medicare faces a flood of more than 77 million baby boomers joining the program over the next 20 years. The Medicare trustees' annual report continues to warn of the program's unsustainable and unfunded obligations. Meanwhile, Medicaid is draining state budgets, taking more resources away from other important programs such as education and transportation. Nothing could be truer than dealing with the health care savings component. ... They should make measurable progress in restructuring the health care system toward a sustainable, consumer-based model -- not just meet a fiscal target and call it reform."

David Kendall, senior fellow for health and fiscal policy at Third Way, a think tank that creates and advances moderate policy and political ideas: "The rising cost of health care is squeezing the federal budget, making it a common enemy. Over the next 40 years, the cost of Medicare will roughly double in real terms and the number of beneficiaries also will double, while the number of taxpayers will grow by only one-third. For Republicans, spiraling costs have placed them in the increasingly untenable position of proposing steep Medicare cuts in order to avoid tax increases in their budget proposals. Democrats are looking at a budget where health care spending crowds out other progressive priorities such as education, housing and public investments in general. The best way to save money in Medicare and Medicaid is to lower costs throughout the health care system. In the comics, super heroes and their rivals occasionally enter an uneasy alliance against a common enemy. In the face of a looming fiscal crisis, can the two parties use the super committee to follow suit?"

The Super Committee has until Thanksgiving to submit their recommendations to Congress and it must be acted upon within a month’s time. When the Super Committee concept was established, a punitive measure was put in place to make sure partisan bickering and gridlock could not conspire to snuff out this effort. The specter of the $1.2 trillion mandated cuts that will immediately impact every budget area of this country, including defense spending and entitlement programs, was intended to be so harsh that it would force Washington, DC to get out of its own way and allow the Super Committee to accomplish its mission. No one wants to see the looming cuts automatically enacted if the Super Committee fails and/or Congress votes down its recommendations before the end of the year.

As a nation, we have truly arrived at the point where we can no longer kick the can down the road. We have all been enjoying a fantastic dinner party for years but the check is now on the table and everyone has to get out their wallets to help pay. The question for seniors and families faced with long term care expenses—have you prepared for this day (are you even paying attention!?) and do you understand all of your available options to help cover the costs?

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

2011-10-27T17:26:00.000-07:00

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.

As large Medicaid cuts loom, states look to convert life insurance polices to long term care benefits to fill the financial gap

2011-09-02T12:57:00.000-07:00

As the debate over how to balance the budget and whether to raise our nation’s debt ceiling rages on in Washington DC, we are seeing clearly that one of the fattest targets on the radar screen is Medicaid. Our nation’s Governors from both parties spoke out during the National Governor’s Association (NGA) annual meeting held in July and said they are “most worried that both President Obama and Congressional Republicans wanted to cut Medicaid payments to the states by $100 billion over the next decade.” House Republicans have taken things even further proposing more than $700 billion in Medicaid cuts, largely by converting federal funds into block grants for states. “There has been an unsettling silence around Medicaid — even from members of my own party,” said Sen. Jay Rockefeller (D-WV). “Medicaid suddenly looks like the sacrificial lamb.”

Medicaid is the primary payor of long term care services in the United States. Over 10 million Americans now require long term care annually, and in 2009 Medicaid spent $240 billion on long term care services accounting for 43% of total expenditures. By comparison, $45.6 billion or19% of long term care 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.

Medicaid and 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. There is a combined budget shortfall of $121 billion across 46 states for fiscal year 2011. States are legally required to operate with balanced budgets every year, and draconian cuts as well as federal assistance have become necessary. Although Medicaid cuts were not part of the Federal budget and deficit ceiling compromise agreement (for now), on August 1, 2011 CMS enacted an unprecedented across the board reduction in LTC reimbursements from Medicare and Medicaid of 11.1% for 2012.

To keep pace with these paralyzing budget problems and growing demand for long term care services, states have begun looking for alternative ways to stimulate private dollars to help pay for the costs of long term care and reduce the pressure on Medicaid budgets. One example has been the unanimous passage by the National Conference of Insurance Legislators (NCOIL) of the Life Insurance Consumer Disclosure Model Law requiring that life insurance companies inform policy owners they have a number of options to consider instead of abandoning an in-force policy. 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.

Sources

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

A Growing Strategy: Paying for Long-Term Care with Life Policies

2011-08-14T14:45:00.000-07:00

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.

Private funding solutions for LTC

2011-06-21T19:06:00.000-07:00

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?

Driven by crisis, alternative solutions emerge to pay for long term care

2011-05-24T05:39:00.000-07:00

Over 10 million Americans now require long term care annually and Medicaid is the primary payor of long term care services in the United States. In 2009, Medicaid spent $240 billion on long term care services accounting for 43% of total expenditures. By comparison, $45.6 billion or19% of long term care 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. A report tracking Medicaid spending going back over the last seven years showed that Medicaid underfunded payments for services to all patients by $14.17 everyday in 2009 and this alarming underfunding trend will get worse through 2011. The economic crisis has robbed state budgets of funds available to support Medicaid funded programs and as a result there was a national deficit of almost $5 billion.

Medicare and Medicaid are under so much stress that the cuts are coming fast and furious. The impact of all these aging Baby Boomers being added to the equation is now described as the “Silver Tsunami”. As this 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.

An Alternative Solution Emerges

According to the NAIC, today there is $10 trillion of in-force life insurance in the hands of 153 million Americans. 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 will be abandoned. Too few policy owners’ posses the knowledge of how insurance works and 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.

The shame of this situation for the consumer is that there are numerous options for them to explore before surrendering or lapsing a policy. 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.

For many policy owners, life insurance is an illiquid asset that is easily abandoned. The vast majority of life insurance policies in-force will never pay a death benefit because they either expire, lapse or are surrendered for cash value. Legislative and market activities across the country point to the growing realization that life insurance policies are an asset well suited to help pay for long term care. Too few seniors realize their policy could be used for purposes other than a death benefit—but the word is rapidly spreading among policy owners and law makers.

Consumer Disclosure Law Spreads Across the Country

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 policy holders above 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. As of this writing, the states of 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.

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 policy holders 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."

The adoption of this law in the states is a direct response to the explosion of Baby Boomers reaching retirement age, anemic sales and significant disruption in the long term care insurance market, and a realization that billions of dollars worth of life insurance is abandoned every year by people who do not know their legal rights or options. Expect more legislative action like this to escalate rapidly throughout the country.

Helping Families Pay for Long Term Care

Too often our company encounters seniors and their family who have owned a life insurance policy for many years that are about to lapse or surrender it for minimal value. They have contacted their life insurance company to ask them what they can do. The life insurance company will inform them that they really only have two options if they don’t pay their premium: surrender the policy for its cash value (if it has any) or let it lapse. Most people that receive a lapse notice have no cash value because it has already been drained by the carrier to make premium payments. That typically leaves the final option of pay or go away. The number of seniors that allow this to happen to a policy after paying premiums, sometimes for decades, is scandalously high. State law makers around the country have taken notice of this situation and are now taking action to make sure policy owners are informed of their options before abandoning their life insurance.

The life insurance companies are not happy about this disclosure law and have been gearing up their considerable lobbying machine to fight it in the states. They have objected on the grounds that too much information will confuse policy owners and may create unrealistic expectations for them. They also object to the idea that they “are advertising” other options that do not directly benefit them. Lastly, they object to the costs of sending notices to policy holders, but that argument is somewhat fungible because they will be sending notices through existing mailings such as lapse notices or premium statements.

It has been difficult for the carriers to argue against the simple concept that consumers are better off with more information and not less. The law’s intent is to make sure that insurance carriers disclose to their policy owners that they have multiple options to consider beyond lapse or surrender. It 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 penalties established by state law.

It is common sense that the best interest of policy holders is to make decisions with full disclosure of rights and options—and not in a vacuum. In today’s stressed economic environment, policy owners need to understand that a life insurance policy is more than just a death benefit. It is an asset that can help them in a number of ways and simply walking away from their policy is their worst possible option.

During testimony before NCOIL as they considered final adoption of the Model Law on November 19, 2010, Life Care Funding Group offered the following:

“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.”

Life Insurance Policy Conversion

This conversion option, known as an Assurance Benefit Plan, is not a long term care insurance policy. It is an actual benefit plan that a allows the owner of any form of life insurance to use their policy to pay for long term care life insurance by converting their death benefit into a living benefit to help pay for the costs of senior housing and long term care such as assisted living, home healthcare, and nursing home care. Any type of life insurance will qualify and once their 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.

This conversion option differs from hybrid policies sold by carriers that can be converted into LTCI. This option allows for the actual exchange of a life insurance policy for a long term care benefit plan at the time that care needs to be paid for. Not to be confused with an insurance policy, the benefit plan is not issued by a carrier and is not restricted to polices that contain a conversion rider and is not restricted to the issuing carrier. Unlike long term care insurance there are no wait periods to receive benefit payments. Once a policy is converted by the owner benefits are immediate and they are relieved of any responsibility to pay premiums and there are no fees.

The policy conversion can be done for any form of individual or group life insurance and is not subject to the same limitations and wait periods as LTCI. The entire conversion process can be done in under 30 days, and then a third party benefit administrator makes benefit 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. Families with the need to pay for long term care that are unable or unwilling to keep their life insurance policy in-force by maintaining premium payments, the conversion option is a much better choice than abandoning the policy.

Providers of long term care services such as nursing homes, assisted living communities and home health agencies have been quick to embrace this alternative form of payment. 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. Life insurance is an unqualified asset for Medicaid applicants and 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. But now, by converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered by the long term care benefit plan 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.

Qualified Spend Down of an Unqualified Asset

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 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.

But, instead of abandoning a life insurance policy as part of a Medicaid eligibility process, the policy owner can convert a life insurance policy while still alive to help pay for long term care, and they are 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 so doing, a person enrolled in an Assurance Benefit plan would stay off of Medicaid while they were enrolled.

An Informed Consumer is an Empowered Consumer

As is the case with any product or service, the more options and benefits that the consumer understands is 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.

The fact that they are in control of their policy and have multiple options available to them beyond just a death benefit opens up many new possibilities for how a policy is valued by the consumer. Its’ death benefit is just one level of value because the policy also has “present day value” and the owner is in control of how and when that is accessed.

On November 19, 2010, during testimony at NCOIL’s annual meeting to consider passing the Consumer Disclosure Model Law, Life Care Funding Group offered the following observation:

“The intersection of a growing senior and Baby Boomer population and economic bust is creating a crisis for how seniors will fund their retirements and eventually long term care expenses. Our case workers hear from seniors and their families every day who have been paying premiums for years and are getting ready to abandon their policy. These are middle class Americans without insurance expertise and the typical size of their policy is well under $500,000. This disclosure law will help consumers understand they have a number of options to consider before discarding a policy, including converting their policy into a long term care benefit plan that holds the potential to address their financial shortfalls.”

LTC funding crisis driving search for alternatives

2011-04-17T08:16:00.000-07:00

On February 4th, 2011, Federal Reserve Chairman Ben Bernanke gave a dire warning in a speech before a gathering of top financial policy reporters at the National Press Club in Washington, D.C. “The two most important driving forces for the federal budget are the aging of the U.S. population and rapidly rising health-care costs,” said Bernanke. There you have it folks from the top—the costs of caring for the rapidly growing population of seniors in the U.S. will be an unsustainable burden for the U.S. budget and a constant impediment to economic recovery. The big three entitlement programs, Social Security, Medicare and Medicaid, are all in the red and creating havoc for government budgets at the federal and state levels. Just as 10,000 Baby Boomers a day started turning 65; this has become the number one concern of the Federal Reserve about the immediate and long term future of the U.S. economy.

Medicaid in particular has become a serious problem for the states. It is the primary payor for long term care services and will pay out approximately $200 billion to cover those costs for seniors in 2011. Unlike Social Security and Medicare, seniors do not automatically qualify for Medicaid at age 65 and instead must qualify based on income and assets at indigent levels. Many seniors follow a “spend down” path to get rid of money and assets so that they can qualify. Since the economic crisis began three years ago, Medicaid rolls have increased while the available dollars to cover services have decreased. The current situation and future projections are so serious that both the Fed. Chairman and the Secretary of Health and Human Services (HHS), the body that runs Medicaid and Medicare, issued unprecedented high profile warnings on back-to-back days in early 2011.

State law makers understand the situation and efforts throughout the country are underway to find alternative, private market solutions to help pay for long term care services. Ten years ago it looked like long term care insurance (LTCI) was going to be a major part of the solution. Unfortunately, growth in sales for the last decade actually declined and then serious market disruptions further hampered the product. The combined impact of MetLife leaving the market in 2010 and The Guardian leaving the market in 2011, multiple rate increases from Genworth and John Hancock, and state’s taking over entire blocks of business to ensure solvency has undermined consumer confidence. Additionally, the CLASS Act may be well meaning but entirely insufficient to address the magnitude of this problem. At this point it is all too clear that other solutions will be necessary.

Legislative leaders in the states have taken notice of the amount of life insurance in the hands of seniors and are focusing on opportunities for them to use it as a means to pay for long term care. According to the NAIC, there is $10 Trillion of in-force life insurance policies in the U.S. Of that amount, there is $100 Billion - $500 Billion in the hands of seniors annually who could potentially use their policy as a living benefit to help pay for long term care. In late 2010, the National Conference of Insurance Legislators (NCOIL) unanimously passed the Life Insurance Consumer Disclosure Model Law which requires that life insurance companies disclose to their policy owners that they have a number of alternative options to use their life insurance policies to consider instead of a lapse or surrender. Among the options legally required to be disclosed to policy owners is their ability to convert a policy’s death benefit into a long term care benefit plan.

NCOIL declared that final passage of the Life Insurance Consumer Disclosure Model Law "would empower consumers through education about their options." NCOIL President Rob Damron (KY), upon unanimous passage said, "It is imperative that policy holders understand that they have alternatives to merely lapsing or surrendering their policy. The model would require a clear notice to consumers, listing eight available options, including accelerated death benefits, conversion to long term care, and the possibility of a life settlement."

State law makers understand that there is billions of dollars worth of life insurance policies at play and a massive amount is abandoned every year because the owners are uninformed about their legal rights and options. By educating the public about alternative uses for their asset, those policies could be put to work to help pay for the costs of long term care. As an example of disparity between products, there are 400,000 long term care policies in-force in New York State compared to 9,000,000 life insurance policies. If states can successfully delay the need for someone to go onto Medicaid by extending the spend down period of a life insurance policy through converting its use, they are improving the circumstances of both the individual and the provider of long term care services, and reducing the tax payer’s burden to bail out Medicaid and Medicare.

Medicaid in Crisis

2011-04-17T08:11:00.000-07:00

Treatment of Life Insurance as an unqualified asset for Medicaid eligibility

Over 10 million Americans now require long term care annually. Medicaid is the primary payor of long term care services in the United States. The national average cost of a nursing home is $72,000 per year, for assisted living it is $38,000, and for home healthcare services it is $21 per hour. Most people will drain all personal savings and assets paying for long term care in their first year of usage.

In 2009, Medicaid spent $240 billion on long term care services accounting for 43% of total expenditures. By comparison, $45.6 billion or19% of long term care 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.

Medicaid and 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. There is a combined budget shortfall of $121 billion across 46 states for fiscal year 2011. States are legally required to operate with balanced budgets every year, and draconian cuts as well as federal assistance have become necessary. The federal government passed a temporary increase in federal matching payments (FMAP) for Medicaid of $87 billion in 2009. Over 2010 and 2011, the FMAP was extended at reduced levels by half and then by half again, and will be eliminated in 2012. As the FMAP assistance winds down and ultimately concludes, state spending will need to increase by at least 25% to keep pace—and at a time when the dollars are not available.

States have begun looking for alternative ways to stimulate private dollars to help pay for the costs of long term care and reduce the pressure on Medicaid budgets. One example has been the unanimous passage by the National Conference of Insurance Legislators (NCOIL) of the Life Insurance Consumer Disclosure Model Law requiring that life insurance companies inform policy owners they have a number of options to consider instead of abandoning an in-force policy. Among the options in the law is the right to convert a life insurance policy into a long term care benefit plan.

An Assurance Benefit will convert any form of life insurance to pay directly for the costs of long term care in a nursing home, assisted living and home healthcare. It is considered a “qualified spend down” of a life insurance policy asset for Medicaid eligibility. 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.

Sources:

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

Medicaid Eligibility Q&A

Q: Does ownership of a life insurance policy count against an applicant for Medicaid eligibility?

A: 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.

Some states allow for a final expense policy to be kept or transferred to a funeral home (but the funeral home would keep the entire death benefit). 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.

Q: What options do owners’ of a life insurance policy have when attempting to qualify for Medicaid?

A: Medicaid rules are very clear that a life insurance policy is an unqualified asset and counts against Medicaid eligibility. The owner of one or more policies has a variety of options to consider:
• A policy with more than a minimal amount of cash value (usually $1,500 or more depending on the state) must be liquidated with the proceeds spent down on care.
• A policy with no cash value does not need to be liquidated but the death benefit will be subject to Medicaid recovery efforts to return the amount of money spent on care.
• Many states will exempt a “final expense” policy if the full death benefit value is assigned to a funeral home.
• Assignment of a life insurance policy for less than its fair market value is a violation of asset transfer rules if done within the 60 month look back period.
• A policy owner has the legal right to convert a life insurance policy into a long term care benefit plan at its fair market value and extend their spend down period by covering cost of care while preserving a portion of the death benefit until exhausted.

Q: How does a policy conversion work?

A: 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.

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

Medicaid Eligibility Fact Sheet

What is Medicaid: Medicaid is health insurance that helps many people who can't afford medical care pay for some or all of their medical bills. Medicaid is available only to people with limited income. You must meet certain requirements in order to be eligible for Medicaid.

Who qualifies for Medicaid: Many groups of people are covered by Medicaid. Even within these groups, though, certain requirements must be met. These may include your age, whether you are pregnant, disabled, blind, or aged; your income and resources (like bank accounts, real property, life insurance, or other items that can be sold for cash); and whether you are a U.S. citizen or a lawfully admitted immigrant. The rules for counting your income and resources vary from state to state and from group to group. There are special rules for those who live in nursing homes and for disabled children living at home.

Who qualifies for Long Term Care to be covered by Medicaid: In addition to financial eligibility, States determine if an individual meets the functional criteria by assessing the limitations in an individual’s ability to carry out activities of daily living (ADL) and instrumental activities of daily living (IADL). The Medicaid statute requires states to use specific income and resource standards in determining eligibility; these standards differ based on whether an individual is married or single. If a state determines that an individual has transferred assets for less than “fair market value” (FMV), the individual may be ineligible for Medicaid coverage for long term care for a period of time. Individuals who incur high medical costs may “spend down” into Medicaid eligibility because these expenses are deducted from their income. Spending down may bring their income below the state determined income eligibility limit.

What type of assets count against Medicaid eligibility: Income and Assets are both calculated to determine Medicaid eligibility. Income from work, investments, and entitlements such as Social Security all need to be reported by the applicant. Assets such as cash, stocks, bonds, trusts, annuities, real estate, vehicles and life insurance all must be reported and are calculated for eligibility. States determine their own specific eligibility standards within federally mandated parameters.

How is life insurance counted as an unqualified asset: Ownership of any in-force life insurance policies must be reported by the applicant when determining eligibility for Medicaid and failure to report is fraudulent. Specific limitations vary by state, but any policy with cash value in the range of $1,500 to $2,500 must be liquidated and the proceeds spent down on care before eligibility is approved. Exemptions are allowed for final expense policies if the entire policy is assigned to a funeral home. Term policies that do not have cash value are also exempt, but the death benefit and estate is subject to legal action and liens by the Medicaid department to recover all money spent on care for the deceased.

Life insurance is an unqualified asset and counts against the Medicaid applicant’s eligibility to qualify. Any amount of money derived from ownership of a life insurance policy must be either spent down on care (cash value or monetary value available while alive) or the death benefit is subject to legal action against the estate as part of Medicaid’s required asset recovery procedures.

What are the rules for Medicaid Recovery actions: 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, intermediate care facility for the mentally retarded, 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.

People with Medicare are notified of the Medicaid estate recovery program during their initial application for Medicaid eligibility and annual redetermination process. Individuals in medical facilities (who do not return home) are sent a notice of action by their county Department of Social Services informing them of any intent to place a lien/claim on their real property. The notice also informs them of their appeal rights. Estate recovery procedures are initiated after the beneficiary's death.

Can ownership of a life insurance policy be transferred to keep the policy in the family: 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.

Are there penalties or delays to qualify for Medicaid based on violations of asset transfers and reporting: 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))

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

New Disclosure Requirements for Insurers—What NCOIL’s Life Insurance Consumer Disclosure Model Act Means to Your Client

2011-02-07T13:19:00.000-08:00

Too often when seniors and their families contact their life insurer about their old policies, they are given only three options: surrender the policy for its cash value(if it has any), pay the premium or let it lapse.

Most people who receive a lapse notice have a policy with no cash value because it has already been drained by the carrier to make premium payments. That typically leaves a final option of paying the premium or walking away. The number of seniors allowing this to happen to a policy after paying premiums, sometimes for decades, is scandalously high. State law makers around the country have noticed this situation and are now taking action to make sure policy owners are informed of their options before they abandon a life insurance policy.

Consumer Disclosure

As of this writing, the states of California, Kentucky, Maine, New Hampshire, Oregon, Washington State, 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 and it will be introduced in state legislatures around the country in 2011.

The Law requires that life insurance companies inform policy holders above 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 eight options for consumers to be made aware of in the Model Law include:

- Accelerated death benefit
- Assignment of policy as a gift
- Life Settlement
- Policy replacement
- Maintenance pursuant to terms or riders
- Maintenance of policy through a loan
- Conversion from term to a permanent policy
- Conversion to LTCI or a Long Term Care Benefit Plan

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. Insurance departments are taking action as well and have been implementing and policing the disclosure law in their states—and some have created consumer friendly brochures to reach out to policy owners and help make them aware of their rights and options.

Industry Opposition

The life insurance companies are not happy about this disclosure law and have been gearing up their considerable lobbying machine to fight it in the states. They have been unsuccessful so far and now NCOIL has drafted and approved a Model Law for the rest of the nation to adopt despite the objections of ACLI and companies such as MetLife, Mass Mutual and Prudential. They have objected on the grounds that too much information will confuse policy owners and may create unrealistic expectations for them. They also object to the idea that they “are advertising” other options that do not directly benefit them. Lastly, they object to the costs of sending notices to policy holders, but that argument is somewhat fungible because they will be sending notices through existing mailings such as lapse notices or premium statements.

It has been difficult for the carriers to argue against the simple concept that consumers are better off with more information and not less. It is common sense that the best interest of policy holders is to make decisions with full disclosure of rights and options—and not in a vacuum. In today’s stressed economic environment, policy owners need to understand that a life insurance policy is more than just a death benefit. It is an asset that can help them in a number of ways and simply walking away from their policy is their worst possible option.

During testimony before NCOIL as they considered final adoption of the Model Law on November 19, 2010, I offered the following:

“Our case workers hear from seniors and their families every day who have been paying premiums for years and are getting ready to abandon their policy. These are middle class Americans without insurance expertise and the typical size of their policy is well under $500,000. They are being told by their insurance company that their only option is to pay or walk away. With this Consumer Disclosure law, policy owners will not make decisions based on a lack of information and instead will be informed that they have a number of options to consider first that could make a significant difference in their lives, and at a time when they need it most.”
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 policy holders understand that they have alternatives to merely lapsing or surrendering their policy. The model would require a clear notice to consumers, listing eight available options, including accelerated death benefits, conversion to long term care, and the possibility of a life settlement."

Death Benefit to Living Benefit

Another reason that the disclosure law is such an important victory for the consumer is that for people requiring long term care, such as seniors and those suffering from terminal or chronic conditions, this will increase their awareness of opportunities to get the best use of their life insurance policy’s death benefit while still alive. There are millions of people every year requiring long term care and lack the means to pay for it. For those that qualify, Medicare and Medicaid can pick up some of those costs. Others may have a long term care policy. But what about the vast middle market that won’t qualify for government assistance and do not own LTCI? Millions of those people do own a life insurance policy, and both the senior care industry and law makers are recognizing the opportunity to convert those policies into a method to pay for the high costs of senior housing and/or long term care.

A newer option among the eight that is included in the Law is for a policy owner to “convert a policy into a long term care benefit plan”. This option differs from hybrid policies that can be converted into LTCI (which is also included in the list of eight). This option allows for the actual exchange of a life insurance policy for a long term care benefit plan. Not to be confused with an insurance policy, the benefit plan is not issued by a carrier and is not restricted to polices that contain a conversion rider and is not restricted to the issuing carrier. The policy conversion can be done for any form of individual or group life insurance and is not subject to the same limitations and wait periods as LTCI. The entire conversion process can be done in under 30 days, and then a third party benefit administrator makes benefit 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 have been quick to embrace this alternative form of payment. 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. Life insurance is an unqualified asset for Medicaid applicants and 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. But now, by converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered by the long term care benefit plan 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.

Conclusion

With the consumer disclosure law spreading across the country, life insurance policy owners are going to learn about converting their policy and the other options for getting more out of their asset than just abandoning it. As it is specified in the Law, agents and advisors are going to play an important role in educating their clients about these options. In the midst of an ongoing economic malaise, policy owners will become more challenged to remain in force and many will be looking at abandoning their asset as they struggle to make ends meet. By offering people information and access to a variety of options to get the most out of their policy as a living benefit, agents and advisors will be giving polices and their owners a second life.

Life Insurance Consumer Disclosure Law: A Life Boat in the Eye of the Storm

2011-02-01T18:38:00.000-08:00

January 1, 2011: The Silver Tsunami Hits with a BANG!

“Senior boom begins amidst economic bust” (USA Today 11/14/10). We see it in the headlines almost every day-- between the senior population already in the long term care system and Baby Boomers now hitting Social Security and Medicare age at a rate of over 10,000 people a day, it is now safe to say that the long term care funding crisis has arrived. The crux of the dilemma is the most basic of economic principles: Supply and Demand. Amidst the most persistent economic downturn since the Great Depression, “demand” of seniors that need (or will need) long term care is growing at a much faster rate than the “supply” of resources to pay for their care. This demographic-economic disconnect will force the government to raise barriers to entry for the three primary entitlement programs: Social Security, Medicare and Medicaid. It will also result in reduced benefit levels and push more of the responsibility to fund retirement and long term care back on the individual (and their family).

Seniors and their families are already struggling with the costs of every day living, if you add the costs of long term care to the picture it is a back breaking scenario for most Americans. Statistics show that the majority of people do not understand the various forms of long term care, the different means to pay for it, and most do not plan for long term care until they are beset by a health care crisis.

For the wealthy, the costs of long term care can be absorbed. For the poorest, government subsidized care is available. But what about the Middle American who does not fit either of these descriptions? A small percentage of people have had the foresight and resources to prepare at some degree through long term care insurance. Unfortunately, sales have been in decline for years (just when they should have been sky rocketing) and the market has been severely disrupted by rate increases and carriers exiting the market. A much larger number of people in this category own life insurance, and the use of that asset as a means to pay for long term care is an option readily available to them. But, over 90% of life insurance polices lapse or are surrendered and most middle market policy owners are unaware that their life insurance policy’s death benefit can be used as a “living benefit”.

Life Insurance Consumer Disclosure Law

State governments have started to recognize the dilemma of policy owners who do not understand the variety of options available to them when they are considering surrendering or lapsing their life insurance. There are literally millions of seniors who have been paying premiums for years and then abandon their policies at the time when it could be of most use to them. Efforts have been underway to address that lack of information for policy owners. A number of states including California, Kentucky, Maine, New Hampshire, Oregon, Washington State, 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, and despite opposition by the life insurance industry, it will be introduced into state legislatures across the country starting in 2011.

The Law requires that life insurance companies inform policy holders above 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 eight options for consumers to be made aware of in the Model Law include:

- Accelerated death benefit
- Assignment of policy as a gift
- Life Settlement
- Policy replacement
- Maintenance pursuant to terms or riders
- Maintenance of policy through a loan
- Conversion from term to a permanent policy
- Conversion to LTCI or a Long Term Care Benefit Plan

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 policy holders understand that they have alternatives to merely lapsing or surrendering their policy. The model would require a clear notice to consumers, listing eight available options, including accelerated death benefits, conversion to long term care, and the possibility of a life settlement."
The timing of this disclosure law could not be better. The Silver Tsunami explosion has begun, economic conditions remain in turmoil with no significant recovery in sight, and the LTCI market is in disarray. Consumers are looking for solutions to their problems and they may be able to find it in their life insurance policy.

Policy Conversion

One of the newer options for policy owners included in the Model Law is to “convert a life insurance policy into a long term care benefit plan.” This option differs from hybrid policies that can be converted into LTCI (which is also included in the list of eight). This option allows for the actual exchange of a life insurance policy for a long term care benefit plan. Not to be confused with an insurance policy, the benefit plan is not issued by a carrier and is not restricted to polices that contain a conversion rider and is not restricted to the issuing carrier. The policy conversion can be done for any form of individual or group life insurance and is not subject to the same limitations and wait periods as LTCI. The entire conversion process can be done in under 30 days, and then a third party benefit administrator makes benefit 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 have been quick to embrace this alternative form of payment. 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. Life insurance is an unqualified asset for Medicaid applicants and 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. But now, by converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered by the long term care benefit plan for an extended period and the life insurance asset can be spent-down in a Medicaid compliant fashion—while preserving a portion of the death benefit.

On November 19, 2010, during testimony at NCOIL’s annual meeting to consider passing the Model Law, I 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.”

Life insurance policies with long term care riders are available in the market, but it is a newer product and it will be some years before a substantial percentage of policy owners are using this option to fund their needs. Recently, the concept of using life settlements as a way to monetize a life insurance policy for long term care began to spread, but the challenge there is that the focus of life settlement companies is on high net worth individuals with large face policies. For the vast majority of the senior population with life insurance under $500,000, a life settlement is not a likely scenario.

For the vast majority of Middle Class Americans that require long term care today and own a life insurance policy, the conversion option is one that merits serious consideration. The conversion of a life insurance policy’s death benefit to a “living benefit” is an alternative to abandoning a policy and making the best use of it to help pay for the escalating costs of long term care.

Funding Long Term Care with Life Insurance: Trend Catches On

2011-01-10T19:18:00.000-08:00

The recent passage of a New York law that will allow the proceeds of an accelerated death benefit to be used to pay for nursing home costs is another example of the growing national trend of using life insurance policies as a means to pay for long term care. The bill, signed into law by Gov. Paterson on Dec. 14, 2010, expands the definition of “life insurance” to include the ability to provide a living benefit to pay for long term care. It allows for those who have been residents of a nursing home for at least three months to apply the proceeds of an accelerated death benefit toward their costs of housing and care. The bill does not provide for payment toward assisted living, home health care, or other forms of senior housing and care.

The goal of this law, first introduced into the New York Assembly in 2008, is to offset the costs of New York’s Medicaid program paying for a nursing home stay by extending the spend-down period of a life insurance policy if it has an accelerated death benefit rider. The bill’s author, State Sen. Jeff Klein, cited the high costs of New York’s Medicaid program paying for a nursing home stay as the driving force behind the new law’s passage. He stated that New York’s Medicaid program spends more than $23 billion on long term care, and that this new law could save the state approximately $1 billion over the next five years. He also pointed out the wide disparity between owners of long term care insurance and life insurance in New York — with 400,000 residents owning LTCI, versus 9 million who own life insurance.

“We’re supportive of it, as it gives seniors more flexibility in planning for their future,” said Richard Herrick, president and CEO of the New York State Center for Assisted Living.

This law, as well as other options using life insurance to pay for the escalating costs of long term care, have really begun growing over the last couple of years. Factors driving this trend include the explosion of baby boomers reaching retirement age, anemic sales and significant disruption in the long term care insurance market, and a realization that billions of dollars worth of life insurance is abandoned every year.

Consumer disclosure law emphasizes policy conversion over abandonment

For many policy owners, life insurance is an easily abandoned illiquid asset. The vast majority of in-force life insurance policies will never pay a death benefit because they either expire, lapse, or are surrendered for cash value. The New York law, as well as other legislative and market activities, point to the growing realization that life insurance policies are an asset well-suited to help pay for long term care.
Too few seniors realize that their policy could be used for purposes other than a death benefit, but the word is rapidly spreading among policy owners and lawmakers.

Another recent example of legislative action in support of using life insurance as a tool to help pay for long term care costs is last month’s passage of NCOIL’s Life Insurance Consumer Disclosure Model Law. (Versions of the law have already passed or are under consideration in Oregon, Washington, Maine, California, Wisconsin, and Kentucky.)

“It is imperative that policyholders understand that they have alternatives to merely lapsing or surrendering their policy,” said NCOIL President Rob Damron upon the model law’s unanimous passage. “The model would require a clear notice to consumers, listing eight available options, including accelerated death benefits, conversion to long term care, and the possibility of a life settlement.”

In the law, life insurance companies are legally required to inform policy owners older than 60, or if they have a terminal or chronic condition, that they have eight alternative options to consider before lapsing or surrendering a policy – and one of them is converting a life insurance policy into a long term care benefit plan.

The long term care conversion option opens up the ability to use a life insurance policy for long term care to an even wider population than the New York accelerated death benefit law. There is no minimum requirement of three months' residence in a long term care facility, and unlike long term care insurance, there are no waiting periods to receive benefit payments. Policy owners unable or unwilling to keep their life insurance in force can convert their policy to pay for the costs of assisted living and home health care, as well as for nursing home care.

The life settlement option

Life settlements are another alternative to abandoning a life insurance policy, and are specifically listed in the disclosure law in the states and in the NCOIL Model. In 2009, Conning and Company published its annual report on the life settlement industry, and in it, analyzed this option’s potential to pay for long term care:

“This new source of policies represents a potential alignment of life settlements, long term care providers, and state governments. 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 nursing home care.”

As another potential outlet to convert life insurance policies into the means to pay for long term care, life settlements have both pros and cons. On the plus side, life settlements can be a good option for high-net-worth clients with large policies looking to move into independent living communities or continuing care retirement communities (CCRCs). These environments can be quite expensive, and the typical profile for this population is more aligned with a life settlement scenario, i.e., high-net-worth and a longer life expectancy akin to the industry’s typical horizon of 10 or more years. For many people looking to access this form of senior living, their home’s value may have been negatively affected by the current economic situation, leaving them to seek alternative resources to bridge the gap. A life settlement might help them access the present-day value of what may be their most valuable, but illiquid asset.

The challenge for those in the larger, middle class population who own life insurance policies with a face value of $500,000 or less is that those policies may be too small for a life settlement. This, of course, is the population most inclined to abandon their policy, and to look to Medicaid to pay for their long term care costs. This is the population that the New York State Assembly, NCOIL, and the states that have passed the disclosure law are trying to help through the use of their life insurance policies.

Fortunately for millions of Americans in need of long term care, they now have multiple options to get the best use of a life insurance policy to meet their immediate needs.

Chris Orestis is president and founder of Life Care Funding Group; a 15-year veteran of both the life insurance and long term care industries; and a frequent speaker, featured columnist, and contributor to a number of industry publications. His blog on senior living issues can be found at www.lifecarefunding.com/blog. He can be reached at 888-670-7773 or chris@lifecarefunding.com.

Article available online: http://www.asjonline.com/Exclusives/2011/1/Pages/Life-Insurance-Funding-Long-Term-Care-Trend-Catches-On-.aspx

MetLife Exits Market: What Now?

2010-11-24T07:07:00.000-08:00

Instability in the Long Term Care Insurance Market puts pressure on the Consumer

An unexpected announcement by Met Life that they will exit the long term care insurance market in less than two months stunned an industry that has been forced to endure an escalating series of negative announcements over the last three years. The industry has worked for years to arrive at the point when the Baby Boomers would begin crossing over into retirement age and long term care insurance policy sales should be booming. But instead the industry has been set back by decreasing sales, rate increases, blocks of business being taken over by state risk pools, and now the sudden departure of one of the leading carriers and brand names for retirement and long term care security.

This storm, brewing for some time, became particularly evident in the last three years through a series of disruptive events emanating from leading long term care insurers. In 2007, John Hancock and Genworth began raising rates by 20 percent on new policies sold. In 2008, Conseco, the Indiana-based insurer and one of the nation's largest sellers of long term care insurance, transferred its long term care policies to a state trust fund in Pennsylvania. It was estimated at the time that the transfer of polices to the Senior Health Insurance Co. of Pennsylvania, a state trust fund, would impact 140,000 policyholders. In September 2010, John Hancock made a stunning announcement that it would increase rates on in-force policies by 40 percent and would suspend group product sales, and in October, Genworth announced that it, too, would again raise rates on at least 26 percent of its in-force business.

The common factor driving this escalation of events is incorrectly pricing the costs for this product by underestimating longevity of policy holders and the level of policy persistence. Simply put, long term care insurers under priced their product and it has become increasingly expensive for them to keep the policies on the books for longer periods of time at the original price they were sold. Solutions to this situation have come in the form of rate increases on new and existing business, abandoning blocks of business and leaving it to the states to take over, or now most recently, exiting the market all together.

Genworth attributes their rate increases to, “persistency, or the number of people who will retain, rather than lapse, their policies over time – leading to higher claims than pricing assumed for these older policies.” Similarly, when John Hancock examined their claims experience between 1990 and 2010 they discovered “unfavorable claims patterns” as it was described by Marianne Harrison, president of John Hancock Long Term Care. They discovered that claims had doubled since they last examined their experience in 2006 and that the age group 80 and older had increased by a factor of 4. Length and severity of claims had risen in the same time period while termination of policies had decreased. The bottom line is that more people were living longer and using their policies for longer periods of time than had been expected. “Put simply, more people used the insurance than anticipated, reinforcing the value of the product to policyholders, but creating a pricing issue,” Hancock says.

In the case of Met Life’s announcement to leave the market, these same factors are also true. In their statement, they indicated a major reason for leaving the market is that they have more customers cashing in on their long-term-care policies and, at the same time, the cost of providing care is rising. "While this is a difficult decision, the financial challenges facing the [long-term-care insurance] industry in the current environment are well known," said Jodi Anatole, vice president of long-term-care products for MetLife.

Of course the irony of this situation is that Met Life is leaving the market at exactly the time that consumers need private market options to help pay for long term care more than ever. Starting in 2011 as many as 10,000 Baby Boomers a day will start going onto Social Security and Medicare. Those social safety net programs are already under tremendous stress to keep up with the current population’s demands. Combined with a weak economy undermining the availability of tax dollars to sustain them, these programs are going to start pushing the responsibility to pay for long term care back on the individual and their family. State Medicaid programs are under enormous stress to keep up as well. They are also cutting budgets, increasing barriers to entry and emphasizing funding long term care more and more with out-of-pocket money. As the economy continues to search for its footing and demand for access to these programs rise, this will be an escalating area of concern for all stake-holders across the country.

Final Testimony – Life Care Funding Group

2010-11-20T11:55:00.001-08:00

National Conference of Insurance Legislators (NCOIL)
Life Insurance & Financial Planning Committee
November 19, 2010

Thank you to the members of the Committee for allowing me to participate in this very open, inclusive and thoughtful process.

I am Chris Orestis, President of Life Care Funding Group. We work with seniors and their families throughout the Untied States to help them raise funds they need to cover the costs of long term care. We specialize in converting a life insurance policy into a long term care benefit plan.

The Consumer Disclosure law currently being considered is important from three perspectives:

1) This is not about life settlements; it is about consumer rights to have access to information and options to get the best possible use and value for a life insurance policy based on their specific circumstances.
2) The consumer most helped by this law is the middle class policy owner about to discard one of their most valuable assets without the benefit of advisors or the knowledge that they have a number of alternative options to consider.
3) The intersection of a growing senior and Baby Boomer population and economic bust is creating a crisis for how seniors will fund their retirements and eventually long term care expenses. This disclosure law will help consumers understand they have a number of options to consider before discarding a policy, including converting their policy into a long term care benefit plan that holds the potential to address their financial shortfalls.

Our case workers hear from seniors and their families every day who have been paying premiums for years and are getting ready to abandon their policy. These are middle class Americans without insurance expertise and the typical size of their policy is well under $500,000. They are being told by their insurance company that their only option is to pay or walk away.

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.

With this Consumer Disclosure law, policy owners will not make decisions based on a lack of information and instead will be informed that they have a number of options to consider first that could make a significant difference in their lives, and at a time when they need it most.

NCOIL Comment Letter II: Consumer Disclosure Law

2010-11-08T18:08:00.000-08:00

NCOIL Comment Letter I: Consumer Disclosure Law

2010-11-08T18:07:00.000-08:00

The Honorable Ronald Crimm
Vice-Chairman
Life Insurance and Financial Planning Committee
National Conference of Insurance Legislators
385 Jordan Road
Troy, NY 12180

September 7, 2010

On behalf of Life Care Funding Group, I thank you for the opportunity to offer these written comments in support of the Life Insurance Consumer Disclosure Legislative Model currently under development by NCOIL.

Founded in 2007, LCFG is the leading provider of Funding Solutions for Senior Living to the senior housing and long term care industry. Our company specializes in converting the death benefit of an in-force life insurance policy into a long term care benefit to cover the costs of skilled nursing home care, assisted living, home health care, and hospice. We are members of the Assisted Living Federation of America (ALFA) and the American Health Care Association (AHCA).

LCFG focuses on providing seniors information and access to private market financial resources. One resource we have been able to use for their benefit is an in-force life insurance policy. There are millions more seniors in this country today with an in-force life insurance policy than a LTC policy.

The U.S. is experiencing a massive influx of seniors and Baby Boomers hitting the long term care system at the worst possible time from an economic perspective. This economic crisis now entering its third year is translating into less tax dollars for Medicare and Medicaid to pick up the costs of long term care which is forcing more emphasis back on the consumer to cover costs out of their own pocket. Seniors and their families are uninformed and unprepared to handle the costs and navigate the LTC industrial complex. Studies show the majority of people don’t save or plan for LTC until they are hit with a health crisis and the time is now.

We often times encounter seniors with a life insurance policy that they have been carrying for years. They are now in a crisis mode and will most likely lapse the policy because there is little to no cash value and they can no longer afford the premiums. When they reach out to the insurance company for options they are told they have two: pay up or lapse/surrender.

LCFG’s solution is to convert a life insurance policy’s death benefit into a long term care benefit that will help pay the costs of care and/or housing. Our program, called the Assurance Benefit, has helped people pay for the costs of nursing home, assisted living and home based health care. Each family we have helped were owners of a life insurance policy they no longer could afford to keep in force. They were planning to either lapse the policy or surrender it for minimal cash value. After they learned that there were alternative options to realize value for an asset they were prepared to abandon, they quickly acted on our program and were able to move forward securing the best possible long term care for their needs.

It is in the better interest of the senior and their family to monetize the policy through a variety of options, such as in our case converting a death benefit to a long term care benefit, and then applying the maximum private market value of the policy towards their needs. It 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.

We are living in a time when we must be doing all we can to get as much information as possible into the hands of seniors. I understand insurance companies would rather see someone in their 80’s and in the process of moving towards long term care lapse a policy they have been paying premiums on for 20 years. But, if the policy can be converted into the means to cover the costs of long term care for an extended period, and keep them off of Medicaid that much longer, it is in the best interest of the insured and their home state. People need to be informed of their options even if that means entities such as insurance companies are compelled to give the consumer information that is not in the best interest of their profit margins.

Our belief is that the consumer is best served by making informed decisions based on access to all available information. When a senior and their family is informed that an asset they are about to throw away has unrealized value for them, and by converting the policy into a long term care benefit they have found a solution to a health care crisis they are confronting, the consumer wins when they are able to access the most appropriate form of long term care and the state wins when a citizen is able to extend their ability to cover the costs of long term care for as long as possible before accessing Medicaid.

I thank you again for this opportunity to provide comments, and look forward to being a resource to this NCOIL’s efforts to ensure the consumer has access to more, and not less, information and options.

Sincerely,

Chris Orestis
President
Life Care Funding Group

Alternative Funding Solution for Long Term Care: Convert a Life Insurance Policy

2010-11-08T18:04:00.000-08:00

Now that we have arrived at the long awaited generational stage in our society that “Baby Boomers” are reaching the age of Medicare eligibility, the need to address the question of who is going to pay for a massive increase in long term care spending has become paramount. Exacerbating the growing crisis is the impact of the economy on the availability of private pay dollars and government spending. For the last two years we have watched as one of the primary sources of private funds, equity in the homes of seniors has evaporated.

State and federal budgets feeling the pinch of an eroding tax base and out of control spending on health care have started cutting back on Medicare and Medicaid spending. The cost of long term care continues to rise every year, and seniors (and their families) confronting the realities of what it costs to provide home based care, assisted living, or long term nursing home care are looking for solutions.

Annual Costs of Long Term Care

- Skilled Nursing Facility (SNF): $79,935
- Assisted Living Facility (ALF): $37,572
- Alzheimer’s Unit: $85,045
- Home Healthcare: $43,065
** 8 hours per day @ $21/hr, 5 days per week for a year

Met Life Mature Markets Institute 2009

For those families with a long term care insurance policy, a portion of these costs may be covered if they meet the necessary eligibility requirements. And for those families with the last name Gates or Winfrey, they can just cut a check. But what about the vast and often overlooked middle market? Where do they find the resources to cover all or a portion of these costs?

One asset to look at for liquidity is an in-force life insurance policy. A policy owner could look at taking the cash surrender value or a loan against the policy. But for many policy owners there is little to no cash value and the liquidity available through these routes would be insufficient. In that case, another option would be to convert their life insurance policy into a long term care benefit plan.

More and more senior care companies around the United States are using this approach to help families overcome a gap in their ability to fund the most appropriate form of senior housing and/or care. Life Care Funding Group works with over 3,000 assisted living properties, nursing homes and home health agencies around the U.S. to help families convert a life insurance policy they no longer plan to keep in-force.

Case Study

A family wanted to keep their father at home who is suffering from cancer. He wanted to remain in the comfort of his own surroundings and with his loved ones for the remainder of his life. They did not have enough money to afford the costs of care at home, but he owned a $250,000 universal life policy and they all agreed they would rather liquidate the policy and use the proceeds to keep him in place. There was no cash value in the policy but they converted the policy into a long term care benefit of 60% of the total face value. That level of benefit would be more than enough to cover the costs of care for their father and was a much better alternative then allowing the policy to lapse.

The family was about to let their policy lapse and had no idea that they held a legally recognized asset that they had the right to convert into the most advantageous manner possible. If they had not been informed of their options they would have discarded the policy and been forced to suffer through with insufficient liquidity. There has been much debate about how to pay for long term care, but in these and many other cases converting a life insurance policy to address the immediacy of a healthcare funding crisis made all the sense in the world.

In the case of converting a life insurance policy to cover a financial shortfall preventing someone from securing the best possible housing and/or long term care, there could be no more obvious choice.

Convergence of Life Settlements and Long Term Care: A Funding Solution Emerges

2010-11-08T18:03:00.000-08:00

An interview with Chris Orestis, President of Life Care Funding Group

Chris Orestis, president of Life Care Funding Group, is a 15 year veteran of the insurance and long term care industries. Over the course of ten years in Washington, D.C. he worked in senior positions for the Health Insurance Association of America (HIAA--now reconstituted as AHIP), and for the American Council of Life Insurers (ACLI). His first professional exposure to the life settlement market came in 2005. Since 2007, Life Care Funding Group has been working exclusively with some of the largest national chains of nursing homes and assisted living properties across the United States. These companies have been informing families about a life settlement as a funding option if their loved one owns a life insurance policy that they are planning to surrender or lapse. Life Care Funding Group then works directly with the family to educate them about the process and represent them if they decide to pursue a life settlement for their policy.

Q: How did you first decide to work with the “Senior Living” industry?

A: I have been involved in the “Senior Living” industry for most of my adult life. The need for private sector solutions to combat the growing long term care funding crisis has been building for years now. The Baby Boomers are now hitting the system and they are unprepared financially to handle the costs. It was very obvious to us and the “Senior Living” industry that the proceeds from a life settlement could be put to very good use helping seniors secure the best possible housing and/or long term care.

Q: How many Senior Living companies are you working with?

A: Life Care Funding Group works with close to 100 companies of various sizes using our “Funding Solutions for Senior Living” program. Together these companies have over 2,500 facilities with an average occupancy of 100 or more beds.

Q: What is the typical profile of the policy holder you would encounter?

A: The vast majority of policy holders we encounter would not be considered high net worth. These are people with policy sizes under $500,000 and who have owned their policies for 10-20 years. They have reached a point in their lives where they have a pressing health care issue and are discovering that the costs associated with long term care are beyond their means. Typically they are about to either surrender or lapse their policy and had no idea that a life settlement is a much better alternative.

Q: How has the life settlement market responded to “middle market” policy holders?

A: We actually have been surprised to discover that the majority of Providers are not interested in middle market policy holders. These “funders” would rather deal with much larger policies and are not that interested in smaller face policies even though the market size is enormous. We have found it takes private funders that want to specifically focus on this market and the unique aspects of underwriting seniors in “Senior Living” environments to make it work.

Q: What are some of the challenges you encounter working in this environment?

A: Other than the general lack of interest in small face policies by traditional Providers, we have found that it takes a great deal of work and systems to support such a large cross section of facilities. We have also found that the current lack of electronic medical records (EMR) across the health care system causes big delays in underwriting, but we are encouraged to see adoption picking up in the health care industry in concert with stimulus dollars made available through TARP.

Q: Are there other ways to help seniors in this circumstance with their finances?

A: Yes, life settlements are not the only approach. We emphasize that families understand all of their funding options and also educate them on things such as policy loan programs, the VA Aid and Attendance health care benefit, senior credit programs, reverse mortgages, and long term care insurance. We also make sure they understand how Medicaid and Medicare work in the total picture.

Q: The life settlement industry tends to get a bad rap, what has been the reaction to your approach?

A: We have been very pleased to see the favorable coverage we have received in the press and also in state capitols. There have been numerous stories written about our approach and we were also gratified to see states such as Maine, Washington and Oregon enact legislation forbidding the insurance industry from suppressing information about the life settlement option for seniors.

Q: What does this “convergence” potentially mean for the future of the life settlement industry?

A: We believe this growing convergence is positive for the industry from a couple of perspectives. First, life settlements are being used for a positive purpose by helping seniors cover the costs of long term care. The industry is well served to show that life settlements can be done for reasons beyond just profit. Also, it is an opportunity for state Medicaid programs to reduce expenditures by prolonging spend down periods for seniors before qualifying for coverage. Lastly, it is an opportunity to tap into a massive market that so far has been ignored by the industry.

Q: How do you see today’s market conditions for the life settlement industry?

A: There is no doubt that the impact of the economic crisis made the second half of 2008 and 2009 tough for the industry. Although we don’t necessarily participate in the traditional life settlement marketplace, it appears to us that funding is coming back into the secondary market and a real recovery could be in swing by summer. The industry is going to need to find new sources of policies now that the world of STOLI has just about been brought to an end.

Q: What are your opinions about the regulatory environment for the life settlement industry?

A: We are in total agreement with LISA and ACLI that there is no place for STOLI based transactions and we applaud their efforts to bring it to an end. As legislation has been enacted across the country we have seen a consistent recognition that life settlements of policies established for reasons of true insurable interest are not being impeded. For people with a pressing reason for liquidity, such as the population we serve, it would not be fair and in fact a violation of constitutional law to put up artificial barriers impeding peoples’ ability to access the value of their personal property.

Q: There has been a lot of talk about securitization and the possibility that it could lead to another economic crisis like the sub-prime mortgage debacle. Do you see that as likely?

A: We see that more as an interesting story to sell newspapers or as fodder for groups that want to use misinformation to impede people’s access to the secondary market than as a likely outcome. At some point the successful securitization and trading of life settlement pools is quite possible. But the idea that this niche market could undermine one of the world’s largest industries and the U.S. economy is at the vey least disingenuous hyperbole being used to serve other purposes.

Q: What are your predictions for where the market could be in five or ten years?

A: The market should continue to grow if for no other reason than the aging Baby Boom population is in bad financial shape and looking for every possible outlet to find liquidity. Securitizations could help fuel that growth, but not to cataclysmic levels. We believe that a bigger growth driver could come from state governments that realize life settlements could save their budgets millions if not billions of dollars by extending spend down periods for seniors with policies. Another area of activity that has started gaining traction in the last few months is the use of life settlement portfolios as a collateral instrument for commercial loans. We also believe the public perception of the industry will improve due to regulatory actions, the ongoing exit of questionable characters looking for the next gold rush, and the growth of life settlements being used for positive purposes such as funding the costs of lo

Demand for Long Term Care Services Increasing

2010-11-08T18:00:00.000-08:00

There are over 60,000 assisted living and nursing home properties throughout the Untied States. More than 2,000,000 people reside in these properties, but over the last ten years the differences between assisted living and skilled nursing have become less distinct. There are a number of contributing factors to consider: pressure on Medicare and Medicaid budgets, private pay services such as Alzheimer’s care, personal tastes of the aging Baby Boomers, and the economics of the facilities themselves.

Assisted Living facilities have increased the level of service and care provided to be more competitive, and Nursing Homes have added private pay services and higher end living arrangements to be more competitive as well. The Baby Boomers are driving much of this evolution because they are a more affluent cohort than generations past, and their lifestyle expectations are very high.

The annual MetLife Mature Markets study released in 2009 highlighted the continuing increase in the costs of senior housing and care. The national average cost of staying in a semi-private room in a nursing home grew from $189 per day / $68,985 annually in 2007 to $191 per day / $69,715 annually in 2008. The national average cost of living in an assisted living facility grew from $2,969 per month / $35,628 annually in 2007 to $3,031 per month / $36,372 annually in 2008.

As the growing population of Baby Boomers and seniors hits in concert with a shrinking economy, the pressure on the federal budget to support entitlement programs such as Social Security and Medicare and on state budgets to fund Medicaid programs is creating push back on citizens to carry more of the load.

Medicaid pays the vast majority of costs associated with the almost 1.5 million people receiving housing and long term care in skilled nursing facilities. Medicaid is now moving in the direction of operating more like health insurance and by charging premiums will deflect a portion of the costs back on the individual. And by charging higher co-pays, they hope to motivate people to be more cost conscious when spending Medicaid dollars. Each state runs its own Medicaid program and will have discretion to set premium and co-pay amounts as they wish.

A report tracking Medicaid spending going back over the last seven years showed that Medicaid underfunded payments for services to all patients by $14.17 everyday in 2009. Projections are that this alarming underfunding trend will get worse in 2010 and 2011. The economic crisis has robbed state budgets of funds available to support Medicaid funded programs and as a result there was a national deficit of almost $5 billion.
Medicaid funds at least 2/3 of all spending for nursing home care. Spending shortfalls of this magnitude threaten the ability of nursing homes to offer the highest levels of care for the most vulnerable populations. Frustratingly for nursing homes and those in their care, state governments were given money in 2009 via the American Recovery and Reinvestment Act to make up this deficit. But guess what—governments diverted the money away from providing the healthcare it was intended, and instead used the money to shore up their own budget deficits.
As readers of the Life Care Funding BLOG know, we continue to bring awareness to the unavoidable trend of reducing the amounts of money that are available for Medicare and Medicaid. And why is that? Because we are now in the throes of an explosion of Baby Boomers reaching retirement age at the same time that our country’s economy is under siege and entering unfamiliar territory. Washington, DC and 50 state capitols have no choice but to figure out how to make do with less.
They have two tools to work with:
1. Make it harder for people to qualify for Medicare and Medicaid, and--
2. Reduce what is available for those that do qualify.
What tools do seniors and their families have to work with?
1. Information
2. Time
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 what kind of financial options are out there such as the VA Benefit, Life Insurance Settlements, Credit Programs, Reverse Mortgages, Long Term Care Insurance and other sources of private funding.

It is important that people understand these early warning signs of what is to come. 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 various options available—and how to pay for it. Now is the time to prepare by understanding the funding options that are available to help cover these costs as they become more and more the responsibility of the individual.

Electronic Medical Records: Resistance is Futile

2010-01-03T18:07:00.000-08:00

Medical records are the life blood of any life or health underwriter. The collection and review of medical records is the most costly, time consuming, and frustratingly inconsistent necessity of underwriting. As the United States medical system begins making truly meaningful progress away from a paper based system to one based on the electronic storage and dissemination of medical records, the impact on underwriters will be transformational. As those familiar with Star Trek know, when the Borg assimilates another individual entity into their collective they proclaim, “Resistance is futile”!

Introduction

Efforts to move the medical system away from a paper based system to one predominantly operating on an electronic platform have been underway for years. The improvements such a system would have for costs, operations and outcomes are obvious but the transformation by hospitals and physicians has been slow. Over the last two decades, factors such as cost, legacy systems, generational reluctance, worries about technological obsolescence, and fear that systems will be underutilized have all contributed to the glacial pace of adoption. But, in the last 3-5 years the pace has begun to hasten. A number of factors are contribution to the increasing adoption of Electronic Medical Records (EMR) on a national level. The cost of technology has dropped dramatically and the internet has been a big factor as well. The generational divide has shrunk with a greater percentage of medical professionals use technology and the internet on a daily basis. Last but not least, the government has come to realize the benefits of adoption and has been instituting programs and incentives to open up the “mainstreaming” of EMR.

From Bits to Bytes

The logic behind EMR is undeniable. Moving from an analog to a digital world holds a host of benefits for every stakeholder in healthcare. The conversation has been going on since at least the 1960’s, and there are some very interesting (and even humorous) visions for the future in older papers that reminds me of a trip to Disneyland’s “World of Tomorrow” attraction when I was a kid. One of the biggest factors to the delay in making the transition is that until relatively recently the technology has not really been there. Most early attempts at adopting EMR were thwarted by the inability of systems from different vendors to communicate with each other. In an attempt to develop the dominant platform, technological silos were built trapping data within a system and would not allow for “interoperability” or transfer of data across different institutions and systems. Interoperability is a key factor to getting any value from EMR. In fact, the discussion now has moved beyond records and has really shifted to connectivity and communication between various participants in a healthcare value chain..

Another key driver of today’s advances for EMR is the internet. The true utility of the internet only emerged in the last five years. Ten and fifteen years ago the internet was still very much in its infancy. Most companies looked at the internet as a curious novelty where they might put up a website that was little more than an electronic brochure. But, sometime around 1999-2000, IBM coined the phrase “E-Commerce” and a shift in attitudes and utilization began. More marketing than reality at the onset, concepts such as “E-Health”, Tele-Medicine, Smart Cards, and Electronic Medical Records all began to take root. Companies such as Amazon, E-Bay, Apple, Google, YouTube and now the social networking phenomenon driven by Twitter and Facebook proved that the E-Commerce hype of ten years ago was actually quite prescient. Not only could business be conducted using the internet, but the internet had proven itself to be the platform to provide the three key elements that any successful EMR initiative must have: Functionality, Interoperability, and Security.

Meaningful Use

Technological capabilities and capacity have increased, costs have decreased and the internet has created the avenue through which meaningful utilization can occur, yet adoption continues to be the exception and not the rule. In a 2008 New England Journal of Medicine survey of 2,800 physicians only 4% reported having a fully functional EMR platform. What will it take for national adoption of EMR? As is the case with most things that we know are good for us, it will take both the stick and the carrot. In the American Recovery and Reinvestment Act of 2009, President Obama specifically included incentives and possible penalties to move adoption of EMR forward at a much faster pace. Individual physicians are eligible for $64,000 in subsidies and hospitals could receive up to $11 million for implementing an EMR program. Medicare and Medicaid certified providers could also face reimbursement penalties if they do not have a system in place. Specific deadlines are yet to be established, but compliance to receive subsidies or avoid penalties will hinge on systems that would meet the definition of “meaningful use”.

Although the final definition of meaningful use is yet to be agreed upon by the Health IT Standards Committee (a federally mandated body), they have published a quasi-mission statement for the concept: “Better healthcare does not come solely from adoption of technology itself but through the exchange and use of health information to best inform clinical decisions at the point of care.” What is enlightening about this statement is that it emphasizes the use and exchange of data as the key and not the technology itself. It is not the “what” that is important, but rather the “how and why”. This is why functionality, interoperability and security become the three critical elements to a successful EMR platform.

Exchange of data

In recent years Health Information Exchanges (HIE) and Regional Health Information Organizations (RHIO) have been developing around the country to empower secure transfer of medical information between participants across a chain of care. This would include hospitals (and their various departments), physicians and practice groups, specialists, and providers of long term care. It could also include labs, pharmacy, and supplies. HIE’s function day-to-day transferring medical records throughout a connected group of stakeholders. The RHIO is the governing body that sets the standards for the HIE to follow in a given region so that all stakeholders can benefit from participation. Following the mandate set by the Office of the National Coordinator for Health Information Technology to create a National Health Information Network (NIHN); RHIO’s establish the local level of interoperable connectivity that must be in place to create a nation wide network. There are almost 200 RHIO’ around the country at various stages of development and functionality with as many as 57 currently reporting that they are actively exchanging health records across a variety of approved participants.

“In the past, technology was too slow, too expensive, unconnected, and technology was too quickly outdated for any meaningful level of adoption and information exchange to happen”, says Dr. Faiz Fatteh, CEO of Soren Technology, “but now the costs are very low if not non-existent, speed and security of connectivity is finally here, and the emphasis now has moved way beyond simply transferring records from paper to digital files, and it is really now all about sharing data through use of an HIE platform connected via a geographically situated RHIO.”

One stakeholder in the process slow to be involved in the development of the NIHN is the insurance industry. When looking at the various RHIO’s in place around the country, the proverbial elephant in the room is the lack of insurance companies involved. Save for a few exceptions and its own failed attempt at creating a national exchange, the insurance industry has not been as actively involved as it should be. Will that change? It appears that with the efforts towards national healthcare reform being driven by incentives and mandates to finally get a national network in place, the insurance industry will be well served to be getting on board as well.

What’s in it for me?

Financial incentives have been targeted at the providers, but the insurance industry stands to benefit from at least three perspectives:

1) Improved underwriting -- Obviously medical records are the key tool used in underwriting life and health insurance. Easier access to the most up to date and comprehensive records on an applicant can only improve the underwriting process, pricing, and outcomes. Anything that can be done to reduce the time and costs involved in collecting medical records and ensure the records collected are complete, would very much be to the advantage of the insurance company and the applicant.
2) Reduced claims -- Underwriting is always the best defense from unnecessary claims. Better coordination of care and records will provide information to avoid duplicative and unneeded treatments, poor outcomes, missed conditions, and opportunities for fraud.
3) Competitive necessity -- As time progresses there will be more pressure from providers with an EMR capacity to submit claims through them and manage the process on their platform. Insurers not participating will find themselves at a disadvantage in the marketplace.

“As one the largest APS retrieval companies in the United States, we touch thousands of medical records every day”, explained Parameds.com CEO, Eli Rowe, “and we know from experience how difficult the task of obtaining records is. The vast majority of records we collect are sent to us as paper and then need to be sorted and scanned before we can deliver them to our clients. We have looked for a long time at what it will take for payers to be successful participants in the growth of EMR, and our work with life, health, DI and LTC insurers have shown us that payers are well situated to play a lead role.”

Because of the central role that underwriting and claims plays in the world of health care, all carriers are in a position to lead and benefit from the rapid adoption of EMR and growth of a national exchange capability. The benefits to health insurers on the claims side and life insurers on the underwriting side are obvious, but DI and LTC insurers will see great benefits on both of those fronts as well. At the end of the day, it is good public policy and good business to be actively involved and help shape the outcome of what is inevitable.

Conclusion

“Progress has, of course, been made in the development of electronic medical record systems (EMRS). Very little of the data that are routinely generated by computer-such as laboratory test results-are now lost to electronic accessibility, as they typically were twenty years ago, when the typical lab instrument would print its results on paper and discard the electronic version. Nevertheless, much of the information on which clinical care is based continues, in most institutions, not to be captured in electronically usable form. This includes the results of patient and family histories, physical examinations, doctors' and nurses' notes, etc.”

That observation on the state of EMR was not written within the last couple of years, it was written 15 years ago by Peter Szolovits from MIT’s Laboratory for Computer Science. How much progress has been made since 1995 when this was written depends on your point of view. Current studies still show actual adoption and use of an EMR system that would meet the definition of “meaningful use” to be very small (various estimates are 1%-4% of providers). Yet, technology and costs are now conducive to rapid adoption, government incentives are in place, standards and regional networks to foster HIE are emerging across the country, and a majority of consumers support the idea of collecting and exchanging electronic medical records with proper privacy and security measures in place.

Ten and fifteen years ago, it was a matter of if EMR could happen. Now it is just a matter of when. We will see more progress in this direction over the next 2-5 years than we have during the last 30. The insurance industry stands to benefit greatly from what is emerging and it is happening faster than you think. “Prepare to be assimilated--resistance is futile…”

Growing Financial Pressure on Seniors as Government Pushes Back

2009-11-24T21:17:00.000-08:00

Numerous studies and reports continue highlighting the pressure being placed on seniors to find ways to cover the growing costs of Long Term Care

By Chris Orestis

In a recent report, the government agency that administers Medicare and Medicaid detailed the possible impact of cuts proposed in healthcare reform passed by the House of Representatives. The study states that the proposed $500 billion in cuts would be so severe that hospitals and nursing homes would be forced to stop accepting Medicare as payment.

The report says that seniors would suffer form additional reductions in benefits and services to pay for the $500 billion in reduced spending. The White House answered back against the report’s findings by saying the reductions would come in the form of reduced wasted spending on fraud and abuse in the system and from administrative savings through such efficiencies as expanded use of electronic medical records. Democrats also contend that these cuts would extend the life of Medicare a number of years before becoming insolvent.

As is often the case, both sides are focusing on the aspects of this study that bolster their position in the debate. But regardless of who is right, one truth is clear—seniors need to be preparing themselves for less and less financial support coming from the government. The burden to cover the costs of senior housing and long term care will continue to be pushed back on seniors and their families and people should do all they can to prepare for the inevitable.

Two recent reports add more evidence to the alarming trend of financial pressure being pushed back onto seniors and their families as they reach the age that the costs of long term care play a central role in their lives. In addition to Medicaid cuts in the states and cuts to Medicare being proposed as part of healthcare reform, more money will continue coming out of seniors’ pockets.

The annual MetLife Mature Markets Institute study tracking the costs of long term care in assisted living, nursing homes and home healthcare was recently released showing significant increases in costs over the last year:
- Nursing Home costs rose 3.3%
- Assisted Living costs rose 3.3%
- Home Healthcare costs rose 5%
- Adult Day care costs rose 4.7%

The increasing costs of long term care can be attributed to the most basic economic principal there is: supply and demand. The economic crisis has slowed the construction and expansion of facility based care. Also, more people requiring long term care are having a difficult time selling their homes. As the population of seniors demanding long term care services of every type increases, the supply of options and dollars is decreasing—driving up the costs.

In another alarming report, the costs of Medicare premiums will rise 15% next year. This will push the monthly Medicare premium above $100 for the first time in history. The final outcome of this increase, or measures to offset the increase, is being debated in Congress as part of healthcare reform. Regardless of the outcome, this will now become a yearly struggle as the population going onto Medicare is exploding-- and just when the country is least prepared financially to accommodate the demand.

The realities of a global economic recession intersecting with explosive growth in the senior populations will create increasing pressures for the United States. More people needing help (money), with less resources to go around (money), equals hard choices about how to help those who need it most (money). Increasing emphasis on the individual to shoulder more of the costs of their senior years will grow quickly. Moves to cut COLA’s, raise the minimum age for Medicare and cut Medicaid funding in the states will become more common occurrences.

The Baby Boom generation is still in the early stages of moving into their retirement years and the amount of money required to support these programs is already overwhelming. As economic and demographic trends over the coming years continues to challenge the governments ability to keep pace, seniors and their families must do all they can to prepare themselves financially for the costs of retirement and the even greater costs of long term healthcare.

Life Expectancy Compression

2009-09-02T19:42:00.000-07:00

The impact of moving into a long term care facility on length of life

Life Expectancy has been on an upward trajectory for over 100 years. According to the most recent report released by the AARP, the age group 65 and above will increase 89% over the next twenty years, and the 85 and older population will grow 74% during the same period. This rise in life expectancy, and the impact on quality of life was explored by James F. Fries in his 1982 study for the National Academy of Sciences entitled “The Compression of Morbidity”. In the paper, Fries contends that the aging population will live longer and in much better condition for a longer period of time due to improved lifestyles, nutrition, exercise, abstinence, and education. The flip side of this dynamic is that once people experience a disease or injury that requires long term care, the result is most often a dramatic decrease of life expectancy. For example, an age appropriately healthy 78 year old that lives an independent and active lifestyle might have a life expectancy of 15 years or greater. If that same individual suffered physical trauma or a disorder that required a move into a long term care facility, their life expectancy could be reduced 50%-75%.

The Assisted Living and Skilled Nursing Home (Senior Living) industry currently houses approximately 2,000,000 people across 60,000 facilities in the United States. This represents one of the biggest components of our country’s health care system and as an industry, theses facilities experience the impact of “Life Expectancy Compression” on a daily basis. Average “length of stay” is a carefully tracked industry benchmark for determining turnover and occupancy metrics. In the annual State of the Senior Housing Industry report released by the American Senior Housing Association (ASHA) the Senior Living industry reported average length of stay in 2008: Assisted Living (21 months), Independent Living (38 months), CCRC (77 months) and Alzheimer’s Care (17 months).
According to the National Center for Assisted Living (NCAL), of those currently residing in an assisted living community 34% will move to a skilled nursing facility due to deteriorating health and 30% will die. The mortality rate of individuals moving into a skilled nursing facility is death within the first 12 months by as much as 50%-60%. The mortality rate is even higher in the first 6 months.

In addition to length of stay experience, there are a number of studies that have been conducted measuring life expectancy across significant population cohorts in various forms of long term care settings:

In the study Mortality-related factors and 1-year survival in nursing home residents it was concluded from a population of over 100,000 residents during a three year period: “Major factors associated with 1-year mortality were identified in both the newly admitted and long-stay cohorts. MDS data can identify major factors associated with 1-year mortality in newly admitted and long-stay nursing home residents.” The first year of residence in a nursing home is the highest risk of death for the resident.

The research paper Death Rates Following Nursing Home & Care Facility Placement concludes: “There is evidence that people with dementia admitted to nursing homes and care facilities die comparatively quickly. It is known that mortality rates are high, initially, when people move from their own homes. Mortality rates are especially high in nursing homes.” The mortality rate for an individual moving into an Alzheimer’s care unit within the first year is greater than 50%.

In recent years the insurance industry has begun taking a closer look at the unique factors of underwriting seniors. As more insurance products are sold to higher risk populations, it has become critical to better understand factors impacting morbidity and mortality. Senior Vice President and Chief Medical Officer of RGA Reinsurance Company, J. Carl Holowaty, MD, DBIM, stated in a 2009 paper published in the Journal of the Academy of Life Underwriting that loss of ADL’s (activities of daily living: bathing, dressing, toileting, transferring, and continence) increases the risk of death. He also cites “will to live” in the elderly “must be taken very seriously” and that there is a relationship between mortality and degree of social engagement and changes in social patterns over time. Moving into an institutional care facility is possibly the single most disruptive event to patterns of social engagement that a person could experience (ranking maybe even higher than the death of a spouse).

What has been observed by daily experience throughout the entire long term care industry, and supported by numerous studies, is that individuals living in institutional care (regardless of age) will have significantly shorter life expectancies than their contemporaries living independently. Mortality is not only driven by their condition, but also by the impact of the significant change in environment. There are intangible factors such as “will to live” and tangible factors such as exposure to communicable diseases in the group environment that all come together to “compress” their life expectancy. Until very recently, actuarial tables and life expectancy calculations have ignored this well known and well documented fact. But now, the reality of this dynamic is becoming more important as the population of people reaching the compression point is increasing. Accurate underwriting in today’s “Silver Tsunami” driven world must take into account that people may be living longer and healthier lives, but when they cross the morbidity threshold, their life expectancies drop dramatically.

Exhibits

1) Length of Stay Data, Group 1 (Skilled Nursing Provider)

2008:

Medicaid admissions= 149 residents @ 379 days
Private Pay admissions= 77 residents @ 335 days

2) Length of Stay Data, Group 2 (Assisted Living Provider)

2007-2009(Q2):

44 deceased residents with a combined average length of stay of 2.9 years
- 75% female
- 25% male

Sources

American Seniors Housing Association, The State of Senior Housing, 2008
Death Rates Following Nursing Homes & Care Facility Placement: http://alzheimers.about.com/od/caregivers/a/surv_nurs_homes.htm
Mortality-related factors and 1-year survival in nursing home residents: http://www.ncbi.nlm.nih.gov/pubmed/12558718

Mortality, Disability, and Nursing Home Use for Persons with and without Hip Fracture: A Population-Based Study: http://pt.wkhealth.com/pt/re/jags/abstract.00004495-20021000000005.htm;jsessionid=KQNQ9hz1WyBL5gzxJTCyh2y2PWYj6FQs2mKGrcYjjpVndtf9g7jP!331639832!181195628!8091!-1

2008 MetLife Market Survey of Nursing Homes and Assisted Living Costs: http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-studies-2008-nhal-costs.pdf

Demographic Profile of 65+ Population : http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-studies-65-profile-20041010.pdf

Demographic Profile of American Baby Boomers: http://www.metlife.com/assets/cao/mmi/publications/studies/mmi-studies-boomer-profile-2007.pdf

Nursing Homes Fact Sheet , AARP Public Policy Institute: http://www.aarp.org/research/longtermcare/nursinghomes/aresearch-import-669-FS10R.html

The Silver Tsunami: http://www.lifecarefunding.com/whitepapers/LifeCareFundingGroupWhitePaper8-08SilverTsunami.pdf

Brown Atlas of Dying: http://www.chcr.brown.edu/dying/BROWNATLAS.HTM

CDC, National Center for Health Statistics: http://www.cdc.gov/nchs/default.htm

The Compression of Morbidity: http://www.milbank.org/quarterly/830427fries.pdf

Life Settlements: The Legal Rights of Insurance Policy Owners

2009-09-02T19:40:00.000-07:00

The right of a policy owner to engage in a Life Settlement was guaranteed when U.S. Supreme Court Justice Oliver Wendell Holmes ruled in 1911 that life insurance is personal property and the owner is protected by all the same inalienable rights that any owner of real estate, stocks or any other assets enjoy. By the end of the 20th Century, Viaticals emerged as an opportunity for AIDS patients to cash out of a life insurance policy while still alive to cover the high costs of care not covered by health insurance. The Life Settlement market became an offshoot of Viaticals and has been growing rapidly ever since, with $13 billion in transactions completed in 2008.

In a 2003 study conducted by Conning & Co, they estimated that 90 million senior citizens owned approximately $500 billion worth of life insurance in 2003, of which over $100 billion was owned by seniors eligible for Life Settlements. The Wharton Business School issued a study where they observed, “Life insurance policies are typically assignable, which means that a policyholder is free to transfer their ownership of the policy to another person. A policyholder’s right to assign their policy to someone other than the insurance carrier has existed for some time.” The study also went on to observe that a life settlement, “gives the policyholder the economic freedom to choose between a number of buyers and, in so doing, to receive the fair market price for their policy.”

The right of a policy owner to engage in a life settlement is guaranteed by the landmark Supreme Court decision, Grigbsy v. Russell. In Justice Holmes’ final opinion it was codified that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner could transfer without limitation. This decision established a life insurance policy as transferable property that contains specific legal rights, including the right to:
· Name the policy beneficiary
· Change the beneficiary designation
· Assign the policy as collateral for a loan
· Borrow against the policy
· Sell the policy to another party
A number of insurance industry organizations such as the National Association of Insurance Commissioners (NAIC), National Council of Insurance Legislators (NCOIL), American Council of Life Insurers (ACLI), National Association of Insurance and Financial Advisors (NAIFA), American Association of Life Underwriters (AALU) and the Life Insurance Settlement Association (LISA) have also recognized the legal rights of a policy owner to liquidate a life insurance policy through a life settlement.

During a panel session at ReFocus 2008, jointly presented by the ACLI and the Society of Actuaries, industry CEO’s agreed on the need for Life Settlements. Stuart Reese, chairman, president and CEO of MassMutual Life Insurance Company said that if a policy is first purchased with protection in mind and is no longer needed after a period of time, then a contract holder does have property rights and “there is a legitimate Life Settlement business which is consistent with the purpose of insurance.”

“The Life Settlement industry provides an important and efficient function to the insurance marketplace-- and it is a practice established by the Supreme Court”, said Chris Orestis, President of Life Care Funding Group (www.lifecarefunding.com), “In light of the long standing Supreme Court ruling on the transferability of insurance as property; those holding a policy that they no longer need will always be able to maximize the value of that property through a life settlement transaction.”

Life Settlements vs. STOLI

2008-12-17T19:53:00.000-08:00

Understanding the Differences between Stranger Owned Life Insurance (STOLI) and Life Settlements

Executive Summary

The origins of Life Settlements can be traced back to a landmark Supreme Court ruling in 1911 that established the property ownership rights of a life insurance policy holder. By the end of the century, the conditions were right for a secondary life insurance market to emerge and flourish. The continuing debate around this evolving market has been the pros and cons to the overall health of the life insurance industry. Effective arguments, supported by market evidence from both sides, have been made about the benefits and threats of Life Settlements to the broader insurance industry. Both the Life Settlement and the life insurance industries have mobilized forces to bolster their position in what has become a vigorous debate. The major threat to the industry, and driving factor of the friction between the two camps, has been around Stranger Owned Life Insurance (STOLI). The NAIC and NCOIL have developed model regulations that are being introduced and adopted in some states to address STOLI abuses. Both the insurance and Life Settlement industry are opposed to STOLI, and the life insurance industry is on the record acknowledging the legal rights and market efficiency of policy holders’ ability to liquidate unneeded policies through a Life Settlement.

A robust secondary market will increase customers’ valuation of life insurance policies. Economic theory holds that an active and efficient secondary market for a good improves the liquidity of the good as an asset, and thus increases
the value of the good to consumers.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania

Introduction: Evolution of a Market

In 1911, United States Supreme Court Justice Oliver Wendell Holmes ruled that life insurance possesses all of the inherent characteristics of personal property giving a policy owner the right to dispose of this asset as they see fit. By the end of the 20th Century, Viaticals emerged as an opportunity for AIDS patients to cash out of a life insurance policy while still alive to cover the high costs of care not covered by health insurance. The Life Settlement market became an offshoot of Viaticals and has been growing rapidly ever since, with $30 billion in transactions projected in 2007. In a 2003 study conducted by Conning & Co, they estimated that 90 million senior citizens owned approximately $500 billion worth of life insurance in 2003, of which over $100 billion was owned by seniors eligible for Life Settlements.

With this kind of market potential it is no surprise that Wall Street is now paying attention. In a Business Week article published in July of 2007, it was observed, “Wall Street sees huge profits in buying policies, throwing them into a pool, dividing the pool into bonds and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.” But, with these kinds of numbers and market potential it should be no surprise that regulators and law makers are paying attention as well.

The secondary market for life insurance policies gives the policyholder the economic freedom to choose between a number of buyers and, in so doing,
to receive the fair market price for their policy.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania

Fundamental Property Rights

Life Settlements involving policies that were purchased based on a sound insurable interest premise are the foundation of a legitimate transaction. In fact, this type of a transaction is supported by the landmark Supreme Court decision, Grigbsy v. Russell. In Justice Holmes’ final opinion it was codified that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner could transfer without limitation.

This decision established a life insurance policy as transferable property that contains specific legal rights, including the right to:
· Name the policy beneficiary
· Change the beneficiary designation
· Assign the policy as collateral for a loan
· Borrow against the policy
· Sell the policy to another party

Justice Holmes makes a clear distinction between a policy based on insurable interest and one where none exists, “A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end. The very meaning of an insurable interest is an interest in having the life continue…”, his decision clearly considers an insurance policy to be the same as real property and does not oppose transferring the property/policy to an entity without an interest in the life of the insured, and to this point he is very clear, “…life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner's hands”.

Life insurance policies are typically assignable, which means that a policyholder is free to transfer their ownership of the policy to another person. A policyholder’s right to assign their policy to someone other than the insurance carrier has existed for some time.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania

The Insurable Interest Debate

The right of a policy owner to transfer ownership interest is a guaranteed right under Constitutional law established by one of the greatest legal minds in our country’s history. But the difference he recognized between policies based on insurable interest and one where none exists is a problem that the Life Settlement industry must address. In the case of STOLI are we looking at what Justice Holmes defines as, “a pure wager”? If that is the case, then this practice could threaten not only the long term future of the Life Settlement marketplace but also the foundation of life insurance itself.

Both the Life Insurance and Life Settlement industry have spoken out on the STOLI issue and made their concerns clear. The circumvention of insurable interest and the prospect of Congress revoking the tax deferred status of inside build up for life insurance, if the perception of insurance changes from income protection to life expectancy speculation, is at the root of their fears. The tax free exemption for inside build up of a life insurance policy is constantly under scrutiny by law makers. If it is ever concluded that life insurance has changed from its original function of providing a death benefit for beneficiaries to an investment vehicle for third parties to place “wagers” with no insurable interest in the insured-- then the tax free exemption could be revoked.

Legislative activity in the states has picked up over the last year as bills have been introduced and passed designed to stop STOLI transactions. The Governor of Ohio signed into law a bill that extends the time that a policy must be owned by the policy holder from two years to five before it can be settled. It is important to note that this law recognizes and does not impede Life Settlements done for legitimate changes in personal circumstances such as an adverse turn in health, loss of job or death of the beneficiary. In September, 2008, California passed an anti-STOLI bill and sent it to the desk of Governor Schwarzenegger for signature. Governor Schwarzenegger subsequently vetoed the measure and stated, “I am also concerned that the final version of the bill may unfairly exclude some companies from participating in the legitimate life settlement market,” and that he wants to be sure that life settlement legislation “does not unfairly discriminate against legitimate companies trying to compete in the life settlement business.”

At the conclusion of the 2008 legislative session in California, Brad Wenger of the Association of California Life and Health Insurance Companies was asked to comment about the differences between a Life Settlement and STOLI, “When people with existing life insurance policies that they no longer need are approached by a life-settlement company that will offer them an amount of money if they assign their policies to the company – that is a legitimate transaction,” Wenger emphasized, “STOLI’s are different.” The Life Insurance Settlement Association opposes the practice of STOLI. They are on the record stating, “A STOLI transaction circumvents insurable interest laws and is, therefore, illegal. STOLI transactions abuse uninformed senior consumers and damage the reputation of the life settlement industry. Public policy makers should understand STOLI, its consequences, and the best methods to effectively prevent this practice.”

In the midst of these concerns and legislative developments surrounding STOLI, the Life Insurance industry is on the record acknowledging the legitimacy of Life Settlements. The American Council of Life Insurers (ACLI) are on the record saying that the anti-STOLI legislation they support would not “affect the property rights of policy owners who acquired life insurance in good faith,” rather they are combating transactions where, “the intent at the outset is to transfer the death benefits to investors.” During a panel session at ReFocus 2008, jointly presented by the ACLI and the Society of Actuaries, industry CEO’s agreed that there is a need for Life Settlements. Stuart Reese, chairman, president and CEO of MassMutual Life Insurance Company said that if a policy is purchased with protection in mind and is no longer needed after a period of time, then a contract holder does have property rights and “there is a legitimate Life Settlement business which is consistent with the purpose of insurance.” Jessica Bibliowicz, chairman and CEO of National Financial Partners of New York, a distributor of financial services products to the high net worth market explained that Life Settlements do make people feel more relaxed about their options. Bibliowicz added, “It is not just a matter of surrender or die.”

Viatical and Life Settlement firms allow policyholders who have experienced a negative shift in life expectancy to obtain the fair market value for their life insurance assets. The flexibility offered by the secondary market for life insurance policies gives a policyholder the ability to respond to changes in their life situation.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania

Conclusion

The market is still evolving and the insurance industry is effectively wielding its considerable clout with regulators and law makers to ensure practices such as STOLI that game the system are curtailed. Third party sponsored life insurance transactions initiated for the sole purpose of flipping them in the Life Settlement marketplace is not a practice that is in the best interest of consumers or the industry. Conversely, in light of the long standing Supreme Court ruling on the transferability of insurance as property, the ability for those holding a policy based on insurable interest that they no longer need will always be able to maximize the value of that property through a Life Settlement transaction. The Life Settlement industry provides an important and efficient function to the insurance marketplace-- and it is a practice defended by the Supreme Court. But what constitutes insurable interest and ownership rights, and how that defines the key differences between STOLI and a Life Settlement, are important for the industry and consumers to understand.

A consumer now knows that if they should experience a decline in life expectancy and no longer need (or no longer be able to afford) their life insurance policy, they will be able to sell it for its market value instead of having to surrender it for the low price offered by the insurance carrier.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
Bibliography

“The Benefits of a Secondary Market for Life Insurance Policies”; Doherty, Neil and Singer, Hal; Wharton Financial Institutions Center
U.S. Supreme Court GRIGSBY v. RUSSELL, 222 U.S. 149 (1911) 222 U.S. 149; A. H. GRIGSBY, Petitioner, v. R. L. RUSSELL and Lillie Burchard, Administrators of John C. Burchard, Deceased. No. 53. Argued November 10 and 13, 1911. Decided December 4, 1911.

"Life Settlements: Additional Pressure on Life Profits”; Conning & Co., 2003

“Life Settlements: Betting on Death”; Goldstein, Matthew; Business Week; July 23, 2007

“Little Known Insurance Practice Targets the Elderly”; Howard, John; Capitol Weekly; September 11, 2008

“Press Release”; State of Ohio, Department of Insurance; September 11, 208

“Life Settlement Advisory”; Morris, Manning & Martin, LLP; October 2, 2008

“Issues: STOLI”; Issues; American Council of Life Insurers; http://www.acli.com/

“STOLI Poses Danger to Industry”; Connolly, Jim; National Underwriter; March, 2008

2008-11-12T20:17:00.000-08:00

Underwriting the “Silver Tsunami”
By
Chris Orestis

Introduction

The approaching surge of Baby Boomers and the ever expanding ranks of the 65+ generation have been on our radar screen for years. But today, it is no longer a concept far off on in the future. The reality is that the conversion of Baby Boomers turning into bona-fide seniors is actually now upon us. The oldest Baby Boomers began qualifying to take government benefits last year, and according to the U.S. Census Bureau, in less than three years 8,000 Americans will start to become Medicare eligible every single day. This generation, from the youngest Baby Boomer to those now in their eighties, will require innovative solutions from life insurance, annuities, health and disability coverage, and long term care to address their financial needs.

Examining the Boom

The “Silver Tsunami” population can be broken into two distinct cohorts:

Cohort 1- Seniors born 1939 or before that account for 35,986,082, or 12.6% of the U. S. population. The gender split is 42% male and 58% female.
Cohort 2- Baby Boomers born 1946-1964 that account for 76,402,903, or 26% of the U. S. population. The gender split is 49% male and 51% female.

These two age based groups posses unique demographic characteristics that are important to understand if one is to measure, and then fully realize the opportunities of providing financial and healthcare services to meet their needs.

Baby Boomers account for 48% of U.S. families with 45 million households, and spending power of over $2 Trillion. The younger Boomers born between 1956 and 1964 have an average household population of 3.3 people (with 1 or more children), and an average annual income of $56,500 of which they spend $45,149. The older Boomers born between 1946 and 1955 have an average household population of 2.7 people (with 1 or no children), and an average annual income of $58,889 of which they spend $46,160. 69% of younger Boomers own their homes and devote a larger share of their monthly budgets to mortgage payments. This group also spends about 10% less than the average on life and other forms of personal insurance, while the older Boomers spend 20% more than the average.

Fast Fact
Over 50% of the Baby Boomers live in nine states
California, Texas, New York, Florida, Pennsylvania, Illinois, Ohio, Michigan, and New Jersey.

Average life expectancy from age 65 increased from 77.7 to 84 years for males and 79.7 to 87 years for females in the 60 year period from 1940-2000. Life expectancy going forward into 2040 should add another 3 years on average for both males and females. The age group of 85+ is the fastest growing segment, and they are experiencing the highest gains in life expectancy on a percentage basis. Further, the population of Centenarians (age 100+) more than doubled from 37,306 in 1990 to 88,289 in 2004. Important to note with all of the life expectancy gains is that the population of 65+ living in a nursing home accounts for 1,557,800 or 4.5% of the total cohort population. Most people that move into an assisted living or nursing home are a surviving spouse, and to that end, the number of seniors surviving a deceased spouse triples when moving from the age segment 65-74 to 85+.

The population of 65+ will increase 48% and the population of 85+ will increase 43% by 2020. The growth of the 65+ population will be attributable mostly to the aging of the Baby Boomers, but the growth of the 85+ population is primarily a factor of increasing life expectancy.

Underwriting Impaired Risk

Underwriting impaired risk tends to be more prevalent with our two cohorts, particularly with the 65+ group. This is one of the faster growing segments for the insurance industry with life, annuity and long term care products. This is also becoming an important area for group and work site benefits such as health, disability and disease specific insurance. According to the U.S. Department of Labor, the number of employed people still working between the ages of 65 and 90 has increased from 4.7%, or 600,000 people a decade ago, to 6.4%, or now over 1 million people. This means that the numbers of workers age 65 and over accessing benefits through employers will continue to grow with these evolving economic and life expectancy trends.

Over the last decade, advancements in underwriting and actuarial models, as well as medical science, have made it possible to price all insurance products at competitive rates in ways that once was unavailable to this age group. Underwriting seniors is a different process than underwriting “unimpaired” or relatively young and healthy applicants.

Fast Fact
Top health conditions that become causes of death for those 65+
- Vascular
- Cancer
- Stroke
- Dementia
- Influenza

Once people reach age 65: 80% of seniors report having at least one chronic condition, 50% report at least two, and 30% report having three or more chronic conditions. Additionally, 30% of people 65-70 have reported vascular issues and that number jumps to 70% once you get past the age of 70!

Beyond the obvious underwriting screens that are typically looked for; factors such as recent cessation of smoking, sudden weight loss, frailty and use of assistive devices, ADL impairments, MVR history and work/volunteering/travel schedules are scrutinized more closely with the 65+ group. Underwriting tools that can be used to measure impaired risk include Pulmonary Function Exams to measure decline of lung function, eGFR to measure kidney filtration, Serum Albumin levels as an indicator of “all-cause” mortality risk factors, and MMSE Cognitive Assessments to measure deterioration of visual, verbal, concentration, and orientation levels.

Another important health screen for this cohort is any recent history of falls and broken bones. There is at least a 30% chance that a person will need to move into a nursing home after a fall, and only 33% regain their pre-fall physical condition. Also, there is as high as a 35% chance of death within the first year of a fall.

As the individual ages, certain health conditions shift from being of concern to the norm. For example, seniors will typically experience a slowing of reflexes and loss of muscle mass. Renal and liver functions, as well as pulmonary and vascular capacity can all be expected to decrease. Cognitive abilities will begin to slow, and a certain level of “memory challenge” (not to be confused with Alzheimer’s Disease) will creep into the picture. Also, conditions such as cancer or heart disease that are long in remission, under control and/or being managed by medication become less of a factor in determining overall mortality and morbidity.

Level of education has a direct correlation to income, which in turn has also been proven to have a direct impact to overall health. Baby Boomers are the most educated generation in U.S. history with almost 90% completing high school and then 28.5% going on to earn at least a masters degree. The bottom line is that the better educated someone is, then the higher their income will be and in turn they can expect to be in better health and live longer.

Lastly, an important life expectancy concept to understand is “Morbidity Compression”. Current life expectancy trends indicate that more people than ever are living at a relatively healthy state up to average target ages based on their demographics. But if a person experiences any significant health impairment, then their remaining life expectancy usually becomes compressed. For example, a healthy individual in the 75-80 age range that lives at home, is able to care for and transport themselves, and pursues leisure vocations and social interaction could have a life expectancy of ten or twenty years. But if that individual experiences a TIA/stoke or breaks a hip, and then must either access home care or move into an assisted living or skilled nursing facility, it is more likely that the life expectancy range would compress to less than five years.

Conclusion

Previous generations retired on schedule and then lived the rest of their lives on pensions and government benefits. For the most part, they ceased becoming viable consumers of insurance and financial services. The Silver Tsunami generation will live, work, and stay active much longer than any generation in history. This will prolong their need and ability to continue being acquirers of health and financial security products. And with their expectations for quality lifestyles until the very end—they are going to need every possible financial tool to make it happen.

** This article consist of excerpted material from the White Paper, The Silver Tsunami by Chris Orestis available on request info@lifecarefunding.com

2008-11-12T20:14:00.000-08:00

Alternative Pay Plan: Life Insurance as a Funding Vehicle for Senior Housing and Care

By Chris Orestis

A consumer now knows that if they should experience a decline in life expectancy and no longer need (or no longer be able to afford) their life insurance policy, they will be able to sell it for its market value instead of having to surrender it for the low price offered by the insurance carrier.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania

All indicators point to Senior Living companies doing a better job than most industries weathering the current economic storm afflicting the U.S. But the fact remains that the national media is beating a very steady drum beat about a slumping economy and the national mood is understandably skittish. Housing values and the elongated time it takes to sell, as well as the topsy-turvy stock market and the higher prices of fuel and groceries, have people nervous about funding retirement. Most Americans rely on the sale of their home as the primary source of revenue to pay for residence in an assisted living or continuing care retirement community. In today’s economic environment, it is important to provide seniors with every possible option to raise money from their assets when they are preparing to make the move into a senior living environment.

Most people don’t realize that a life insurance policy is an asset that can be liquidated at the discretion of the policy owner. Life insurance is legally recognized as personal property and ownership rights are the same as a home, stocks or any other asset. Over the last twenty years a financial option emerged that will provide a readily available source of funds for seniors that own a life insurance policy. It is called a Life Settlement, and very quickly it is becoming a financial tool for all forms of retirement living and care companies to overcome the impact of falling home and stock values.

Life Settlements are an offshoot of Viaticals that emerged in the late 1980’s. This unique financial vehicle afforded AIDS patients an opportunity for an early cash out of a life insurance policy to cover the high costs of care not covered by health insurance. The Life Settlement market has been evolving rapidly ever since, with approximately $30 billion in transactions completed in 2007. A study conducted by Conning & Co., found that 90 million senior citizens owned approximately $500 billion worth of life insurance in 2003. The University of Pennsylvania’s Wharton Business School conducted a study on the potential impact of the Life Settlement market concluding that life settlement providers are paying hundreds of millions to consumers for their underperforming life insurance policies, an opportunity that was not available to them just a few years before.

A New Financial Option Emerges
The definition of a Life Settlement is simply this: It’s the sale of a life insurance policy by the policy holder while still alive to an institutional investor that will pay a lot more for the policy than the cash “surrender” value. The institutional investor will then carry the policy as an investment for the remaining life span of the policy owner. Life insurance values are guaranteed and disconnected from the economy so there is no fluctuation, as is the case with real estate and stocks. Understanding the significance of owning a life insurance contract with guaranteed value, all of the major players on Wall Street (Morgan, Chase, Goldman, UBS, Deutsch Bank, Credit-Suisse, AIG, etc.), as well as major hedge funds and global financial institutions are now buying people’s policies on a mass scale. In a Business Week article published in July of 2007, it was observed, “Wall Street sees huge profits in buying policies, throwing them into a pool, dividing the pool into bonds and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.”

Life Settlements bring efficiency to the life insurance marketplace. They offer a competitive outlet to liquidate a life insurance policy that has outlived its purpose and/or to raise cash in a time of immediate crisis. But, life insurance companies have their concerns about the explosive growth of the Life Settlement market. Life insurers are worried about their bottom line when policies that no longer lapse or are converted for the cash “surrender” value have a negative impact on profitability. A significant percentage of the insurance industry’s profitability comes from collecting premium payments on policies that are either eventually abandoned or surrendered for pennies compared to their total value. Insurers are also concerned that the growth of life settlements could be at the expense of the already anemic long term care insurance market. In both cases, Life Settlements are an efficient market outlet to maximize the value of ones legitimate ownership interest in a life insurance policy; and insurers concerns are driven by the impact on their bottom line.

During a panel session at ReFocus 2008, jointly presented by the American Council of Life Insurers and the Society of Actuaries, industry CEO’s agreed that there is a need for life settlements. Stuart Reese, chairman, president and CEO of MassMutual Life Insurance Company said that if a policy is purchased with protection in mind and is no longer needed after a period of time, then a contract holder does have property rights and “there is a legitimate life settlement business which is consistent with the purpose of insurance.” Jessica Bibliowicz, chairman and CEO of National Financial Partners of New York, a distributor of financial services products to the high net worth market explained that Life Settlements do make people feel more relaxed about their options. Bibliowicz added, “It is not just a matter of surrender or die.”

At the conclusion of the 2008 legislative session in California, Brad Wenger of the Association of California Life and Health Insurance Companies was asked to comment about the differences between a Life Settlement and controversial Stranger Owned Life Insurance, or STOLI as it is known, and he explained, “When people with existing life insurance policies that they no longer need are approached by a life-settlement company that will offer them an amount of money if they assign their policies to the company – that is a legitimate transaction,” Wenger emphasized, “STOLI’s are different.”

Benefits for Senior Housing and Care

For seniors who own life insurance and are faced with the uncertain prospect of selling their home or stocks in such a down economy, Life Settlements are not only a chance to consider accessing an asset that will not fluctuate in value, but it is also an opportunity to liquidate a less dearly held asset. People obviously have a sentimental attachment to their home, stocks and other personal assets. This can cause delays in moving forward—but people have no sentimental attachment to an insurance policy and are more willing to liquidate it as a first option. If you can eliminate the reluctance seniors have about tapping into their most dearly held assets, and in the process eliminate the worry seniors have about outliving their money, then you can eliminate the delays in making a commitment to a course of action.

This is not just a financial tool-- it is also a marketing and relationship building opportunity by providing another option for prospective and current residents to find money to pay for residency and services. Properties are able to remove reasons for delay, and can provide peace of mind for seniors about prematurely running out of money. It is also another opportunity to reach out to residents and prospects and show them that you are actively looking to work with them because you care about their well being.

“We have talked to seniors who would like to move in, but they are a little hesitant, hoping the market will turn around,” said Debbie Howard, Northeast Divisional Vice President of Sales and Marketing with Emeritus Senior Living, “Our goal is to support our residents and make it easy for new residents to move in. A Life Settlement is another way for us to make it possible.”

Life Settlements to Pay for Senior Housing and Care

The majorities of people who can be helped by a Life Settlement are first encountered during the admissions/registration process while still living independently and have not yet altered their finances. People that have recently encountered a pressing need to understand their options about the best retirement or long term living scenario, and how to pay for it, will be those most likely to possess some measure of financial means and own a life insurance policy. There may also be some current residents that still own policies and need help raising money and they would most certainly be eligible as well.

The process of a Life Settlement is straightforward and takes between 30-60 days-- obviously much quicker than relying on the sale of a home. Life Settlements are not a loan or a reverse mortgage, not a government program and not long term care insurance—it is the sale of an asset through a competitive bidding process that will provide the policy owner with an unrestricted lump sum payment for a far greater amount than the cash “surrender” value. Once a policy owner sells their policy, they are no longer responsible for the premiums and they are free to use the money anyway they want. Also important to note is that there are absolutely no costs involved for the facility and no up front fees or out of pocket expenses involved for the policy owner.

Conclusion: A Win – Win Scenario

The secondary market for life insurance policies gives the policyholder the economic freedom to choose between a number of buyers and, in so doing, to receive the fair market price for their policy.
The Benefits of a Secondary Market for Life Insurance Policies
The Wharton School, University of Pennsylvania
According to the Society of Actuaries’ 2007 Retirement Survey: 60% of retirees worry about three things--
1. The cost of health care
2. The effect of inflation on their nest eggs
3. Not being able to maintain a reasonable standard of living for the rest of their lives

In light of today’s economy those concerns are well founded. With billions of dollars worth of life insurance owned by people over the age of 65-- tapping into Life Settlements as an alternative funding option for senior housing and care makes a lot of sense. Any chance to overcome financial hurdles preventing seniors from securing the best possible arrangement is in the best interest of the individual and their family, the facility and the government. Life Settlements are an easy to understand and straightforward financial tool to accomplish the goal of welcoming a resident who is able to afford living without fear of running out of money.

2008-11-12T20:13:00.000-08:00

Economic “Perfect Storms” in the Wake of the Silver Tsunami

By Chris Orestis

There are two inextricably linked fundamentals that determine the quality of life for Baby Boomers and Seniors: health and finances. As they age and life expectancies compress, there is less time and vitality available to recover from injury and illness. The same is true of financial “vitality”. People in their thirties and forties have time to recover from set backs in the stock market, housing values, or business and investment fluctuations. Once people reach their sixties, it is too late to start a meaningful savings program (as the benefits of compound interest have long since abated) and if investments and/or property are underperforming there may be little time available to wait for recovery.

Retirements funded by a corporate pension after a life time of service are almost extinct in this country. Beyond Social Security and Medicare, the vast majority of Americans today rely on equity in their homes to be a major component of their retirement. For seniors facing major costs such as health care and long term care, the current state of the economy could not be worse. The impact of the sub-prime mortgage implosion on credit and equities markets has resulted in a huge hit on many American’s net worth via erosion in home equity. In fact the National Association of Home Builders released a report in June of 2008 citing that, $426 billion of equity in the U.S. has vanished. That is almost half a TRILLION dollars taken away from Americans in less than two years!

During an interview with former Federal Reserve Chairman Alan Greenspan in July, 2008 he was quoted as saying that the U.S. housing market is nowhere near the bottom and that our economy is teetering on the brink of recession. He described the confluence of economic factors currently battering the U.S. a once in a century “phenomenon”. Validating his concerns is the most recent reports released on foreclosures showing a 55% increase from July of 2007 to July of 2008. That translates into 1 in every 464 households in this country foreclosed in July, 2008. Maybe even more alarming is the 184% increase in bank repossessions during the same time period. The top states in the country for foreclosures is Nevada, California, Florida, Ohio, Georgia, Michigan, Colorado, Utah, Virginia, Texas, Illinois, and New York.

When Greenspan talks about this “phenomenon” he is talking about the combination of the real estate woes and the alarming pace of inflation in core areas such as food and fuel costs. The impact of these two areas has been causing huge swings on an almost daily basis in the stock market furthering adding to people’s concerns. Energy prices are up almost 30% for the year and food prices have increased 6%. Even with recent declines in oil prices and a drop at the fuel pump, oil prices are still double what they were in the summer of 2007 and grain prices are double what they were in the summer of 2006.

The impact that this is having on seniors is very serious. Home equity is in reverse and savings and equities are being chewed up by inflation and stock market volatility. Social programs such as Social Security are not doing much better with the smallest benefit increase in the last four years at 2.3% for 2008. According to the AARP, the number of seniors filing for bankruptcy over the age of 55 in the last year was about 250,000. At this pace, the recent study by Ernst & Young LLP showing that three out of every five new middle class retirees will outlive their financial assets if they do not downwardly adjust their standard of living (expenses) by 24%-37% looks to be optimistic.

During good times, equity in homes and the growth of the stock market can propel a high standard of living in retirement and also help to fund the expenses associated with health care and long term care. But during hard times, when these critical economic engines are not cooperating the outlook can change drastically.

Long Term Care Crisis

The double-edged sword of the senior market is the long term care crisis. Everyone will eventually need to secure some form of long term care and/or assisted living, but no one likes to think about it today and making plans for the future is easily put off until later. In fact, the long term care crisis in the United States is a lot like global warming. There is no denying it is happening and that you are going to be impacted—but it seems like it is far enough away into an uncertain future that today’s needs and priorities take precedence. As is usually the case with the human condition, we seldom plan for a crisis and instead are forced to react to it when it is upon us. One study on how seniors make choices about senior residential and long term care options showed three distinct and familiar patterns:

13% actively plan for retirement and how they will live as they grow older and frailer
40% actively plan following a “near catastrophic” health event such as total joint replacement or extended illness
46+% never plan and must make decisions about site of care in a very short period of time, usually while still in the hospital

Currently in the U.S. there are over 1.5 million people living in nursing homes. Of that population, 72% are female and the 85+ population is growing the fastest with a 20% increase. The oldest old are living longer and they are costing more than ever to support with private or public funds. This is important to consider when planning for the future because as of today, 56% of residents will live in a nursing home anywhere from one to five years or more (with a national average of 30 months).

For the population of 900,000 people currently living in assisted living facilities, the vast majority of financing is private pay. In addition to the monthly cost for a room, apartment or cottage; residents may also face one-time entrance fees ranging from $60,000-$350,000 for higher end “resort style” or “cottage” properties. Additional monthly fees ranging from $348-$522 are often times charged for transportation, dementia care, meal delivery to residence, and other extras that would add to quality of life.

With the reality of escalating costs and the growing senior population; we will see increasing pressure on publicly funded programs such as Medicare and Medicaid (which combined pays for roughly 80% all long term care related expenses in the U.S.), and moves to make it more difficult to qualify. The economic squeeze of inflation, the real estate crisis and stock market performance are all contributing to declines in tax revenues for the states. When taxes shrink one of the most vulnerable areas is also one of the most expensive for state budgets: Medicaid and other social support programs. The long term care industry and the government at all levels are in agreement on how to compensate. More emphasis must be placed on the individual to pay for as much care and housing as possible with private funds before any public funds are made available. But what are some private funding options that people should be considering?

An obvious source of funds to cover these expenses would be from long term care insurance. The only problem is that attractive tax deductions have never been established to incentivize growth in the market, and it has been stalled for over a decade. As of today, long term care insurance accounts for an anemic single digit percentage of all funding for senior housing and care.

A primary option that people have often looked to is cashing in their home through a sale to raise the funds to sustain themselves (or to meet spend down requirements). But, the current real estate market has taught us, as is the case with the stock market, that it is always vulnerable to a correction. Another means to extract equity from a home could be through a reverse mortgage, and it might be a good option for a home healthcare arrangement, but what happens if health conditions deteriorate rapidly and the person must move into a facility on short notice? The home owner is then faced with the dilemma of funds that can’t be used for a setting outside of the home, and a loan that must be paid back immediately.

If a person has built up cash value in a life insurance policy, they could consider taking a loan against the policy or surrendering it for the cash value. Also, if someone attempts to qualify for Medicaid, a life insurance policy would be an “unprotected” asset subject to the 60 month look back period. It would need to be liquidated and spent down on care before eligibility could begin. According to a Federal Government Accounting Office (GAO) report released to the U.S. Congress in March, 2007: when examining a sample population of over 500 Medicaid applicants entering long term care facilities, 38% owned a life insurance policy that needed to be liquidated because it exceeded minimum state mandated asset levels.

As we all watch the current economic crisis unfold on a daily basis it is important to understand how the value of life insurance policies are affected by these events. The value of a life insurance policy is guaranteed by law. Insurance companies are legally required to maintain enough cash reserves to pay off the death benefit of the policies they issue. Even in the case of AIG, there are enough cash reserves in place to cover all of the company’s outstanding policies. That money can not be touched for any reason other than to cover their active insurance policies. The volatility of the stock market and the drop in real estate values have absolutely no impact on life insurance polices or the reserves put aside to cover them.
According to most economists, this economic crisis could result in a recession that will last well beyond 2009. For most people who own life insurance policies in the U.S. today, it may be the most stable asset they currently own. Their home and stock portfolios may be suffering significant losses in value, but their life insurance policy has not, and will not change in value. The demand for life insurance policies in the Life Settlement market is stronger than ever because insurance polices are disconnected from the economy and their value remains constant despite the current economic turmoil.

When cashing out a life insurance policy, either by choice or because of an eligibility mandate, the superior option is a Life Settlement. This process will ensure that the highest possible value is obtained for the policy through bidding from multiple institutional sources in the secondary market. Also, any tax implications for capital gains realized from a Life Settlement would be offset by deductions based on spending the money for “the entire cost of maintenance in a nursing home or home for the aged” (sec. 1016 U.S. Master Tax Code 2008). The Conning & Co. Research study "Life Settlements: Additional Pressure on Life Profits” found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements. Statistical data gathered on policies “settled” in 2007 continues to verify that the difference between the amounts of money that can be realized through a Life Settlement is significantly greater than through cash “surrender” value. When the time comes to look at funding vehicles to pay for long term care related expenses, cashing in a life insurance policy through a Life Settlement could be an excellent financial move.

** This article consist of excerpted material from the White Paper, The Silver Tsunami by Chris Orestis available on request info@lifecarefunding.com

Bibiliography of Chris Orestis

2008-08-07T19:37:00.000-07:00

Published Articles/Studies:

· Life Settlements vs. STOLI: Let’s Get the Debate Straight
(published December, 2008 - ProducersWEB)

· Understanding the Differences between Stranger Owned Life Insurance (STOLI)and Life Settlements
(published December, 2008 - On the Risk)

· Life Settlements vs. STOLI
(published December, 2008 - Insurance News Net Magazine)

· Underwriting the “Silver Tsunami”
(published November, 2008 - ProducersWEB)

· Alternative Pay Plan
(published October, 2008 - Assisted Living Executive (magazine of ALFA)

· Economic Storms and Quality of Life in the Wake of the “Silver Tsunami”
(published September, 2008 - ProducersWEB, and ISIS)

· The Silver Tsunami (magazine cover story) and WHITE PAPER
(published August, 2008 - Insurance News Net Magazine )

· WHITE PAPER- Life Settlements: Looking for a Calm Financial Harbor in a “Perfect Storm”
(published July, 2008)

· Underwriting in the 21st Century: Informals—Turning a Pain into Profits
(published June, 2008 - On the Risk, and InsuranceNewsNet, June, 2008, ProducersWEB,
July, 2008)

· Life Settlements: Protecting the Golden Goose
(published April, 2008 - Insurance News Net Magazine)

· Underwriting in the 21st Century: Exploring the Direct-to-Consumer Channel
(published September, 2007 - On the Risk, and InsuranceNewsNet, September, 2007, ProducersWEB,
November, 2007, posted on SmartBrief)

· Aging and Long-Term Care Insurance: A National Policy Perspective
(published August, 2007 - Society of Actuaries: Long Term Care Section Newsletter, and
InsuranceNewsNet, September, 2007, ProducersWEB, September, 2007, posted on SmartBrief)

· Underwriting in the 21st Century: Remote Underwriting Study 2007 (Underwriting in your Underpants)
(published June, 2007 - On the Risk)

· Underwriting in the 21st Century: Understanding the Risks of Private Aviation
(published March, 2007 - On the Risk and InsuranceNewsNet, July, 2007 World News Network, July, 2007, ProducersWEB, October, 2007)

· INDUSTRY STUDY- Underwriting in your Underpants: Remote Underwriting Study 2006-2007
(Released at 37th Annual MUD Meeting as reported by National Underwriter, January, 2007, and featured by Insurance News Net, January, 2007, InsureIntell, February, 2007, Hot Notes by Hank George, 2007, posted on SmartBrief)

· Bringing Together the Pieces of the Insurance Puzzle by Understanding the Lifecycle of a Policy
(published February, 2007 - InsuranceNewsNet and HealthDecisions, InsureIntell, April, 2007, ProducersWEB, August, 2007)

· Breaking Down Barriers Between Underwriting and Distribution
(published January, 2007 – InsuranceNewsNet and InsureIntell, February, 2007; ProducersWEB, July, 2007)

· Overcoming the Underwriting Crunch through Outsourcing
(published January, 2007 – InsuranceNewsNet and InsureIntell, February, 2007)

· Underwriting in the 21st Century: Life Outside the Home Office
(published December, 2006 - On the Risk and InsuranceNewsNet, March, 2007, ProducersWEB, August, 2007)

· Underwriting in the 21st Century: Mastering the APS Paradox
(published September, 2006 - On the Risk and InsuranceNewsNet, February, 2007, InsureIntell, February, 2007, ProducersWEB, September, 2007)

· Underwriting As A Profit Center: Bringing Together the Pieces of the Puzzle
(published June, 2006 - On the Risk)

· How Insurance Companies Benefit from Professionally Summarized (APS) Attending Physician Statements
(published June, 2006 – InsuranceNewsNet and HealthDecisions)

· Underwriting As A Profit Center or How I Survived The 21st Century
(published December, 2005 - On the Risk)

WHITE PAPER- Life Settlements: Looking for a Calm Financial Harbor in a Perfect Storm

2008-08-07T19:36:00.001-07:00

Life Settlements: Looking for a Calm Financial Harbor in a “Perfect Storm”

Executive Summary

The U.S. is facing a three front crisis that poses long lasting implications for the providers of senior housing and senior care:

The economy is currently in its worst slump since the great depression, and we may never see home values or commodity prices (fuel, groceries, etc.) return to where they were just a year ago.
The 65+ population is about to explode with the aging of the Baby Boomers, and as they age we will see life expectancies continue to increase.
Governmental budgets will be pushed more and more to the breaking point trying to fund the care of the exploding senior population through Social Security, Medicare, and in particular, Medicaid.

The senior housing and senior care industry is only beginning to come to grips with this “perfect storm” of demographic and economic factors-- and how it will impact the financing of their services. Adaptation and creativity will be necessary to stay ahead of the evolving U.S. socio-economic landscape.

In this paper we explore how a market innovation that emerged over the last decade called a “Life Settlement”, is now being used as an alternative funding mechanism for the entire continuum of senior housing and care.

Introduction: Stormy Seas Ahead

We see the headlines everyday.

Study Finds Increases in Nursing Home, Assisted Living Costs
Genworth study tracks fifth straight year of cost increases, trend to continue with Baby Boomers
-- AP Newswire April 29, 2008
Americans Delay Retirement as Housing, Stocks Swoon
Nest Eggs Shrink; Deferring Dreams
--
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Wall Street Journal April 1, 2008
Bleak Retirements for 150 Million?
Majority of Americans aren’t saving nearly enough; expenses they’ll face are sobering
--
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MSN Money.com MarketWatch March 28, 2008
Housing prices to free fall in 2008 - Merrill
According to a Merrill Lynch report, home prices will drop 15 percent this year, and declines will continue in 2009 (and 2010).
-- CNNMoney.com staff writer January 23, 2008

Only 1 in 4 U.S. Adults Think They Can Pay for Long-Term Care
74% Confident they do not have enough money, 33% Unsure
-- SeniorJournal.com February 1, 2006

The economy is besieged by slumping home sales and foreclosures, erratic stock prices, imploding sub-prime mortgage portfolios, and people’s incomes are being eaten up at an alarming rate by the increasing cost of goods and fuel. But for the most vulnerable of our population, seniors facing health and long term care challenges, the added pressures of this down economy have created a “perfect storm”.

The combined impact of these negative economic conditions, and the pressure on public programs to meet the increasing demand to fund senior care, is creating a surging tide for seniors that threaten to put many underwater. The undeniable goal of government is for individuals to cover senior housing and long term care expenses with more and more private funds. But very few have managed to accumulate enough savings to independently sustain years of quality lifestyle and care. Now, compounding this problem is the fact that traditional sources of funds are drying up as the housing and stock markets swoon.

According to a MSN Money.com Market Watch report (March 28, 2008) “a sixty five year old couple retiring now would need more than $300,000 set aside just to pay for health care costs over twenty years and would need $550,000 if they were to live into their early nineties.” Particularly alarming, according to the report, is the fact that these numbers, “haven’t factored in the costs of nursing homes, assisted living facilities or home health aides—and those costs are staggering!” The reality is that very few people will have half a million dollars to cover health care costs-- without even accounting for the costs associated with long term care and retirement living. Most people will depend on public funds to take care of them, but as the Baby Boom generation swells the number of seniors age 65 and over, those public funds will become harder and harder to access. Many others that are relying on equity built up in their homes or stocks are finding out now just how risky that proposition can be.

Fortunately, a financial tool has emerged that can provide a readily available source of funds for seniors that own a life insurance policy. It is called a Life Settlement, and very quickly it is becoming a financial tool for retirement living and skilled nursing facilities. In the face of falling home and stock values, rising inflation, and depleted savings; generating cash through a Life Settlement is rapidly becoming a welcome and much needed financial alternative to these strained resources.

A New Financial Option Emerges

The definition of a Life Settlement is simply this: It’s the sale of a life insurance policy by the policy holder while still alive to an institutional investor that will pay a lot more for the policy than the cash “surrender” value. The institutional investor will then carry the policy as an investment for the remaining life span of the policy owner. The Life Settlement secondary market emerged about ten years ago as financial institutions began competing to buy and hold people’s life insurance policies as investments. Life insurance values are guaranteed and disconnected from the economy so there is no fluctuation, as is the case with real estate and stocks. Understanding the significance of owning a life insurance contract with guaranteed value, all of the major players on Wall Street (Morgan, Chase, Goldman, UBS, Deutsch Bank, AIG, etc.), as well as major hedge funds and global financial institutions are now buying people’s policies on a mass scale.
A Life Settlement can be thought of similarly to a Reverse Mortgage. It is an alternative way for seniors to tap into an existing asset to generate liquidity to cover immediate needs —but there are also important differences:

- A Reverse Mortgage is a loan that must be paid back, with interest and fees, once the secured property is no longer the primary residence (a prohibitive requirement for someone seeking to move into a senior housing or care facility).
- A Life Settlement is the sale of a life insurance policy to a third party while the policy owner is still alive for a lump sum payment-- and since it is not a loan, the funds are unrestricted and require no repayment.

The Long Term Care Crisis Grows

People seldom plan for a crisis and instead are forced to react to it when it is upon them. A recent study on how choices are made about senior housing and senior care showed three all too familiar patterns:

13% actively plan for retirement and how they will live as they grow older and frailer
40% actively plan following a “near catastrophic” health event such as total joint replacement or extended illness
46+% never plan and must make decisions about site of care in a very short period of time, usually while still in the hospital

The problem is that the combined impact of our nation’s economic strains and people’s tendency to not plan and save threatens to sink the vast majority of people’s chances for quality “golden years”. Compounding the stress on the system is the fact that by 2020, the population of 65+ will increase 48% and the population of 85+ will increase 43%. The growth of the 65+ population will be attributable mostly to the aging of the Baby Boomers, but the growth of the 85+ population is primarily a factor of increasing life expectancy.

Currently in the U.S. there are over 1.5 million people living in nursing homes. Of that population, 72% are female and the 85+ population is growing the fastest with a 20% increase. The oldest old are living longer and they are costing more than ever to support with private or public funds. This is important to consider when planning for the future because as of today, 56% of residents will live in a nursing home anywhere from one to five years or more (with a national average of 30 months).

For the population of 900,000 people currently living in assisted living facilities, the vast majority of financing is private pay. In addition to the monthly cost for a room, apartment or cottage; residents may also face one-time entrance fees ranging from $60,000-$350,000 for higher end “resort style” properties. Additional monthly fees ranging from $348-$522 are often times charged for transportation, dementia care, meal delivery to residence, and other extras that would add to quality of life.

As of 2000, the most recent year for data, there were 1,355,290 people receiving some form of extended home-based healthcare. Of that population, 70% were 65+ and 65% were female. The average time span of care was for 312 days, and over 93% of the care was being delivered by Medicare/Medicaid certified agencies.

Fast Fact
Current national average costs across the three categories of long term care for 2008

Home/Community-
Non-Medicare Certified, Licensed “Companion” Care - $18/hr (4% over 2007)
Non-Medicare Certified, Licensed “Home Health Aide” - $19/hr (3% over 2007)
Medicare Certified “Home Health Aide” - $38/hr (18% over 2007)
Adult Day Health Care Center - $61 per day

Assisted Living Facility-
Private One Bedroom - $3,008 per month (11% over 2007)

Nursing Home-
Semi-Private Room - $187 per day (4% over 2007)
Private Room - $209 per day (2% over 2007)

With the reality of these kinds of costs and the growing senior population; we will see increasing pressure on publicly funded programs such as Medicare and Medicaid (which combined pays for roughly 80% all long term care related expenses in the U.S.) and moves to make it more difficult to qualify. The long term care industry and the government at all levels are in agreement. More emphasis must be placed on the individual to pay for as much care and housing as possible with private funds before any public funds are made available. But what are some private funding options that people should be considering?

An obvious source of funds to cover these expenses would be from long term care insurance. The only problem is that tax deductions have never been established that would incentivize growth in the market, and it has been stalled for over a decade. As of today, long term care insurance accounts for an anemic single digit percentage of all funding for senior housing and care. That leaves private pay to pick up close to 20% of the approximate total of $200 billion spent on all long term care service last year. But where do those funds come from if you have not saved literally hundreds of thousands in cash?

A primary option that people have often looked to is cashing in their home through a sale to raise the funds to sustain themselves (or to meet spend down requirements). But, the current real estate market has taught us, as is the case with the stock market, that it is always vulnerable to a correction. Another means to extract equity from a home could be through a reverse mortgage, and it might be a good option for a home healthcare arrangement, but what happens if health conditions deteriorate rapidly and the person must move into a facility on short notice? The home owner is then faced with the dilemma of funds that can’t be used for a setting outside of the home, and a loan that must be paid back immediately.

If a person has built up cash value in a life insurance policy, they could consider taking a loan against the policy or surrendering it for the cash value. Also, if someone attempts to qualify for Medicaid, a life insurance policy would be an “unprotected” asset subject to the 60 month look back period, and it would need to be liquidated and spent down on care before eligibility could begin. According to a Federal Government Accounting Office (GAO) report released to the U.S. Congress in March, 2007: when examining a sample population of over 500 Medicaid applicants entering long term care facilities, 38% owned a life insurance policy that needed to be liquidated because it exceeded minimum state mandated asset levels. Statistical data gathered on policies “settled” in 2007 continues to verify that the difference between the amounts of money that can be realized through a Life Settlement is significantly greater than through cash “surrender” value.

When cashing out a life insurance policy, either by choice or because of an eligibility mandate, the superior option is a Life Settlement. This process will ensure that the highest possible value is obtained for the policy through bidding from multiple institutional sources in the secondary market. Also, any tax implications for capital gains realized from a Life Settlement would be offset by deductions based on spending the money for “the entire cost of maintenance in a nursing home or home for the aged” (sec. 1016 U.S. Master Tax Code 2008). When the time comes to look at funding vehicles to pay for long term care related expenses, cashing in a life insurance policy through a Life Settlement could be an excellent financial move.

Storm Clouds Begin to Clear

For seniors faced with the uncertain prospect of selling their home, securities or savings in such a down economy, Life Settlements are not only a chance to consider accessing an asset that will not fluctuate in value, but it is also an opportunity to liquidate a less dearly held asset. People obviously have a sentimental attachment to their home, stocks and other personal assets. This can cause delays in moving forward—but people have no sentimental attachment to an insurance policy and are more willing to liquidate it as a first option. If you can eliminate the reluctance seniors have about tapping into their most dearly held assets, and in the process eliminate the worry seniors have about outliving their money, then you can eliminate the delays in making a commitment to a course of action.

This is not just a financial tool-- it is also a great marketing and relationship building opportunity by providing another option for prospective and current residents to find money to pay for residency and services. Properties are able to remove reasons for delay, and can provide peace of mind for seniors about prematurely running out of money. It is also another opportunity to reach out to residents and prospects and show them that you are actively looking to work with them because you care about their well being.

How Life Settlements are Being Used to Pay for Senior Housing and Care

The majority of people who can be helped by a Life Settlement are first encountered during the admissions/registration process. People who are living independently and have recently encountered a pressing need to understand their options about the best retirement or long term living scenario, and how to pay for it, will be those most likely to possess some measure of financial means and own a life insurance policy. Typically social workers, the marketing department or the administrative/admissions office will be in a position to offer this as an option when people are considering their finances. There may also be some current residents that still own policies and need help raising money (and they would most certainly be eligible), but primarily it will be those living independently who have not yet altered their finances that will be most readily helped.

The process of a Life Settlement is straightforward and takes between 30-60 days-- obviously much quicker than relying on the sale of a home. Remember, this is not a loan, not a government program and not long term care insurance—it is the sale of an asset through a competitive bidding process that will provide the policy owner with a lump sum payment for a far greater amount than the cash surrender value. Once a policy owner sells their policy, they are no longer responsible for the premiums and they are free to use the money anyway they want. Also important to note is that there are absolutely no costs involved for the facility, and no up front fees or out of pocket expenses involved for the policy owner.

In the case of people entering a private pay arrangement directly or after a Medicare funded “short term” stay is over, how to raise enough money to last indefinitely could be one of the biggest emotional and financial challenges of their life. For those intimidated by the thought of selling their home or liquidating other assets to secure the funds they will need, a Life Settlement is a welcome alternative source of funds to access.

Anyone that owns life insurance and will rely on Medicaid to cover expenses associated with their care will be required to cash in the policy if its face value exceeds state mandated asset levels. The proceeds must then be spent down to cover the cost of care before Medicaid coverage can begin. If they decide to hold onto a policy, the beneficiaries could be subject to asset recovery efforts once the policy owner is deceased. The owner of a life insurance policy in this situation would be well served to explore the benefits of a Life Settlement. They could receive significantly more money than the cash “surrender” value that would be given to them by an insurance company-- and in turn sustain a private pay arrangement for a much longer period of time.

Conclusion: A Win – Win Scenario

According to the Society of Actuaries’ 2007 Retirement Survey: 60% of retirees worry about three things--
The cost of health care
The effect of inflation on their nest eggs
Not being able to maintain a reasonable standard of living for the rest of their lives

With today’s economy those concerns are well founded. There is billions of dollars worth of life insurance owned by people over the age of 65 today-- tapping into Life Settlements as an alternative funding option for senior housing and care makes a lot of sense. Any chance to overcome financial hurdles preventing seniors from securing the best possible arrangement is in the best interest of the individual and their family, the facility and the government. Life Settlements are an easy to understand and straightforward financial tool to accomplish the goal of welcoming a resident who is able to afford living without fear of running out of money.

Sources

AARP Public Policy Institute, Across the States Profiles of Long Term Care and Independent Living, Seventh Edition 2006

Genworth Financial, 2008 Costs of Care Survey, April 2008

Government Accounting Office (GAO), Report to Congressional Requesters on Medicaid Long Term Care Impact of Deficit Reduction Act, March 2007

Health Care Financing Review, Winter 2002 Study

Life Policy Dynamics, 2007 Summary: U.S. Life Settlement Market Analysis, March 2008

MetLife Mature Market Institute, Demographic Profile Americans 65+, 2008

MetLife Mature Market Institute, Demographic Profile American Baby Boomers, 2008

MetLife Mature Market Institute, Market Survey of Adult Day Services & Home Care Costs, September 2007

MetLife Mature Market Institute, Market Survey of Nursing Home & Assisted Living Costs, October 2007

MSN Money.com Market Watch, Bleak Retirements for 150 Million?, March 2008

Society of Actuaries, Life Settlements 101: Introduction to the Secondary Market in Life Insurance, October 2007

United States Census Bureau

The Silver Tsunami

2008-08-06T20:03:00.001-07:00

The Silver Tsunami- Original Verison

(edited version published August, 2008 Insurance News Net Magazine)

Executive Summary

The approaching surge of Baby Boomers and the ever expanding ranks of the 65+ generation have been on our radar screen for years. But today, it is no longer a concept far off on in the future. The reality is that the conversion of Baby Boomers turning into bona-fide seniors is actually now upon us. The oldest Baby Boomers began qualifying to take government benefits last year, and according to the U.S. Census Bureau, in less than three years 8,000 Americans will start to become Medicare eligible every single day. This generation, from the youngest Baby Boomer to those now in their eighties, will require innovative solutions from life insurance, annuities, health and disability coverage, and long term care to address their financial needs.

But how well do we really know these people? What are their plans for the future and are they financially prepared? What are the realities that will confront them as they move across the age continuum of Baby Boomer to 65-- and then continue aging for many years to come?

In this paper we will look at statistical data from a wide range of sources to create a picture of the Baby Boomers and the 65+ seniors ahead of them. Together they are a “Silver Tsunami” that will hit the U.S. economic and social fabric with a force unprecedented in any nation’s history. We will examine the opportunities and challenges associated with this group. We will also consider the impact of economic conditions and the eventual realities that will confront them, and us all, as aging and the necessity of long term care goes from a distant concept to a frighteningly expensive reality.

Demographic Profiles

The first step in harnessing the opportunities and mastering the challenges that will come in the wake of the “Silver Tsunami” is analyzing and understanding this population that is so different from any other in U.S. history.

The “Silver Tsunami” population can be broken into two distinct cohorts:

Cohort 1- Seniors born 1939 or before that account for 35,986,082, or 12.6% of the U. S. population. The gender split is 42% male and 58% female.
Cohort 2- Baby Boomers born 1946-1964 that account for 76,402,903, or 26% of the U. S. population. The gender split is 49% male and 51% female.

These two age based groups posses unique demographic characteristics that are important to understand if one is to measure, and then fully realize the opportunities of providing financial and healthcare services to meet their needs.

Average life expectancy from age 65 increased from 77.7 to 84 years for males and 79.7 to 87 years for females in the 60 year period from 1940-2000. Life expectancy going forward into 2040 should add another 3 years on average for both males and females. The age group of 85+ is the fastest growing segment, and they are experiencing the highest gains in life expectancy on a percentage basis. Further, the population of Centenarians (age 100+) more than doubled from 37,306 in 1990 to 88,289 in 2004. Important to note with all of the life expectancy gains is that the population of 65+ living in a nursing home accounts for 1,557,800 or 4.5% of the total cohort population. Most people that move into an assisted living or nursing home are a surviving spouse, and to that end, the number of seniors surviving a deceased spouse triples when moving from the age segment 65-74 to 85+.

Fast Fact
Top 5 states of residence for the 65+ cohort as a percentage of population
- Florida (17.6%)
- West Virginia (15.6%)
- Pennsylvania (15.3%)
- Iowa (14.9%)
- North Dakota (14.7%)
- Rhode Island (14.5%)

Average household income for age 65-74 is $35,118, and then drops to $23,890 for age 75+. The 70-74 segment has the highest net worth at $120,000, but once seniors reach age 75+ their average net worth drops to $100,000. For the entire cohort of 65+, home ownership is 80% with almost 75% living unencumbered by a mortgage, but when you remove home equity from the equation, average net worth drops significantly from a high of $31,400 to a low of $19,025.

Fats Fact
Three largest expense areas for the 65+ cohort
housing and food
transportation
healthcare

Baby Boomers account for 48% of U.S. families with 45 million households, and spending power of over $2 Trillion. The younger Boomers born between 1956 and 1964 have an average household population of 3.3 people (with 1 or more children), and an average annual income of $56,500 of which they spend $45,149. The older Boomers born between 1946 and 1955 have an average household population of 2.7 people (with 1 or no children), and an average annual income of $58,889 of which they spend $46,160. 69% of younger Boomers own their homes and devote a larger share of their monthly budgets to mortgage payments. This group also spends about 10% less than the average on life and other forms of personal insurance, while the older Boomers spend 20% more than the average.

Fast Fact
Over 50% of the Baby Boomers live in nine states
California, Texas, New York, Florida, Pennsylvania, Illinois, Ohio, Michigan, and New Jersey.

The population of 65+ will increase 48% and the population of 85+ will increase 43% by 2020. The growth of the 65+ population will be attributable mostly to the aging of the Baby Boomers, but the growth of the 85+ population is primarily a factor of increasing life expectancy. Currently, there are three states where the 65+ population exceeds 15% of the states total: Florida, Pennsylvania, and West Virginia. That number will grow to 42 states by 2020.

When it comes to tracking and categorizing the financial habits of the growing populations of Baby Boomers and Seniors, Claritas developed an effective demographic segmentation system called P$ychleNE (for more information visit www.claritas.com) which is particularly insightful for producers of annuity and life insurance products. Their system breaks down U.S. households by financial behavior across 58 segments within 13 life stage groups going back to 1987. For our two cohorts, the 65+ seniors of cohort 1 and the Baby Boomers of cohort 2, P$ychleNE segments them into two unique groups, and then two more that they share with similar characteristics regardless of age classification. Based on their financial behavior, the segments break out across the following primary classifications and related sub-sets that describe key aspects of their life style and spending habits:

Cohort 1
- Wealthy Seniors (Five sub-sets of 65+ retired and living in comfortable suburban homes with substantial nest eggs)
o Globetrotters
o Golden Agers
o Civic Spirits
o Savvy Savers
o Annuity-Ville

- Mid-scale Matures (Four sub-sets of 65+ with working class wages and modest income producing assets)
o Early-Bird Specials
o Conservative Couples
o Senior Solitaire
o Old Homesteaders

Cohort 2
- Boomer Comfort (Five sub-sets of educated, well-off, tech savvy professionals with six figure incomes, strong performing assets and receptivity to insurance products)
o Power Couples
o Big Spenders
o Jumbo Mortgagees
o Bargain Lovers
o Suburban Scramble

- Financial Elite (Two sub-sets of the most affluent segment in the U.S. with the highest income producing assets, highest incomes, and large sums of money to manage across stocks, real estate, insurance, and annuities)
o Wealth Market
o Business Class

Cohort 1 and 2 Blend
- Upscale Empty Nesters (Four sub-sets of well-off 55+ with sizable income producing assets and retirement accounts with large portfolios of securities and real estate as well as accumulators of insurance and annuities typically with the assistance of financial planners and insurance agents)
o Retiree Chic
o Leisure Land
o Travel & Antiques
o Comfortably Retired

- Retirement Blues (Five sub-sets of 55+ with low levels of income and assets and very modest life styles)
o Retirement Ready
o Hunters & Collectors
o Urbanistas
o Senior City Blues

Impaired Risk

Underwriting impaired risk tends to be more prevalent with our two cohorts, particularly with the 65+ group. This is one of the faster growing segments for the insurance industry with life, annuity and long term care products. This is also becoming an important area for group and work site benefits such as health, disability and disease specific insurance. According to the U.S. Department of Labor, the number of employed people still working between the ages of 65 and 90 has increased from 4.7%, or 600,000 people a decade ago, to 6.4%, or now over 1 million people. This means that the numbers of workers age 65 and over accessing benefits through employers will continue to grow with these evolving economic and life expectancy trends.

Over the last decade, advancements in underwriting and actuarial models, as well as medical science, have made it possible to price all insurance products at competitive rates in ways that once was unavailable to this age group. Underwriting seniors is a different process than underwriting “unimpaired” or relatively young and healthy applicants.

Fast Fact
Top health conditions that become causes of death for those 65+
- Vascular
- Cancer
- Stroke
- Dementia
- Influenza

Once people reach age 65: 80% of seniors report having at least one chronic condition, 50% report at least two, and 30% report having three or more chronic conditions. Additionally, 30% of people 65-70 have reported vascular issues and that number jumps to 70% once you get past the age of 70!

Beyond the obvious underwriting screens that are typically looked for; factors such as recent cessation of smoking, sudden weight loss, frailty and use of assistive devices, ADL impairments, MVR history and work/volunteering/travel schedules are scrutinized more closely with the 65+ group. Underwriting tools that can be used to measure impaired risk include Pulmonary Function Exams to measure decline of lung function, eGFR to measure kidney filtration, Serum Albumin levels as an indicator of “all-cause” mortality risk factors, and MMSE Cognitive Assessments to measure deterioration of visual, verbal, concentration, and orientation levels.

Another important health screen for this cohort is any recent history of falls and broken bones. There is at least a 30% chance that a person will need to move into a nursing home after a fall, and only 33% regain their pre-fall physical condition. Also, there is as high as a 35% chance of death within the first year of a fall.

As the individual ages, certain health conditions shift from being of concern to the norm. For example, seniors will typically experience a slowing of reflexes and loss of muscle mass. Renal and liver functions, as well as pulmonary and vascular capacity can all be expected to decrease. Cognitive abilities will begin to slow, and a certain level of “memory challenge” (not to be confused with Alzheimer’s Disease) will creep into the picture. Also, conditions such as cancer or heart disease that are long in remission, under control and/or being managed by medication become less of a factor in determining overall mortality and morbidity.

Level of education has a direct correlation to income, which in turn has also been proven to have a direct impact to overall health. Baby Boomers are the most educated generation in U.S. history with almost 90% completing high school and then 28.5% going on to earn at least a masters degree. The bottom line is that the better educated someone is, then the higher their income will be and in turn they can expect to be in better health and live longer.

Lastly, an important life expectancy concept to understand is “Morbidity Compression”. Current life expectancy trends indicate that more people than ever are living at a relatively healthy state up to average target ages based on their demographics. But if a person experiences any significant health impairment, then their remaining life expectancy usually becomes compressed. For example, a healthy individual in the 75-80 age range that lives at home, is able to care for and transport themselves, and pursues leisure vocations and social interaction could have a life expectancy of ten or twenty years. But if that individual experiences a TIA/stoke or breaks a hip, and then must either access home care or move into an assisted living or skilled nursing facility, it is more likely that the life expectancy range would compress to less than five years.

The Wild Card: Economic Challenges

There are two inextricably linked fundamentals that determine the quality of life for Baby Boomers and seniors: health and finances. As they age and life expectancies compress, there is less time and vitality available to recover from injury and illness. The same is true of financial “vitality”. People in their thirties and forties have time to recover from set backs in the stock market, housing values, or business and investment fluctuations. Once people reach their sixties, it is too late to start a meaningful savings program (as the benefits of compound interest have long since abated) and if investments and/or property are underperforming there may be little time available to wait for recovery.

Retirements funded by a corporate pension after a life time of service are almost extinct in this country. Beyond Social Security and Medicare, the vast majority of Americans today rely on equity in their homes to be a major component of their retirement. For seniors facing major costs such as health care and long term care, the current state of the economy could not be worse. The impact of the sub-prime mortgage implosion on credit and equities markets has resulted in a huge hit on many American’s net worth via erosion in home equity. In fact the National Association of Home Builders released a report in June of 2008 citing that, $426 billion of equity in the U.S. has vanished. That is almost half a TRILLION dollars taken away from Americans in less than two years!

During an interview with former Federal Reserve Chairman Alan Greenspan in July, 2008 he was quoted as saying that the U.S. housing market is nowhere near the bottom and that our economy is teetering on the brink of recession. He described the confluence of economic factors currently battering the U.S. a once in a century “phenomenon”. Validating his concerns is the most recent reports released on foreclosures showing a 55% increase from July of 2007 to July of 2008. That translates into 1 in every 464 households in this country foreclosed in July, 2008. Maybe even more alarming is the 184% increase in bank repossessions during the same time period. The top states in the country for foreclosures is Nevada, California, Florida, Ohio, Georgia, Michigan, Colorado, Utah, Virginia, Texas, Illinois, and New York.

When Greenspan talks about this “phenomenon” he is talking about the combination of the real estate woes and the alarming pace of inflation in core areas such as food and fuel costs. The impact of these two areas has been causing huge swings on an almost daily basis in the stock market furthering adding to people’s concerns. Energy prices are up almost 30% for the year and food prices have increased 6%. Even with recent declines in oil prices and a drop at the fuel pump, oil prices are still double what they were in the summer of 2007 and grain prices are double what they were in the summer of 2006.

The impact that this is having on seniors is very serious. Home equity is in reverse and savings and equities are being chewed up by inflation and stock market losses. Social programs such as Social Security are not doing much better with the smallest benefit increase in the last four years at 2.3% for 2008. According to the AARP, the number of seniors filing for bankruptcy over the age of 55 in the last year was about 250,000. At this pace, the recent study by Ernst & Young LLP showing that three out of every five new middle class retirees will outlive their financial assets if they do not downwardly adjust their standard of living (expenses) by 24%-37% looks to be optimistic.

During good times, equity in homes and the growth of the stock market can propel a high standard of living in retirement and also help to fund the expenses associated with health care and long term care. But during hard times, when these critical economic engines are not cooperating the outlook can change drastically.

Long Term Care Crisis

The double-edged sword of the senior market is the long term care crisis. Everyone will eventually need to secure some form of long term care and/or assisted living, but no one likes to think about it today and making plans for the future is easily put off until later. In fact, the long term care crisis in the United States is a lot like global warming. There is no denying it is happening and that you are going to be impacted—but it seems like it is far enough away into an uncertain future that today’s needs and priorities take precedence. As is usually the case with the human condition, we seldom plan for a crisis and instead are forced to react to it when it is upon us. One study on how seniors make choices about senior residential and long term care options showed three distinct and familiar patterns:

13% actively plan for retirement and how they will live as they grow older and frailer
40% actively plan following a “near catastrophic” health event such as total joint replacement or extended illness
46+% never plan and must make decisions about site of care in a very short period of time, usually while still in the hospital

On the one hand, the exploding senior population and their inevitable need to finance senior residential and long term care options should be a tremendous opportunity for the financial planning and insurance agency world. The problem is that the combined impact of our nation’s economic strains and people’s tendency to not plan and save, is brewing a perfect storm that threatens to sink the vast majority of people’s chances for quality “golden years”. The costs of healthcare and long term care alone are staggering. According to a MSN Money.com Market Watch report (March 28, 2008) “a sixty five year old couple retiring now would need more than $300,000 set aside just to pay for health care costs over twenty years and would need $550,000 if they were to live into their early nineties.” Particularly alarming, according to the report, is the fact that these numbers, “haven’t factored in the costs of nursing homes, assisted living facilities or home health aides—and those costs are staggering!”

Currently in the U.S. there are over 1.5 million people living in nursing homes. Of that population, 72% are female and the 85+ population is growing the fastest with a 20% increase. The oldest old are living longer and they are costing more than ever to support with private or public funds. This is important to consider when planning for the future because as of today, 56% of residents will live in a nursing home anywhere from one to five years or more (with a national average of 30 months).

For the population of 900,000 people currently living in assisted living facilities, the vast majority of financing is private pay. In addition to the monthly cost for a room, apartment or cottage; residents may also face one-time entrance fees ranging from $60,000-$350,000 for higher end “resort style” or “cottage” properties. Additional monthly fees ranging from $348-$522 are often times charged for transportation, dementia care, meal delivery to residence, and other extras that would add to quality of life.

As of 2000, the most recent year for data, there were 1,355,290 people receiving some form of extended home-based healthcare. Of that population, 70% were from our 65+ cohort and 65% were female. The average time span of care was for 312 days, and over 93% of the care was being delivered by Medicare/Medicaid certified agencies.

Fast Fact
Current national average costs across the three categories of long term care for 2008

Home/Community-
Non-Medicare Certified, Licensed “Companion” Care - $18/hr (4% over 2007)
Non-Medicare Certified, Licensed “Home Health Aide” - $19/hr (3% over 2007)
Medicare Certified “Home Health Aide” - $38/hr (18% over 2007)
Adult Day Health Care Center - $61 per day

Assisted Living Facility-
Private One Bedroom - $3,008 per month (11% over 2007)

Nursing Home-
Semi-Private Room - $187 per day (4% over 2007)
Private Room - $209 per day (2% over 2007)

With the reality of these kinds of costs and the growing senior population; we will see increasing pressure on publicly funded programs such as Medicare and Medicaid (which combined pays for roughly 80% all long term care related expenses in the U.S.), and moves to make it more difficult to qualify. The economic squeeze of inflation, the real estate crisis and stock market performance are all contributing to declines in tax revenues for the states. When taxes shrink one of the most vulnerable areas is also one of the most expensive for state budgets: Medicaid and other social support programs. The long term care industry and the government at all levels are in agreement on how to compensate. More emphasis must be placed on the individual to pay for as much care and housing as possible with private funds before any public funds are made available. But what are some private funding options that people should be considering?

An obvious source of funds to cover these expenses would be from long term care insurance. The only problem is that attractive tax deductions have never been established to incentivize growth in the market, and it has been stalled for over a decade. As of today, long term care insurance accounts for an anemic single digit percentage of all funding for senior housing and care. That leaves private pay to pick up close to 20% of the approximate total of $200 Billion spent on all long term care service last year. But where do those funds come from if you have not saved literally hundreds of thousands in cash?

A primary option that people have often looked to is cashing in their home through a sale to raise the funds to sustain themselves (or to meet spend down requirements). But, the current real estate market has taught us, as is the case with the stock market, that it is always vulnerable to a correction. Another means to extract equity from a home could be through a reverse mortgage, and it might be a good option for a home healthcare arrangement, but what happens if health conditions deteriorate rapidly and the person must move into a facility on short notice? The home owner is then faced with the dilemma of funds that can’t be used for a setting outside of the home, and a loan that must be paid back immediately.

If a person has built up cash value in a life insurance policy, they could consider taking a loan against the policy or surrendering it for the cash value. Also, if someone attempts to qualify for Medicaid, a life insurance policy would be an “unprotected” asset subject to the 60 month look back period. It would need to be liquidated and spent down on care before eligibility could begin. According to a Federal Government Accounting Office (GAO) report released to the U.S. Congress in March, 2007: when examining a sample population of over 500 Medicaid applicants entering long term care facilities, 38% owned a life insurance policy that needed to be liquidated because it exceeded minimum state mandated asset levels.

When cashing out a life insurance policy, either by choice or because of an eligibility mandate, the superior option is a Life Settlement. This process will ensure that the highest possible value is obtained for the policy through bidding from multiple institutional sources in the secondary market. Also, any tax implications for capital gains realized from a Life Settlement would be offset by deductions based on spending the money for “the entire cost of maintenance in a nursing home or home for the aged” (sec. 1016 U.S. Master Tax Code 2008). The Conning & Co. Research study "Life Settlements: Additional Pressure on Life Profits” found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements. Statistical data gathered on policies “settled” in 2007 continues to verify that the difference between the amounts of money that can be realized through a Life Settlement is significantly greater than through cash “surrender” value. When the time comes to look at funding vehicles to pay for long term care related expenses, cashing in a life insurance policy through a Life Settlement could be an excellent financial move.

Conclusion

Previous generations retired on schedule and then lived the rest of their lives on pensions and government benefits. For the most part, they ceased becoming viable consumers of insurance and financial services. The Silver Tsunami generation will live, work, and stay active much longer than any generation in history. This will prolong their need and ability to continue being acquirers of health and financial security products. And with their expectations for quality lifestyles until the very end—they are going to need every possible financial tool to make it happen.

Sources

AARP Public Policy Institute, Across the States Profiles of Long Term Care and Independent Living, Seventh Edition 2006

Claritas P$ycleNE, Actionable Segmentation Solution

Genworth Financial, 2008 Costs of Care Survey, April 2008

Government Accounting Office (GAO), Report to Congressional Requesters on Medicaid Long Term Care Impact of Deficit Reduction Act, March 2007

Health Care Financing Review, Winter 2002 Study

John Hancock Life Insurance, More Tools for Underwriting the Elderly?, October 2007

Life Policy Dynamics, 2007 Summary: U.S. Life Settlement Market Analysis, March 2008

MetLife Mature Market Institute, Demographic Profile Americans 65+, 2008

MetLife Mature Market Institute, Demographic Profile American Baby Boomers, 2008

MetLife Mature Market Institute, Market Survey of Adult Day Services & Home Care Costs, September 2007

MetLife Mature Market Institute, Market Survey of Nursing Home & Assisted Living Costs, October 2007

MSN Money.com Market Watch, Bleak Retirements for 150 Million?, March 2008

Society of Actuaries, Life Settlements 101: Introduction to the Secondary Market in Life Insurance, October 2007

Swiss RE, Underwriting the Elderly presentation at NEHOUA 24th Annual Seminar, October 2007

Americans for Secure Retirement/Ernst & Young LLP, Retirement vulnerability of new retirees: The likelihood of outliving their asset, July, 2008

The New York Times, Budget Pain Hits States, With Relief Not in Sight, July, 2008

MSNBC.com, Higher inflation brings lower standard of living, August, 2008

MSNBC.com, Economy hitting elderly especially hard, July, 2008

MSNBC.com, Greenspan: Economy ‘on the brink’ of recession, July, 2008

MSNBC.com, Foreclosure filings up 55 percent in July, August, 2008

United States Census Bureau

Aging and Long Term Care Insurance: A National Policy Perspective

2008-03-06T17:55:00.000-08:00

published August, 2007 - Society of Actuaries: Long Term Care Section Newsletter, and InsuranceNewsNet, September, 2007, ProducersWEB, September, 2007, posted on SmartBrief

Aging and Long Term Care Insurance: A National Policy Perspective

September, 2007

Introduction

The aging baby boom generation and the burgeoning long term care financing crisis that lays in their wake has been a subject of national discussion for well over a decade. No one institution, be it public or private, will be able to handle the care of our nation’s aging population alone. The debate about this issue has been ongoing since the administration of FDR conceived of social security and then Lyndon Johnson ushered in the era of Medicare and Medicaid.

We were fortunate enough recently to sit down with Robert Blancato, a principal and president of Matz, Blancato & Associates at their K St. office in Washington, DC to discuss the perspective of national policy makers about the current state of the Long Term Care Insurance industry. Mr. Blancato is a recognized expert and leader on the topic of aging, having spent 30 years in Washington, DC involved in this issue. He was Staff Director on the House Select Committee on Aging’s Human Services Subcommittee from 1977-1988. He currently serves on the Policy Committee and Executive Committee of the 2005 White House Conference of Aging, as appointed by Speaker of the House Rep. Nancy Pelosi. He was Executive Director of the 1995 White House Conference on Aging, as appointed by the President of the United States. In 1998, he was a delegate to the White House Conference on Social Security. Mr. Blancato has worked closely with the insurance industry over the years through numerous initiatives with the major trade organizations and carries of Long Term Care insurance, and he serves on the boards of numerous advocacy and charitable organizations with the mission of improving the quality of life for the aging.

Q & A

Q: Recently in the New York Times there was an article about Long Term Care insurance claims practices. What is your opinion of that article?

A: The article was an unfortunate example of journalistic opportunism to create a more sensational “expose” than was deserved. First of all, the article was written about the practices of one company, but the way in which it was portrayed would lead many to believe that this was how an entire industry conducts its business. That is unfair journalism and it could not have been done at a worse time. This country needs to focus its energies on creating comprehensive solutions to deal with the coming crisis in financing the care of our aging population. Fear mongering and casting an unfairly wide net do not help us attain the real goal of harnessing the collective energies and resources of the private and public sectors in finding ways to ensure an appropriate quality of life for those who can no longer care for themselves.

As is the culture of Washington, DC during a national election cycle, I would not be surprised to see hearings on this issue as inquiries by the major candidates for President have gone to GAO (the Government Accounting Office) looking into discrepancies between Long Term Care insurance and Medicaid funding for services rendered. This is time and energy that should be spent on solutions and unfortunately could end up instead being spent on investigations.

Q: Where are there examples of positive dialogue and progress on this issue?

A: One of the better examples that I can point to is the 2005 White House Conference on Aging. This is a once a decade gathering of a cross section of disciplines, interest groups, and experts from across the United States, with delegations sent from every state, that has been hosted by the President of the United States since President Truman in 1950. The mission statement of the conference (as enacted by law 85-908) is to, “promote the dignity, health, and economic security of older Americans.” 1,200 delegates worked together to prioritize 50 major issues that would impact the aged over the next decade. Second only to renewing the “Older Americans Act” (originally enacted as a result of the 1961 Conference on Aging), the delegates called for a national strategy and effort to address issues around quality, choice, financing, and defining roles and responsibilities for long term care of the elderly as their highest priority.

In my opinion this recommendation from the Conference report is a blue print for action that represents the thinking of the best minds from every state in the Union and should be taken up by Congress immediately. The report acknowledges the fact that this is a task too big for any one sector or institution and that the crisis is a ticking time bomb that should be moved to the front burner—before we are forced to operate in crisis mode.

Q: How do you explain the delays in taking real action and responsibility on the political and consumer fronts?

A: Unfortunately it is human nature to wait until there is a crisis to act. Although the prospect of living in nursing home that is funded by Medicaid dollars, and the quality of life that would afford is a bleak sounding future, it seems so abstract to us that we either ignore or are unwilling to believe that could be our fate. Priorities that are here and today command our attention and dollars, and too many of us delay getting ready for the final days until it is too late. It is the same dynamic for law makers. They are concerned about spending priorities and budgets that will have immediate impact and the “long term care crisis” can seem like it is a long time away, and then it slips on the list of priorities. Unfortunately the end results for us as individuals and as a county if we delay are the same—too little, too late and a poor quality of life as the end result.

Q: What are some potential “tipping points” to spur action?

A: Any significant efforts to reform entitlements will create a whole lot of action on this issue. But remember, this is the third rail of politics and not many dare touch it. A couple of examples of attempts to make changes that would have an impact in this area include: tightening asset transfer rules which would make it more difficult to qualify for Medicaid-- the default payer of long term care services by a vast majority, and “re-balancing” efforts to direct money away from skilled nursing facilities (nursing homes) and towards more community and home/family based care giving. Neither of these efforts has made a significant impact yet. Again it boils down to the simple fact that people don’t pay attention to this issue until it hits home and then changes from being a theoretical problem for others, to a real problem for the individual.

Q: What will it take to get law makers to help stimulate private market solutions?

A: First and foremost LTC insurance will need to escalate the pace of modernizing to stay relevant with how the public wants to deal with care giving. The vast majority of people want to handle care at the community and in-home level. Policy makers would like to encourage this direction because it de-centralizes responsibility and instills in family care givers a personal stake to negotiate in the market for the best value and price of care. Lawmakers favor personal responsibility in health care reform as is evidenced by market innovations such as health savings accounts, and they are equally interested in seeing the long term care market go in this direction as well.

Insurance companies need to keep up with this rapid pace of evolution and must modernize product offerings if they are going to improve their chances at obtaining meaningful tax qualified status from law makers. As LTC policies continue to become multi-dimensional, more constituencies will have a stake in the game and the chances for political and market advancement will increase. The emergence of plans combining life insurance and long term care insurance is an example of market innovation, but the tax code is yet to catch up.

Insurers need to continue examining trends and better understand what the consumer wants. Products designed towards in-home care and supporting family care givers will be a bigger winner in the market and on Capitol Hill, than products geared towards nursing home care.

Q: Is there enough awareness about private market solutions and the burgeoning crisis?

A: There are some examples of effective public advocacy and awareness initiatives over the years. The LTC Clearinghouse has been doing good work for years. The “Own Your Future” campaign made some in-roads in the states where their focused communication effort was deployed. Another example is the broad based coalition, Americans for Long Term Care Security that I headed up out of Washington, DC for a number of years.

I also thought that the launch of the Federal Long Term Care Insurance program was very effective. They launched the plan for federal employees back around 2001 and it was a very well coordinated communication/education/marketing program that drove a lot of new subscribers. The challenge is being able to sustain that level of activity. A stop and start campaign is only effective for a short time and then you need to start all over again at a later date.

The recent New York Times article is a set back for public perception and acceptance of Long Term Care insurance as a viable solution. The industry still needs to overcome quality issues and a negative perception. It is also difficult to overcome the theoretical vs. reality problem with a life issue that seems far off in the future, and one most people don’t want to contemplate.

This reality also makes things difficult for the industry politically because law makers have a mixed opinion about Long Term Care insurance and the future crisis continues to be more theoretical than reality for them as well. This makes it a “second tier” issue compared to health insurance or covering children. There is still not enough confidence in the market or urgency about the future crisis to move tax incentives that would have a real impact on sales.

Conclusion

Mr. Blancato’s observations are common sense and ring true. The Long Term Care Insurance industry has been waiting a long time for the level of sales to match the urgency of the pending crisis. People (and lawmakers) by nature will only react to a crisis when it has entered their lives and becomes reality. How much less expensive and disastrous would it have been to spend money preparing New Orleans to handle a Hurricane Katrina instead of confronting the aftermath? It was known for years that it was just a matter of when and not if the big storm would hit—the only question was one of preparedness. The same is the case with the aging baby boomers and the impact they will have when that storm hits. It is just a matter of when, not if, and it will take the insurance industry, health care providers, individuals, and law makers all facing this reality and working towards a common goal of preparedness to avoid the potential devastation.

Copyright 2007 by the Society of Actuaries, Schaumburg, Illinois. Reprinted with permission.

Life Settlements: Protecting the Golden Goose

2008-03-06T17:53:00.000-08:00

published April, 2008 – Insurance News Net Magazine

Life Settlements: Protecting the Golden Goose

Introduction

Life Settlements are a healthy and efficient part of the insurance life cycle-- but the existence of the life insurance industry itself becomes threatened when then fundamental concept of “insurable interest” is ignored.

Evolution of a Market

The Life Settlement market is as an offshoot of Viaticals that emerged in the late 80’s and early 90’s. This unique vehicle afforded AIDS patients an opportunity for an early cash out of a life insurance policy to cover the high costs of care not covered by health insurance. The Life Settlement market has been evolving rapidly ever since, with $30 billion in transactions projected in 2007. Based on in-force life insurance policies in the United States held by individuals that fall within the target demographics for a Life Settlement transaction, the annual revenue potential is estimated at $150 billion.

The University of Pennsylvania’s business school, the Wharton School, conducted a study on the potential impact of the Life Settlement market. This study found, among other things, that life settlement providers paid approximately $340 million to consumers for their underperforming life insurance policies, an opportunity that was not available to them just a few years before. Another study conducted by Conning & Co., "Life Settlements: Additional Pressure on Life Profits, found that senior citizens owned approximately $500 billion worth of life insurance in 2003, of which $100 billion was owned by seniors eligible for life settlements.

With these kinds of numbers and market potential it is no surprise that Wall Street is now paying attention. In a Business Week article published in July of 2007, it was observed, “Wall Street sees huge profits in buying policies, throwing them into a pool, dividing the pool into bonds and selling the bonds to pension funds, college endowments, and other professional investors. If the market develops as Wall Street expects, ordinary mutual funds will soon be able to get in on the action, too.” But, with these kinds of numbers and market potential it should be no surprise that regulators and law makers are paying attention as well.

Life Settlement transactions emerged from a worthy concept. Although a dirty word now, Viaticals provided much needed liquidity during a time of crisis for people who did not have enough money to obtain care or improve quality of life in the face of a terminal condition. As is some times the case, what started out as a humane and economically sensible market development also opened the door for those that would seek to game the system for selfish interests. The problem the industry faces now is how to keep growing and providing an efficient outlet to liquidate life insurance policies, without allowing those that would take advantage of this opportunity to kill the Golden Goose.

Fundamental Property Rights

Life Settlement transactions bring efficiency to the life insurance marketplace. They offer a healthy, competitive outlet to liquidate a life insurance policy that has outlived its purpose and/or to raise cash in a time of immediate crisis. Transactions involving policies that were purchased based on insurable interest are the foundation of a legitimate transaction. In fact, this type of a transaction is supported by none other than Supreme Court Justice Oliver Wendell Holmes in his 1911 landmark decision, Grigbsy v. Russell. Justice Holmes noted in his final opinion that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner could transfer without limitation.
This decision established a life insurance policy as transferable property that contains specific legal rights, including the right to:
· Name the policy beneficiary
· Change the beneficiary designation (unless subject to restrictions)
· Assign the policy as collateral for a loan
· Borrow against the policy
· Sell the policy to another party
Justice Holmes makes a clear distinction between a policy based on insurable interest and one where none exists, “A contract of insurance upon a life in which the insured has no interest is a pure wager that gives the insured a sinister counter interest in having the life come to an end. The very meaning of an insurable interest is an interest in having the life continue…” His decision clearly considers an insurance policy to be the same as real property and does not oppose transferring the property/policy to an entity without an interest in the life of the insured, and to this point he is very clear, ““…life insurance has become in our days one of the best recognized forms of investment and self-compelled saving. So far as reasonable safety permits, it is desirable to give to life policies the ordinary characteristics of property. To deny the right to sell except to persons having such an interest is to diminish appreciably the value of the contract in the owner's hands”.

He does draw the distinction though between this and a policy initiated and funded by a third party without any insurable interest or “interest in having the life continue”. Here he states, “cases in which a person having an interest lends himself to one without any, as a cloak to what is, in its inception, a wager, have no similarity to those where an honest contract is sold in good faith.” Justice Holmes also emphasizes again the distinction towards the conclusion of his ruling as such, “…the policy having been taken out for the purpose of allowing a stranger association to pay the premiums and receive the greater part of the benefit, and having been assigned to it at once. On the other hand, it has been decided that a valid policy is not avoided by the cessation of the insurable interest, even as against the insurer, unless so provided by the policy itself.”

Threatening the Golden Goose

The right of a policy owner to transfer ownership interest is a guaranteed right under Constitutional law established by one of the greatest legal minds in our country’s history. But the difference he recognized between policies based on insurable interest and one where none exists is a problem that the Life Settlement industry must address. In the case of investor owned life insurance (IOLI) or stranger owned life insurance (STOLI) are we looking at what Justice Holmes defines as, “a pure wager”? If that is the case, then this practice may now be threatening not only the long term future of the Life Settlement marketplace but also the foundation of life insurance itself.

Life insurers are concerned about the explosive growth of the Life Settlement market for a couple of reasons. On the one hand, life insurers have a selfish concern about their bottom line when policies that no longer lapse or are converted for their cash value have a negative impact on their profitability. This is a healthy outcome of an efficient market that is providing outlets to maximize the value of ones interest in their constitutionally protected property. But insurers also have a bigger picture concern about law makers and regulatory bodies taking a closer look at the growing Life Settlement market, and if their practices are changing the very nature of life insurance.

The tax free exemption for inside build up of a life insurance policy is constantly under scrutiny by law makers. If it is ever concluded that life insurance has changed from its original function of providing a death benefit for beneficiaries to an investment vehicle for third parties to place “wagers” with no insurable interest in the insured-- then the tax free exemption could be revoked. If this were to happen, then life insurance would no longer be able to provide its key financial benefit and differentiator, and the industry as we know it would cease to exist. This is not good for anyone.

There will be Blood

The market is still evolving and it won’t take long for the insurance industry to wield its considerable clout with regulators and law makers to ensure practices that game the system will not kill the Golden Goose. Third party sponsored life insurance transactions initiated for the sole purpose of flipping them in the Life Settlement marketplace is not a practice that will last indefinitely. Conversely, in light of the Supreme Court’s ruling on the transferability of insurance as property, the ability for those holding a policy based on insurable interest that they no longer need will always be able to maximize the value of that property through a Life Settlement transaction. U.S. history has many examples of new economic outlets evolving to meet demands, and along the way, shaking out the questionable practices as it matures. There are also plenty of examples of federal and state law makers getting involved in that process as it is happening. Sometimes it is early in the game such as in the case of genetic sciences and cloning or late in the game such as in the case of sub-prime mortgages.

In both examples a market emerges and then based on the interests involved and the impact on the consumer and the economy, the government will step in to establish the rules. In the case of Life Settlements that process is already underway as is evidenced by the recent actions taken by both the NAIC and NCOIL, the North Dakota State Senate, and the Federal Court of Appeals for the Fourth Circuit. The life insurance industry and the government won’t sit idly on the sidelines. They will make sure that they have a say about how the Life Settlement industry conducts itself over the coming years.

The Life Settlement industry provides an important and efficient function to the insurance marketplace-- and it is a practice defended by the Supreme Court. But the distinctions around insurable interest are important to understand and this debate is only just beginning. Take a picture of this industry in 2008 and then take a look again in 2013—because within five years it is going to look very different.

Underwriting in the 21st Century: Informals—Turning a Pain into Profits

2008-03-06T17:50:00.000-08:00

published June, 2008—On the Risk

Underwriting in the 21st Century: Informals—Turning a Pain into Profits

Executive Summary

This article series continues to explore the evolving landscape of underwriting in the 21st Century. In this installment we explore the impact of informal, or preliminary, applications on both the workflow of an underwriting department and on relationships with producers. We spoke with four leading carriers in this market about innovations they have implemented to improve these dynamics, and we also spoke with a reinsurer to gain additional perspective on this marketplace.

We found agreement that informals, if not handled correctly, can significantly bog down an underwriting operation. The solution offered by these companies is to find ways to create a sense of partnership with the producers and a shared interest for both sides to improve the process. Reducing cycle time and the burden on underwriting departments is the key to improving the process-- and increasing profitability.

What are the problems with informals?

Ask any underwriter who reviews informals on a regular basis this question and you will hear a laundry list of complaints from carriers both large and small. Informals were described as a “necessary evil” and an enormous drain on a company’s underwriting resources. Applicants are more advanced in age and have voluminous medical histories. APS’s accompanying a preliminary application can number in the several hundreds of pages (even over 1,000!) and the quality of the records are often times marginal at best. “Three problems we found with informal submissions all came together to tie up underwriting resources and delay cycle time”, explains Pam Anson, ING’s Underwriting Chief Administrative Officer and Head of Corporate Markets Operations, “volume of pages, complexity of case history and the knowledge that certain producers would use ING to shop but not place cases with us were all negatives that needed to be addressed.”

The need to underwrite cases requiring a disproportionate amount of resources relative to the percentage that are actually placed is a key dynamic cited. These cases are complex and the pressure to issue competitive and timely offers can become difficult for underwriters. With as much as half of a carrier’s underwriting capacity potentially tied up with informals -- and the placement rate hovering between 2%-3%-- handling a large volume of informals can become a morale issue for an underwriting department leaving underwriters asking the question: “why do we bother?”

"These cases are large, complicated and require very experienced senior level underwriters to work on them.” M. Cristina Downey VP, Chief Underwriter of XL Re Life America describes the impact on underwriting departments, “At a time when many companies are struggling to secure and retain sufficient resources; competitive pressure and time constraints need to be carefully balance against placement ratios and the cost of lost business".

“As a reinsurer we do not encourage informals and we only see them when the direct
writer is getting a formal app and wants to start the underwriting process. If we receive
inquiries regarding capacity of potentially large coverage, we do not formally reserve
until a formal application is received. Similarly, retros will not reserve capacity if the
reinsurer submits only an informal. As a reinsurer in a large facultative shop years ago,
we reviewed many inquiries and at times the same one simultaneously from multiple
carriers.” XL’s Downey cautions, “The placement ratio is virtually negligible, they are
often extremely time consuming and voluminous and result in either high substandard
ratings or declinations due to medical impairments or questionable financials, high
substandard medical histories, or suspect insurable interest. In today's environment, I would guess stranger-owned and premium financing are emerging patterns as well.”
How are carriers moving from pain to profit?
With the negatives associated with informals, what kinds of innovations are occurring in the industry to make this a more manageable and profitable business model?
“ We identified key areas that contributed to ING's inability to effectively manage and provide timely service on informal submissions." explains Pam Anson, ING’s Underwriting Chief Administrative Officer, “ Quantity and quality of submissions were impeding our ability to provide timely offers resulting in very low formalization and placement of this business. To be successful and improve the placement rate, we needed to identify solutions.”
In the case of ING, they engaged a well thought out Six Sigma process to identify what their biggest challenges were to becoming more proficient and profitable in the informals’ market. ING’s numbers showed them that 33% of their underwriting resources were being spent on informals and it was generating less than 5% placement. They identified interconnected factors that were contributing to this low return on investment: timeliness of offers, quality and quantity of submissions, and the lack of customer partnership in researching product offerings and pricing to determine the viability of placing cases with ING as their first option. To overcome these challenges, ING encouraged the customer to become a participant in the process and began working with various distribution channels to fine tune their offers and reduce cycle time so ING could be first to make offers—instead of last.
The key for ING to reduce cycle time was first engaging the producer to participate in the solution by investing their own resources. “We specifically did not want to refuse informal service support to any of our customers; however, we knew that our new informal process would naturally discourage submissions from customers that were not willing to invest their resources in improving the quality and quantity of the informals submitted,” explained Ms. Anson. ING went to work building partnerships with productive producers by offering them incentives to participate in the process of reducing cycle time.

ING offered producers the ability to contract with vendors that could summarize APS’s in advance of submitting the informal application and then would pay out a bonus on every case that was submitted in this manner and then placed. Producers submit APS’s to vendors at negotiated rates to be summarized and then they are delivered to ING. Without taking on any additional internal staff or overhead, ING reduced the time it took for home office underwriters to review a submission on average 30 minutes and this in turn drastically reduced cycle time from the previous 30-60 days to their 5 day target.

“This paradigm shift in how ING handles informals put us in the position that we became value added partners to the producers and remain forefront in their minds.” Said Ms. Anson, “By creating incentives for the producers to stop submitting voluminous medical records and instead work with us to summarize those records and create a concise health overview of the applicant, we all benefited and achieved our goal of moving from the last offer to the first and our placement rates moved to the 7% range and profitability immediately improved.”

From Cristina Downey of XL Re’s perspective, there are some guidelines that a carrier should use when evaluating the informals market and producer relations, “Carriers should focus on producers that have a track record of high placement with them. Submissions should carry a considerable face amount of yearly premium and the applicant should be fresh in the market and carry MIB authorization. Producers expectations need to be managed and they should be ready to accept that time service might not be a priority for these cases and that they won’t be reimbursed for expenses if they order requirements without specific consent from underwriting.”
Do improvements handling producer relations lead to improvements handling informals (and vice versa)?
When American National Insurance Company (ANICO) started accepting informal submissions from brokers their goal as a new entrant into the brokerage life arena was to compete not only on price, but by also building value-added relationships with producers and delivering expedited cycle time to get to offer.

They began by requiring that all informals be submitted with summarized APS’s with a total limit of 10 pages for all submissions. According to Jeff Moore, a National Sales Manager with ANICO, “We have seen a significant improvement in cycle time by cutting down on the pages to review and our producer relationships also benefit from our assistance in “pre-underwriting” these cases. Once we introduced outsourced APS summaries to the process, our internal capability to underwrite informals and make offers increased by more than double. For a new player in a highly competitive market, that is a big deal! By using an outside firm to do APS summaries we were able to significantly increase our underwriting capacity without detracting from our capacity to handle formal applications.”

This process has resulted in ANICO’s cycle time decreasing from 3-4 weeks to 2-4 days. They have also built up goodwill and trust with producers who view the summaries as very insightful and valuable as it bolsters their capabilities as well.

Downey of XL Re also sees opportunities to work in a positive fashion with producers,
“A good producer will not just send junk and if there is a very good producer that
occasionally may need help on an inquiry they should be accommodated. A large
profitable agency that expects support on a regular basis from the direct writer should be
given a quick reference set of criteria, for example: alcohol/drug abuse treatment in the
last 6 months or no cases already assessed Table 8 or higher by another carrier.”

Conclusion

The consensus among those we spoke with is that carriers need to work with producers to improve the quality of submissions and reduce cycle times so that informals can be a sustainable business model for both sides. Carriers need to lead the way by clearly establishing guidelines and expectations with the producers to help eliminate decline submissions. Carriers also need to implement incentive programs to cut down on the volume of paper through innovations like APS summaries. To ensure goals are being met, carriers need to have reliable metrics in place to run cost-benefit analysis to determine where the profitable relationships are, and who is costing the company money—and then focus efforts where it counts.
Informals are a double edged sword. If they are not managed with innovation and a sense of partnership between producer and carrier they can become counter productive to any carrier regardless of size. But, handled correctly they can actually help improve producer relations and can be a healthy contributor to the bottom line. As the saying goes, “you get out of something what you put into it.” In the case of informals, the companies that are putting in the extra effort to work smarter, instead of harder, are getting a lot in return.

Overcoming the Underwriting Crunch Through Outsourcing

2008-03-06T17:48:00.000-08:00

published January, 2007 – InsuranceNewsNet and InsureIntell, February, 2007

Overcoming the Underwriting Crunch Through Outsourcing

Introduction

Underwriting at any level is a very specific science; it is also a discipline that can be easily underestimated in both its complexity and bottom-line impact for an insurance company. But what happens to a company’s risk experience if there is a lack of qualified talent due to attrition or workflow overload?

As the Life and Health insurance industry of the 21st Century continues to evolve; the cost savings and improved workflow derived from outsourcing can not be ignored. In less than a decade, a heightened sense of urgency has emerged compelling companies to better understand and have a plan in place for outsourcing some, if not all, risk management functions. This urgency is clearly attributable to the following factors:

1. Resource Drain: Staying ramped up at maximum staffing levels year round is an expensive and wasteful proposition; conversely, it is also expensive and distracting to hire and train temporary staff in a reactionary attempt to handle intermittent peak-volume periods.

2. Brain Drain: One of the last generations of underwriters to receive company specific training and experience over years is reaching retirement age en-masse. Unlike years past, fewer companies are investing in long-term training and career development programs. This reality is making it increasingly difficult to stem the tide of attrition across the ranks of employees that posses much in the way of a company’s institutional risk management knowledge.

Fortunately, there are numerous options available today for outsourcing underwriting functions that can help to overcome these staffing problems while improving operational efficiencies, costs and time service.

When is it time to outsource?

How does a company determine if they will benefit from outsourcing? Start by identify where bottlenecks exist (too much paper, not enough staff, backlogged APS’s, delayed administrative work, etc.) and then consider how augmenting staff through outsourcing can help get the process moving again. A critical internal check is to make sure that trained and experienced underwriting professionals are not being diverted from the risk assessment and decision making process. In the midst of a crunch, underwriters and other specialized/highly paid personnel should not be haphazardly covering personnel gaps or performing administrative tasks - such as chasing down missing application information or glorified data sorting/entry - that could be more cost effectively outsourced.

Smart and strategic outsourcing is not about replacing people with cheaper options-- it is about empowering staff to focus on doing what they do best. The bottom line is that insurance companies should NEVER abdicate their responsibility to manage risk. But, insurers should ALWAYS look at how they can do a better job of managing risk while maximizing all available resources—be they internal or external.

Selecting the best outsource resource

Companies seeking to outsource elements of their risk management functions should look to build a long-term relationship with a company that is staffed by actual underwriters and has a proven track record in providing outsourced services. Look for a company that has the experience and capacity to meet your needs and can be fully compliant with your risk management guidelines. Some companies specialize in one type of support service (i.e. tele-underwriting only) and others offer full service support packages (i.e. requirements retrieval and underwriting services)--based on the needs of a given company either option can be attractive. So how does a company decide which option is best for them?

The first question to ask is: can the outsourced underwriting company create customized solutions that take into account factors such as specific guidelines, appropriate skill sets and product specialties? Another important factor to measure is the scalable capacity of the operation and its ability to expand and contract service levels in concert with the volume cycles of your company.

Which risk management functions to outsource?

1. Requirements
Obtaining exams and retrieving medical records are labor intensive functions that emphasize scale (people and systems) and scope (geographic reach). This is a commoditized area of service, with a hand full of national vendors available that can adequately provide the necessary scale and scope to deliver requirements in a cost effective, but also, time effective manner. Time and cost tend to be the measuring sticks for success in this area.

2. Pre-Underwriting
Underwriting can be compartmentalized and broken into steps very much like an assembly line. Efficient management of the process can impact both risk experience and bottom line before underwriting even begins. In pre-underwriting there are a number of options to select from such as outsourcing data entry, application review and screening, telephone or web based data info gathering, or personal health interviews. Companies that administer a “risk triage” approach to screen an applicant or claim before making the larger investment of requirement gathering and full underwriting are in a position to speed up cycle time, decrease costs, and improve risk experience.

3. Remote Underwriting
There are a number of options to offset attrition in the ranks of an underwriting department and/or help break through backlogs of applications. Quick Quotes, Tele-Underwriting, APS Summaries, Automated (Rules Based) Underwriting, and use of Remote Underwriters are now commonly outsourced functions that are all designed to provide the home office underwriter with better information, and less administrative burden, to keep the underwriting process moving.

4. Claims Risk Management
Evidence of insurability information can be formatted to expedite decision making by claims examiners. For example, an APS summary will eliminate duplicate records, as well as highlight observations regarding potential preexisting conditions, symptoms or concerns previously expressed by the insured. Speed decisions can be assisted by highlighting cases where no concerns exist or those where claims can be denied.

5. Communications
The common thread throughout customer acquisition, underwriting/risk management, and back-office support is effective communication. Whether the communication medium is tele-phonic, digital, or print-- there exist many options for accessing expertise and resources on an as needed, outsourced basis. In-house tele-service, print and internet operations can be a costly and distracting enterprise for an insurance company. These are unique functions that require specialized equipment, operating systems, staff, quality controls, training, and management protocols. Outsourcing these functions is a cost effective alternative to trying to build and manage in-house operations, with the added benefit of the outsourced approach providing maximum flexibility to ramp up and down based on need.

6. Back-Office
To survive in today’s competitive environment, insurance companies must identify where administrative bottlenecks are slowing down the foreword progress of an application or claim. The insurance industry still suffers from paper jams, workflow atrophy, and administrative overload caused by backlogged requirements orders and APS’s, neglected applications of all varieties (short, long, trial), and claims discrepancies. There are a number of domestic and off-shore outsourcing options that will provide focused expertise, lower costs and the ability to perform these functions off-hours to keep an operation moving 24-7.

What are some examples of success?

Companies able to identify opportunities for outsourcing risk management functions hindering productivity will be steps ahead of the competition. This approach is a cost effective way to handle volume cycles and manage the impact of staffing/systems challenges. Your goal should be to speed up the new business cycle with an assembly line or triage approach to risk management. Companies need to take a hard look at their volume cycles and staff/budget levels. If volume exceeds capacity to turn around applications in a timely manner, then outsourcing should be seriously considered.

Obviously, the resources are out there and the expertise exists. A conversation about outsourcing risk management functions 5 or more years ago would probably have been met with blank stares. But, today there are enough proven models across the industry that no company need go in this direction alone.

Some specific examples currently in practice include:

· Companies are speeding up new business cycle times and improving broker relations by efficiently sifting through applications generated through the BGA channel by using remote underwriters to provide Quick Quotes via electronic submission of application summaries.
· Companies are speeding up application cycle times by cutting down the amount of time it takes to retrieve requirements such as an APS. Companies once happy with receiving an APS anywhere from 15-30 business days after placing their order, are now benefiting from retrieval times cut down to 10 calendar days-- or less.
· Companies are clearing backlogs of applications and stacks of Attending Physician Statements (APS) by outsourcing the administrative burden of sorting and summarizing voluminous medical records.
· Companies are overcoming delays and costs associated with acquiring new business through Tele-Underwriting programs. These companies are experiencing reduced costs for acquiring new business (including reducing APS orders), increased quantity and quality of information acquired for application completion and underwriting, faster more accurate application approval or declinations, improved customer service, and acknowledged improvements in overall process for the producer, the carrier, and the customer.
· Companies are overcoming the communication divide between distribution and underwriting by teaming these functions. One company is experiencing great success by referring sales from financial advisors directly through a “rules-based” application completion and tele-underwriting process. Speed of issue, policy placement, customer experience, and persistency have all increased dramatically once sales and underwriting started working together as a team.
· Companies are overcoming the “paper problem” with imaging technology and/or sending data entry and interpretation to domestic or offshore locations where the process can be done for a fraction of the cost and during off-hours. These companies are experiencing a workflow process that is operating at almost 24 hours a day with access to electronic files now constantly at their fingertips.

Conclusion

Today’s insurance company must negotiate a very difficult balancing act. There is immense internal pressure to be cost-effective and risk astute, competing with external pressure for expediency and improved customer service. Compounding this challenge is the simple fact that underwriting departments are being asked to do more, quicker-- but with less staff. Companies tired of being understaffed during busy periods, and overstaffed during slow periods, are looking to overcome this constant juggling act by acquiring additional resources through outsourcing.

The bottom line is clear-- those companies quickest to embrace and master outsourcing will be establishing a clear competitive advantage over companies that chose to ignore this highly cost-effective way to augment staffing levels and maximize workflow on an “as needed basis”.

• Breaking Down Barriers Between Underwriting and Distribution

2008-03-06T17:45:00.000-08:00

published January, 2007 – InsuranceNewsNet and InsureIntell, February, 2007; ProducersWEB, July, 2007

Breaking Down Barriers between Underwriting and Distribution

Executive Summary
A historical friction exists in the insurance industry between risk management and sales. A major challenge facing the industry is to navigate this friction and empower both underwriters and business development channels to work in a collaborative environment to produce optimum risk management outcomes and acquisition cycles. The key to success is being able to bring these two different, yet inextricably linked, disciplines together as part of a seamless transactional environment.

Introduction
The challenges confronting the insurance industry are numerous and well documented. Dynamics such as consolidation, new competitors such as banks ushered in during the Gramm-Leach-Bliley (GLB) era, shrinking producer channels, outsourcing/off-shoring, and pressure to increase the bottom line with less resources have all contributed to create today’s tenuous environment. For the underwriter, the mission undertaken every day is to develop and deliver appropriate and timely risk management decisions w hile not unduly impeding the company’s sales goals.

In an industry with increasingly shrinking margins, underwriters have little room for error: results that are 110% of expected is bad news but 90% of expected is a windfall. The friction lies in meeting 100% targeted mortality or morbidity results without hurting sales. Too often the underwriting department is mistakenly viewed as a hurdle that sales must overcome. Unfortunately for underwriting, the result of this dynamic can be “guilt by association” where underwriters are viewed as cost centers instead of what they truly are--profit centers.

One may logically ask, “If underwriters are not procuring new business, how can they be viewed as a profit center?” The answer is two-fold. First, and perhaps most obvious is that if an insurance company’s underwriting is sub-par, so too will be its bottom line. Simply put, underwriters have always been the first line of defense for an insurance company’s balance sheet. Secondly, for those companies who now integrate underwriting and business procurement as a seamless process, the underwriter not only fulfills their risk management mission but has been transformed into a recognized contributor to business development and revenue generation.

Underwriting as a Profit Center
What are the opportunities for transforming the role of the underwriter into a recognized profit center? The answer lies in harnessing the numerous opportunities for interaction with the customer over the course of the Customer Opportunity Lifecycle. For any insurance enterprise there are several points of contact with the customer during the lifecycle of the policyholder relationship.

The Customer Opportunity Lifecycle encompasses:
1. Sales/Policyholder Acquisition
2. Application Completion
3. Underwriting
4. Customer Service
5. Claims

The Customer Opportunity Lifecycle presents many opportunities for underwriting to create revenue based on risk assessments at each point of customer contact. Does your company maximize opportunities for interaction with its customers over these key points of contact? The difference between growth and contraction for an insurance operation in today’s hyper-competitive environment may lie in the answer to this critical question. The first step is harnessing synergies that exist between underwriters, sales, customer service, and claims. Enhancing the results of these areas can result in a new-found appreciation for the contributions that underwriting can make toward revenue generation while achieving targeted mortality and morbidity results.

For example: More and more companies are augmenting their producer channel with direct marketing programs utilizing mail, the internet, and direct response advertising. Customers interested in products such as term-life, annuities, individual health, long-term care, disability income, and varieties of supplemental insurance will typically respond to these promotions by phone to inquire about their options. Using a Tele-Underwriting process, companies receiving these calls can asses the level of risk associated with the applicant through a medically expanded interview as part of the initial application process. During the course of the telephone interview there are opportunities for the underwriter to maximize this point of contact, such as:

· the applicant can be referred to a licensed sales agent during the same phone call and offered additional products or higher face amounts based on how he or she is rated, or
· the applicant can either be declined or approved in an expedited manner (or quickly referred to underwriting for further assessment).

In this example the underwriter adds value by expediting the decision process and creating additional sales opportunities. Also, in the case of customer service or claims interactions there exist similar opportunities to quickly evaluate and then expedite the opportunities associated with that customer based on the outcome of a telephone risk assessment.

How does Underwriting become a Profit Center?
In Thomas L. Friedman’s recent best seller, “The World is Flat”[1], the author describes how the world in the early stages of the 21st Century has been impacted by collaborative technologies which have created the ability for people to work from any location. In essence Friedman describes a “flattened” world empowered by networks of technology and people woven together by the internet in a seamless, real-time environment—regardless of where the workers are located. What does this mean for the insurance industry? What does it mean for underwriting? Is it a threat? Is it an opportunity? Or is it both?

The threat is that anyone’s job could be moved to another location for less money and (perhaps) greater results. Conversely, the opportunity lies in using technology and its related concepts to one’s advantage by contributing to the enterprise wide goals of your company. The barriers to collaborating across a wide range of personnel and locations are almost entirely gone. Companies are moving quickly to embrace this new environment and here’s the good news: The necessary “technological advancements” are already at your fingertips in the form of an internet connection and a telephone.
Now is the time for companies to assess if they are selling and underwriting products in a vacuum or as an enterprise-wide “network”. Companies should determine which techniques, such as speed underwriting, tele-underwriting, and risk triage, could be used in concert with sales and marketing programs that can open the door to offering higher priced products (up-selling) or other types of products and riders (cross-selling). In an environment that seamlessly integrates risk management and marketing, opportunities for up-selling and/or cross-selling are created through the real-time linkage of underwriting and sales.

The formula is easy to understand: by placing the right risk management and sales personnel on the phone at the right time working from a web based environment; companies can approve/decline, increase, decrease, or modify the type, size, and/or features of an insurance product being sold, underwritten or serviced. The value of this approach is difficult to refute: by combining risk management and sales, companies can enhance revenue and profitability by increasing product availability, sales, service and productivity; all while decreasing unit costs.

Why Should Underwriting Operate as a Profit Center?
The insurance industry has changed radically over the last two decades and companies that wish to continue operating in the next decade must adapt. The unique talent found within an insurance enterprise will drive the process of adaptation. The talent that not only survives, but thrives in this new era will need to look beyond their specific areas of responsibility and think on an enterprise-wide basis. Underwriting and sales are two of the more important and unique functions of an insurance company. How these areas operate -- and co-operate -- will dictate much about how well a company functions.

A company’s leadership is primarily focused on overall performance and growth. If individuals and/or departments are thinking and acting the same way, then management tends to respond favorably to enterprise minded or “team players”. If areas so key to the success or failure of a company are actually working together to improve overall outcomes, and not just perpetuating the unique goals of a singular agenda, then management should be very pleased.

It is no secret that revenue generators are treated well by the companies they represent. As the industry landscape continues to shift on a daily basis, it would be wise for underwriters to position themselves as a recognized part of the revenue generating team. As the saying goes—the best offense is often times a strong defense.

Conclusion
Today’s world requires enterprise-wide thinking and collaborative action. Technology has made it possible for anyone to work as part of a team from anywhere. Insurance companies need to capitalize on every possible touch point with the consumer to create profitable revenue opportunities. By integrating risk management and sales, companies can speed up business acquisition, improve risk assessment, reduce costs, and enhance their bottom line.

1: The World is Flat (A Brief History of the Twenty-First Century), Thomas L. Friedman, Farrar, Straus, and Giroux, NYC, 2005

Original version published in On the Risk, December, 2005 as Underwriting as a Profit Center or How I Survived the 21st Century
"Reprinted with permission of ON THE RISK, Journal of the Academy of Life Underwriting www.alu-web.org"

• Bringing Together the Pieces of the Insurance Puzzle

2008-03-06T17:43:00.000-08:00

published February, 2007 - InsuranceNewsNet and HealthDecisions, InsureIntell, April, 2007, ProducersWEB, August, 2007

Bringing Together the Pieces of the Insurance Puzzle

Executive Summary

In the previous installment of this series we discussed the need for underwriters to think and act like profit centers. We introduced the concept of underwriting and distribution working together in unison to improve both risk experience and sales results. Keeping ones head down and not thinking or caring about how your actions impact the enterprise is not a formula for success in today’s “flattened world”. In this installment we will examine the pieces of the insurance puzzle, explore how to bring them together, and contemplate ways to make sure you are on the winning side of the drive to decentralize (outsource) insurance industry processes.

What are the pieces of the puzzle?

True mastery of the insurance puzzle requires understanding the lifecycle of an insurance policy. As it is with any lifecycle there is a beginning, middle, and an end. The difference between success and failure in a business environment is the ability to recognize and harness the points of connection across a transactional lifecycle. Too often key business functions operate in a silo failing to see the big picture or recognize the opportunities to have a more significant impact on the overall operations and bottom line.

In the case of an insurance transaction, this beginning/middle/end lifecycle can be equated to the pieces of a puzzle.

The first piece of the puzzle is the front-end of a transaction in the form of initial customer interaction through the process of sales or customer service. Whether a new customer is being acquired or a current customer is being supported-- this is an important first opportunity to create and/or enhance the customer relationship.

The next piece of the puzzle is the middle stage of a transaction where applications for coverage are taken and underwriting (in a variety of forms) is conducted. This critical stage can make or break a company-- yet this is probably the most misunderstood and taken for granted piece of the puzzle. Not only does accurate risk assessment have a direct impact on a company’s bottom line, but this stage of the puzzle is the bridge between the front-end and the final piece of the puzzle.

The back-end of a transaction-- the final piece of the puzzle-- is where administrative and business processing as well as claims management and customer support occurs. This is where success in the first two pieces of the puzzle is delivered or where deficiencies emerge. For most companies, this is where the bottom line is measured.

Keeping Pace with Rapid Change

Today, there are a number of societal and business dynamics that make it impractical for an insurance enterprise to operate in non-collaborative silos. As populations age and become more mobile, it is difficult to stem the tide of attrition across the ranks of employees that have received extensive training and posses much in the way of a company’s institutional knowledge. Companies are no longer investing in significant training programs and employees no longer enter into a “lifetime contract” with their employers, as was the case in decades past. We live in a much more disposable society and that cuts both ways—it can hurt employees but that dynamic is also coming around to haunt companies.

For insurers these dynamics have manifested in a number of ways that now permeate the industry:
· The captive agent is becoming scarce and the broker system has become less focused on insurance products and more directed towards financial planning—of which insurance is just one of the items on a commoditized punch list.
· One of the last generations of underwriters to receive extensive, company specific training and experience over years is reaching retirement age en-masse.
· It is becoming increasingly difficult to handle underwriting and administrative operations during the peaks and valleys of the annual insurance-business cycle.
· Cost savings and improved workflow from automation and outsourcing are becoming difficult to deny and/or ignore.

Every piece of the puzzle presents challenges and opportunities. The answer to surviving this rapid pace of change is to not fight these dynamics—but instead embrace them.

Who are the winners?

We live in what has been referred to as a “flattened world” where collaborative, web enabled technologies can now tie qualified personnel together to work on a Real-Time basis from any location in North America-- and around the world. In today’s reality the bad news is also the good news—what makes it possible for jobs to be outsourced and/or moved overseas also makes it possible for jobs to be moved into your living room or home office. This means that underwriters contemplating the next chapter of their life can do so with the comfort of knowing that flexible arrangements making use of their skills are becoming much more common and accepted—and in fact it is quickly becoming a necessity. This also means that underwriting departments can not only soften the blow of key retirements, but actually bolster their resources by tapping into a significant talent pool on an as needed basis.

The companies quickest to adapt and make use of these flexible resource arrangements are the ones in the best position to prosper in the “flattened world”. Adapting to the use of flexible assets -- by either becoming one or mastering the use of them -- is the key to becoming a winning piece of the puzzle.

But that’s not how we do it…….

Can you imagine the conversations around the lunch table at the typewriter factory thirty years ago when the topic of personal computers first came up? Documents had been written on typewriters for decades. They were in every office, school, and a majority of homes throughout the world. Who would ever give up their solid, reliable and ubiquitous typewriter for something like a personal computer? We’re set for life at the typewriter factory! Well, take a look around your office or home right now and find a typewriter (I’ll wait). The business world moves fast and it has no remorse about leaving late-adopters behind.

In today’s flexible economy companies must look at their processes and break them down into component pieces and then ask 2 questions:

· What can be automated?
· What can be outsourced?

Underwriting at any level is a very serious and specific science. Unfortunately, as we all know, it is a discipline that can be easily underestimated in both its complexity and bottom-line impact for an insurance company. But what happens to a company’s risk experience if there is a lack of qualified talent due to attrition or workflow overload?
To assure successful risk management and expeditious approve/modify/reject capability; it is critically important that experienced underwriters and risk managers are used for the risk assessment process—not chasing missing application information or glorified data entry.

It is a matter of looking at workflow to identify where the bottlenecks are (too much paper, not enough staff, too much administrative work and not enough underwriting, etc.) and looking at how automation and outsourcing can get the process moving again. It is not about replacing people with cheaper options it is about empowering staff to do what they do best. Underwriters and other specialized personnel should not be diverted to perform administrative tasks that could be more cost effectively automated and/or outsourced. An insurance company should NEVER abdicate its responsibility to manage risk. An insurance company should ALWAYS look at how it can do a better job of managing risk and improving efficiencies and bottom-line results.
.

So where do we go from here?

Companies need to take a hard look at their volume cycles and staff/budget levels. If volume exceeds staff capacity to turn around applications in a timely manner then outsourcing should be considered. The resources are out there and the expertise exists. There are enough proven models and resources across the industry that no company need go in this direction alone.

Some specific models currently being used by the industry include:

· Companies are overcoming the “paper problem” with imaging technology and/or sending data entry and interpretation to offshore locations where the process can be done for a fraction of the cost and during night hours. These companies are experiencing a workflow process that is operating at almost 24 hours a day with access to electronic files now constantly at their fingertips.
· Companies are overcoming staffing problems caused by retirements, disabilities, peak volumes and holidays by using seasoned and semi-retired underwriters. One company was able to utilize a dedicated team of remote underwriters to work from their homes on an ongoing basis. Using a secure web-enabled platform, the remote team underwrites individual life insurance cases with approval limits up to $5 million.
· Companies are overcoming delays and costs associated with acquiring new business through tele-underwriting programs. These companies are experiencing reduced costs for acquiring new business (including reducing APS orders), increased quantity and quality of information acquired for application completion and underwriting, faster more accurate application approval and declinations, improved customer service, and acknowledged improvements in overall process for the producer, the carrier, and the customer.
· Companies are overcoming the divide between distribution and underwriting by integrating these functions. One company is experiencing great success by referring sales from financial advisors directly through a “rules-based” application completion and tele-underwriting process. Speed of issue, increased policy placement, customer experience, and persistency have all increased dramatically once sales and underwriting started working together as a team.

Conclusion

Competition is fierce and the winners in today’s flexible economy are those that can not only adapt, but also prosper from the impact of collaborative technologies and the decentralization of the corporate environment. Companies need to breach operating silos and bring customer acquisition/service, application completion/underwriting, and administrations/processing together into a seamless, collaborative environment. One of the tools to accomplish this goal is to break down the lifecycle of an insurance policy into the beginning, middle, and end stages of a transaction.

Unavoidable market dynamics are challenging insurance companies in the form of staff attrition, lack of training, long-term career development, and the emergence of global automation and outsourcing. Insurers can take advantage of outsourcing and remote arrangements to handle volume cycles and manage the impact of staffing challenges. Further, companies able to bring together the pieces of the puzzle and identify opportunities for outsourcing those functions that hinder the productivity of operations and staff will be steps ahead of the competition.

Original version published in On the Risk June, 2006 as Underwriting as a Profit Center: Bringing Together the Pieces of the Puzzle
"Reprinted with permission of ON THE RISK, Journal of the Academy of Life Underwriting www.alu-web.org"

Underwriting in your Underpants: Remote Underwriting Study 2007

2008-03-06T17:40:00.000-08:00

Released at 37th Annual MUD Meeting as reported by National Underwriter, January, 2007, and featured by Insurance News Net, January, 2007, InsureIntell, February, 2007, Hot Notes by Hank George, 2007, posted on SmartBrief

Underwriting in your Underpants: Remote Underwriting Study 2007

Executive Summary

In December, 2006 we published the collective thoughts of a number of very experienced underwriters about the state of remote underwriting. They had all made a successful transition from working in the home office to their own “home office”, and they were more than willing to share their insight.

During a series of in-depth interviews in the spring of 2006, we heard unanimous agreement that companies both large and small are sharing the same problem: too much work and not enough trained underwriters to go around. The supply of experienced underwriters has been shrinking for years and there has not been enough emphasis placed on long-term training to replenish this diminishing resource.

All of our participants agreed that well trained and experienced underwriting resources are getting harder to find and it will only get worse. They recommend that it is time to start thinking out of the box and consider using remote/outsourced underwriters to fill the gaps.

The response to this article was strong enough to warrant further analysis of the growth of remote underwriting. Starting in December, 2006 and continuing into January, 2007, we revisited this issue in the form of a survey, which included both closed ended and open ended questions, to seek a better understanding of this issue from the perspective of three distinct cohorts:

· Remote Underwriters (currently working from home as a contractor or employee)

· Life/Health Carriers (surveys sent to 225 companies)

· Reinsurers (all of the top U.S. life reinsurers participated)

More Similarities than Differences

We found more areas of agreement than disagreement across the three categories of participants. For example, all participants agree that remote underwriters have more undistracted time, and are more or equally productive as compared to working in an office environment. Helping to drive that productivity boost is the fact that the majority experienced 30 or more hours of underwriting a week as well as significant “off-hours” underwriting (before or after office hours and weekends). The majority of participants agree that to be successful with remote underwriting, dedicated office space and equipment is important. They also advised that pro-active efforts should be made to stay current with underwriting and medical information, and that it is important to maintain peer level communication. A theme that continues to emerge and be confirmed through objective measures is the lack of training and long-term grooming of underwriters. All agree that they would make positive recommendations to colleagues about remote underwriting.

What Advice Would You Give?

A section of the survey asked two open ended questions of our participants. We found the range of responses and the level of enthusiasm that so many participants expressed about this issue to be fascinating. Although the general consensus about remote underwriting is most definitely positive, there were also recommendations for caution and due diligence for anyone embarking in this direction.

1) “What advice would you give to an underwriter contemplating working from home?”

The underwriters currently working in a remote environment offered practical advice to potential compatriots based on many hours of experience working from home. They emphasized the need to be disciplined, a self-starter and self-sufficient, and cautioned that if an underwriter is easily distracted or needs outside motivation then working remote is not for them. They also stressed the importance of having the proper equipment and working environment. They have all established a dedicated office space to work in and go to their “office” on a regimented schedule just like going to an office outside of the home. It is important to be organized, manage time effectively and set up a work schedule and adhere to it, but they recommend that one should also remain available to work more than the normal business hours and be flexible. As a practical matter, one should always finish what you start and not allow for interruptions. They also spoke of the need to remain current by staying in touch with peer contacts and continue underwriter and industry education.

The carriers’ agreed with much of the practical advice that the remote underwriters had to offer, and they also offered caution about the realities of becoming isolated from an office environment and other people. They started out by asking a bottom line question: Are you sure you can handle the lack of contact with your fellow employee? They observed that remote underwriting is appropriate for people whose lives take precedence over their career and if one is choosing a pure, technical career path then remote would be a viable option. If a leadership position is desired, then it is important to remain in the office. Once working in a remote environment, communication with the home office is crucial and time needs to be made to make visits to the home office on a regular basis. Don’t let relationships and rapport with the management team and colleagues erode. Understand also that you will be asked to produce more file work, and you must make the experience of being remote as seamless and invisible as possible. Lastly, it takes special skills to be successful when working remotely– focus, discipline and organization. Not everyone is suited to work remotely.

In the case of the reinsurers who participated, one summed up succinctly what they look for when considering business with carriers using remote underwriters as part of their staffing model:

“I am in reinsurance and we have to consider constantly when quoting for direct writers how their underwriting staff functions and if they have a remote force how they are being managed and accounted for:”

• Must have undisturbed time (no kids, pets, outside calls other than emergencies)
• Must be self-disciplined, not easily distracted
• Must have a dedicated area that is not used by any other family member
• Must observe the same confidentiality and ethic issues as in the Home Office
• Must have dedicated equipment

2) “What advice would you give companies contemplating using remote underwriters?”

Given the opportunity, our remote underwriters were pleased to offer companies words of wisdom on successfully venturing into remote underwriting based on their personal experience. Before using a remote underwriter, a company should make sure the applicant has a verifiable ability to work well with little supervision and already has training and experience working on their own. Check resumes and references to make sure they are experienced and fluent in medical terminology, vocabulary and can spell well, and audit cases immediately when starting a new person to verify skills and experience. They emphasized the need to maintain close communication and include the remote underwriters in key meetings, new directives and case clinics, and offer training via telephone or internet conferencing. Make your best effort to communicate with the remote underwriters as if they were in the office and provide constructive feedback on how the remote is performing. Most underwriters working remotely will work hard because they want to prove themselves. But, set realistic and measurable goals, and make sure you provide the underwriters with all of the tools and systems that are required to do their job in an efficient and productive manner. Be flexible with remote underwriters’ time and they will work more hours than you expect.

The carriers that responded were able to give advice to other companies based on their experience running remote underwriting programs. They started by accentuating the positive. Remote underwriting is an excellent solution to overcome a shortage of talent when location of the home office is problematic. But, the carriers also offered words of caution about how to select the appropriate personnel to work in a remote environment. You need to be very careful of who you allow to work in this environment and ensure that (remote) staff are self-motivated and driven individuals so production and quality are not compromised. Home office underwriters should not be allowed to work remotely until they have firmly established themselves within the company. Once you have remote underwriters in place, have a service level agreement (SLA) with each remote so there is a mutual understanding of expectations, results, etc., and you need established metrics to check production. Be clear upfront on how you want your cases underwritten and provide a manual to make the transition easier. In terms of areas that will determine the long term success of a remote underwriting program, issues with technology and connectivity are critical. The voice and IT connection between the remote underwriters, the home office, field offices and producers should all be seamless. Lastly, for carriers not yet using remote underwriters but contemplating starting a program, a couple of ways to begin were recommended. Either start with a pilot program, or by outsourcing or hiring contractors instead of employees since this makes it much easier to adjust personnel arrangements.

The reinsurers offered a solid check list of priorities for carries to consider as they launch or evaluate a remote underwriting program:
· Must provide equipment/communication needs/IT security
· Must provide clear and precise expectations in terms of productivity, delivery, accountability (job description must be specific to a remote position)
· Must have measurement controls to audit remote function (total output, time service, offers, placement, phone interaction)
· Must have periodic “conferencing” or “training” interaction with remote staff
· Must treat remote employee with the same consideration as Home Office and not ignore (i.e. out of sight, out of mind)

Conclusions-- Myths vs. Facts

Myth: Remote underwriting is a passing fad that will never catch on.

Fact: Remote underwriting is in fact a trend that has been growing for years and there are
numerous examples of companies running successful programs for 2-5 years or more.

Myth: Remote underwriting could replace the need to staff an office with underwriters.

Fact: Remote underwriting is not a replacement for the home office underwriter. It is a
tool to enhance productivity through staff augmentation, offset the loss of
experienced personnel to retirement/attrition, and a way to overcome relocation
problems when attempting to attract personnel.

Myth: Reinsurers look unfavorably at companies using remote underwriters.

Fact: Reinsurers do not look down on the use of remote underwriting, and in fact, as a
group, reinsurers rate the environment for remote underwriting even more favorably than both the carriers and the remote underwriters– with the majority of reinsures participating in this study currently using remote underwriters themselves.

Myth: Using remote underwriters is a great way to cut costs and trim budgets.

Fact: The majority of companies indicated that they achieved no cost savings through the
use of remote underwriters. A number of them did qualify their answer by stating
it was still too early to accurately compare and quantify the difference of costs
associated with remote underwriters vs. that of home office underwriters.

Myth: Starting a remote underwriting program is as easy as letting some staff work from
home.

Fact: A prudent way to start a remote underwriting program would be to first launch a
pilot program using a select group of underwriters that already proven their acumen
and initiative. Areas that a company will want to trouble shoot and understand are
IT connectivity (computer and phone), production metrics, operating guidelines,
legal issues, and quantifying costs. Another viable option for using remote
underwriters for the first time would be through the use of an outsourcing company
with proven experience, systems, and personnel.

Myth: Remote Underwriters operate in a “vacuum”.

Fact: The most successful remote underwriting programs are a seamless extension of
the home office. Remote underwriters need to be supported by clear and consistent
communication and their technology must be up to date, securely connected to
the home office and receive dedicated IT support. When dealing with agents or
brokers, the fact that a remote underwriter is working on a case should be
indistinguishable.

Myth: Anyone can switch from an office environment to underwriting from home.

Fact: Remote underwriting is not for everyone. Remote underwriters need to be well
organized, self-disciplined, and not require external motivation and supervision to
consistently deliver their assigned cases.

Myth: Remote underwriting is a way to begin and/or advance an underwriting career
path.

Fact: The typical profile of a remote underwriter is someone with 10 to 20 years of home
office experience. Many remote underwriters have already achieved senior rank as
an underwriter and are now looking beyond career growth as top priority. They
find the flexibility of hours and location to be more important than office dynamics
and opportunities for advancement. Both the remote underwriters and carriers
caution that lack of “face time” and regular interaction will limit, if not rule out,
career advancement.

Original version published in On the Risk June, 2007 as Underwriting in the 21st Century: Underwriting in your Underpants
"Reprinted with permission of ON THE RISK, Journal of the Academy of Life Underwriting www.alu-web.org"

Underwriting in your Underpants: Life Outside the Home Office

2008-03-06T17:36:00.000-08:00

published December, 2006 - On the Risk and InsuranceNewsNet, March, 2007, ProducersWEB, August, 2007

Underwriting in your Underpants: Life Outside the Home Office

Executive Summary

Previous articles in this series have explored how to break down silos between underwriting and distribution, the emergence of outsourcing and automation as important underwriting productivity drivers, and we have analyzed ways to get more value from the ubiquitous --yet paradoxical-- Attending Physician Statement (APS).

The common thread throughout this series of articles is overcoming the challenges that underwriting departments must face everyday as the demand on underwriting departments increase while available resources decrease. For this installment, we spoke with a number of underwriters who have decades of risk management experience, about their perceptions of the industry today and what it is like to be part of the growing trend of “remote underwriting”.

Introduction

A “perfect storm” of trends in underwriting has emerged to challenge the industry in the early years of the 21st Century:

An alarming number of the most experienced underwriters have, or are reaching retirement age.
There are not enough well trained underwriters coming up through the ranks to fill the void.
The demand on underwriting departments to keep up is being fueled by the increasing volume and complexity of applications being generated by a growing, and longer living, baby boom generation.

When looking at the major online job search sites (Monster.com, Careerbuilder.com, etc.) there are over 4,000 cumulative postings for open underwriting positions across the life/health insurance industry on any given day. That is a lot of competition for a shrinking resource pool. Many companies are adapting to this reality by working with full and part time remote underwriters as either employees or contractors.

For this article, we interviewed a number of underwriters that are currently working from home. We asked them questions about how working outside of the home office environment has impacted their lifestyle and professional growth, and how they perceive trends that are impacting the insurance industry. The underwriters we interviewed all have decades of experience and were very candid about the positive and negative aspects of operating as a “remote” or “outsourced” underwriter.

** Each heading is a question asked of the participating underwriters
and an aggregate summary of their responses follows**

How many years have you been an underwriter?

All of the participants had significant experience as an underwriter working for life and health insurers with a range between 5 and 40 years. All have been underwriting on an outsourced basis anywhere from 1-5 years.

What companies were you employed by when you were a “home office” underwriter?

Our participating underwriters have worked for large and small insurance companies, a BGA, and in some cases for insurers that no longer exist as their former selves: Bankers Life, BISYS, Connecticut Mutual, First Continental, General American, MONY, National Life of Vermont, The Hartford, United Healthcare, and UnumProvident.

What product lines have you been responsible for?

The product lines that our underwriters have underwritten were primarily life and STD/LTD for group and individual markets, some annuities, healthcare, and LTC.

What level of underwriter were you when you left the home office?

All of the underwriters had achieved significant rank and responsibilities by the time they went out on their own. We spoke with former director and chief level underwriters, underwriting officers, and senior vice presidents. Some had been responsible for underwriting and operations with staffs in the hundreds and multi-million dollar budgets, while others had run small teams and remote offices across the U.S. (and in Canada).

How would you describe the current environment for insurers?

The industry seems to be regrouping after a period of turbulence with reinsurers and claims issues. Companies are experiencing record profits and it appears that senior executive pay is at an all-time high. A definite contributing factor to the rise in profitability is cost cutting. Underwriting departments’ staff and budgets are not growing at the same pace as new business (and the demand for ever faster time service). There is a noticeable trend over the last few years to outsource some functions that traditionally were handled in-house. Flex schedules and tele-commuting have also been on the rise. Outsourcing work has been a way to access hard to find underwriting talent and to cut costs such as benefits and overhead. There seems to be a decline in confidence of internal underwriters and awareness that significant talent is now available on the “open market”.

The general consensus of the current condition of underwriting departments was not entirely favorable: understaffed and overworked, big growth in trial applications and APS bottlenecks, limited administrative support, not enough training, deteriorating relations with the field, too much pressure for quantity over quality, too much interference and micro-managing, too much non-essential communication (email) and distractions (unproductive meetings) and too much stress.

What do you see happening in underwriting departments?

Underwriting is still a conservative science, but there has been a noticeable shift in attitudes over the last thirty years to higher risk tolerance as interpretation of medical science and societal issues has evolved—many things that were once entirely unacceptable are now common place (and almost quaint in retrospect). A shift in attitude has also happened in the acceptance of underwriters working from outside of the home office environment. The trend in this direction is more pronounced on the life/DI/LTC side than health. There are still issues to resolve with communication, interaction with medical directors, and remote use of systems. Overall the misconception that outsourcing means people will lose jobs is quickly being replaced by the realization that it is actually a productivity enhancer. Management seems to now view the trend as less about cost/job cutting and more about access to hard to find talent and increased productivity.

At first outsourcing seemed to be taking hold quicker in small to mid-size companies because of both cost and access to underwriter issues, but larger companies are moving in this direction now for the same reasons. As more volume is driven by brokers and the marketing of guarantee issue and simplified products; underwriting departments are not staffed to keep up. There has been a large increase in trial applications which means more work and the rising importance of allocating already stretched resources to sift through the profitable and unprofitable cases. Costs and delays associated with requirements continue to be a bottleneck for underwriting departments. Today, underwriters are being judged as much on quantity of work and time service as they are on risk experience. This dynamic is creating an even bigger divide between the upper ranks of underwriting management and the rank and file staff.

Is there enough training and grooming of underwriters today?

In the past, companies put much more emphasis on formal, long-term training. Underwriters operated almost like an apprentice and were part of training units. They would be groomed and work their way up inside the same company over years. Now underwriters are “on their own”. Underwriters rising through the ranks over years are quite rare. Companies are less interested in training and instead look to hire the talent they need when they need it. Companies can’t afford to wait years for home grown talent to work their way up through the system. Training remains an important aspect of an underwriter’s development and being able to stay current on evolving underwriting and medical issues. Training still exists but it has become more “modular” and specific to conditions or trends. Training and staying current is now more the responsibility of the individual to find the resources and time on their own.

This reality has made the highly skilled/trained underwriter a hard to find (and valuable) commodity as experienced underwriters that have been in the business 25 years or more begin to retire. For some underwriters this can mean a lucrative “free agent” environment or opportunities to operate on their own terms as a contractor.

Describe the experience of being an underwriter working from home

Every one of the underwriters interviewed cited how much they enjoy the freedom that working from home has allowed them. They enjoy the ability to better accommodate personal time with their professional responsibilities. Many are able to contribute to family obligations by doing their work during off hours. The trade-offs cited include: feeling like they need to work harder to justify their at-home status, as well as feelings of isolation and being “out of the loop” when not interacting in an office environment.

The underwriters say that they are more productive because they are not interrupted by in-office distractions such as non-productive meetings, water cooler gossip, and office politics. They say that remote system access and the option to work on a 24-7 basis contributes to their productivity, and communications through email and conf calls keep them informed. They do need to take the initiative to stay “in the loop” with colleagues, read industry periodicals, attend industry meetings and join organizations such as AHOU to stay involved. All of the underwriters agreed that working from home is not for everybody and that it takes discipline, self-motivation and the ability to overcome the “isolation” factor to succeed.

What advice would you give to an underwriter contemplating working from home?

You will need to set up dedicated space in your home and treat it as if you are going to the office—even though you are not commuting to an office, your attitude needs to be that you are “commuting” to the next room when at work. Build and stick to routines and establish discipline with your schedule and work habits. You will need to make the effort to stay on top of trends in underwriting and should be active with underwriting groups. If you are a contractor, don’t put all your eggs in one basket and look to hook up with outsourcing companies as a source of assignments. Make sure you understand your finances and the tax benefits of working from your home office. You will need your equipment to be up to date, dedicated to this use and you should have high-speed internet. Lastly, try experimenting with working from home while still in the office before setting up shop and making the move.

What advice would you give companies contemplating using remote underwriters?

Companies need to realize that much of the best underwriting talent is now retiring but still interested in working with creative/flexible arrangements. Smart companies can actually benefit from this trend. Realize that remote workers can actually be more productive and are very motivated to prove it. Some work can be broken up like an assembly line shared between remote underwriters and home office underwriters (i.e. tele-underwriting, APS summaries, quick quotes, claims review, etc.). Match up remote and on-site underwriters from a cost-benefit and productivity comparison perspective. Examine IT options for remote and secure connectivity. Companies should at least experiment with remote underwriters to get a feel for how it would work for them. Get a plan in place because this it where underwriting is going.

Conclusion

Companies both large and small are sharing the same problem: too much work and not enough trained underwriters to go around. The supply of experienced underwriters has been shrinking for years and there has not been enough emphasis placed on long-term training to replenish this diminishing resource.

All of our participants agreed that the chief underwriter’s responsibility is to deliver optimum mortality/morbidity results. Today’s environment can either propel or hinder an underwriting department’s ability to deliver those desired results. Well trained and experienced underwriting resources are getting harder to find and it will only get worse. It is time to start thinking out of the box and consider all the tools that are available. Using remote/outsourced underwriters is a potential means to deliver maximum results with the most cost and time effective resources available.

Successful careers in underwriting are extending beyond a centrally located corporate office—with both underwriters and home offices benefiting.

Original version published in On the Risk September, 2006 as Underwriting in the 21st Century: Life Outside the Home Office
"Reprinted with permission of ON THE RISK, Journal of the Academy of Life Underwriting www.alu-web.org"

Exploring the Direct-to-Consumer Channel

2008-03-06T17:33:00.000-08:00

published September, 2007 - On the Risk, and InsuranceNewsNet, September, 2007, ProducersWEB, November, 2007, posted on SmartBrief

Exploring the Direct-to-Consumer Channel

Executive Summary

This article series continues to explore the evolving landscape of underwriting in the 21st Century. Some of the themes that have already been covered include: overcoming barriers between underwriting and distribution, maximizing the value of an APS, the growth of remote underwriting, and risk factors associated with private aviation. Another area worth exploring is the growth of direct-to-consumer distribution channels and its intersection with underwriting. For this article we took a look at the various means by which carriers and producers are reaching the consumer through mediums such as the internet, broadcast and print advertising, direct mail, and the use of contact centers to directly engage prospective insureds on a mass scale via the telephone.

In addition to our primary research, we spoke in detail with Colonial Penn, one of the leading carriers selling a variety of insurance products direct-to-consumer, and InsWeb, one of the leading online insurance portals.

Introduction

The insurance industry has numerous options to consider for distribution channels. Without question the producer channel is still the primary driver of business, but alternative channels such as banking, affinity marketing, and worksite are just some examples that have become increasingly prominent. Another growing channel is direct-to-consumer marketing.

According to the KEHRER-LIMRA Bank Insurance Benchmarking Study, banks that sell life and health insurance through direct marketing channels such as mail, tele-services, and the internet yield “per bank customer” revenue equal to banks that opt to refer leads externally to traditional channels such as brokerage or captive agents. The difference is that the banks using direct marketing experience significantly higher net revenue because, “the acquisition expenses of direct marketing pale in comparison to the cost of face-to-face selling”.

Direct marketing is a long-standing and proven method for selling almost every type of good and service in today’s economy. The benefits of direct-to-consumer marketing come from speaking directly to the customer. It can be both a cost effective addition to a company’s mix of distribution channels and an opportunity to leverage existing communication vehicles. It is also an opportunity to build a bridge between the underwriting and marketing areas of an insurance company.

Real Time Underwriting as Part of the Sales Process

Direct-to-consumer marketing can be a tool to create leads for producers or it can be a low cost - high margin alternative distribution channel. Revenue opportunities lay in both the acquisition of new subscribers and the up-selling/cross-selling of existing policy holders. There are four elements to effective direct-to-consumer marketing of insurance products:

1. Advertising mediums (broadcast, print and direct mail, on-line push/pull)
2. Fulfillment vehicles (call center, mail house, and website)
3. Underwriting (tele-underwriting and risk triage)
4. Relationship Management (customer service, administration)

Utilizing a risk triage process, applicants can be screened at the point of initial contact and then further evaluated for eligibility conducting a phone based personal history interview and/or underwritten by senior lever underwriters. Following a simple script, answers provided during an initial interview, or via a web portal, will quickly determine if the applicant’s health history warrants further consideration. If so, a more detailed interview following a rules-based survey will help determine if a policy could be issued in an expedited manner, or if it is necessary to obtain additional information under further review by an underwriter and/or medical professionals. In addition, information acquired during this process can also open the door to further marketing opportunities to cross-sell other products or up-sell higher face amounts.
Real time risk management in support of a direct-to-consumer marketed product can expedite the application-to-issue cycle, reduce instances of incomplete applications and stalled issuance, and reduce new business acquisition costs. By incorporating simple underwriting practices across the lifecycle of customer interaction, companies can open up new opportunities to approve/decline, increase, decrease, or modify the type, size, and/or features of any insurance product being sold or serviced.

According to Tom Fiordimondo, Vice President for Life/Health Marketing with Colonial Penn, “We believe in the value of incorporating some form of risk management up front into direct-to-consumer sales to avoid being burned later by bad risk experience. We measure mortality experience, persistency, and claims over years to better manage mortality expenses. In the process, our underwriting efforts contribute verifiable risk results to better define marketing budgets based on real results and quantifiable bottom line impact of policies being sold to particular market segments.”

From the perspective of InsWeb Senior Vice President of Life Insurance Sales and Operations Todd Ewing, “InsWeb is like the Lending Tree of insurance, with 5 million transactions per year all conducted online and by phone. Our goal is to pre-screen and qualify applicants for the best rate available. We use an automatic rate calculator based on an initial screening application and then through a tele-underwriting process, further review a candidate’s insurability. Two issues that have become more of an underwriting factor are: healthy lifestyles and foreign travel. We try to educate the applicant on how to get the best results from their exams and use available medical information for the advantage of both the applicant and the carrier, so the applicant can get the best rate and the carrier gets the right match based on their established criteria.”

Direct-to-Consumer products are for the most part small face value policies and fly under the radar screen of reinsurers. As marketing programs and risk management becomes more sophisticated, the face values are getting bigger, and as they exceed the $100,000-$200,000 level reinsurance starts to become a factor. In the case of web portal sales, it is not uncommon to see policies written in the seven figure range and fall under the jurisdiction of a reinsurance arrangement. There have been instances of reinsurer backlash from claim experience because pricing can become aggressive in this channel and reinsurers have pulled out or refused to cover policies/claims generated through this channel.

Direct-to-Consumer Communication Mediums

There are numerous vehicles being used today by the insurance industry to reach the consumer directly. Carriers and producers are both adept at using advertising mediums such as the radio, TV, and print outlets like local or national newspapers and magazines. The internet as an insurance sales tool has grown considerably over the last 5-10 years as well. Insurance companies such as New York Life in partnership with AARP, Colonial Penn, BCBSA, MEGA, Gerber Life, AEGON-Direct, ING Direct, Progressive, and GEICO all run successful direct-to-consumer marketing programs.

Colonial Penn relies exclusively on these outlets to reach consumers and measures effectiveness from a variety of factors. According to Tom Fiordimondo, “We measure marketing costs against annual premiums to derive an ROI. We look at: cost to generate leads vs. quantity of leads generated vs. percentage leads converted vs. policy persistency to track our marketing costs and rank best to worst mediums. TV is an expensive medium with production costs alone hitting six figures before one lead has been generated. By comparison, mail is very inexpensive and can deliver precision targeting. If looking for an older audience, TV can be effective by reaching people at home during the day. Whereas working age people watch TV in the evening when rates get much more expensive. It is important to have an internet strategy with the less than 40 age range being very internet driven and we see the 40-60 age range as being much more viable online than the 60 and older age range.”

The internet is the sole domain of InsWeb and they see customer behavior relative to online shopping continually evolving. Executive Vice President of Business Development Jamie Pickles says, “We are an online screening portal for carriers and a pricing aggregator for consumers. We have seen an evolution in consumer behavior with more comfort and confidence shopping online. The consumer views the process as having three stages:

1) Initiate
2) Inform
3) Narrow Options

As this channel continues to grow and produce better educated/prepared consumers—carriers, agents, and brokers are all recognizing the importance of an online, direct-to-consumer strategy.”

Direct-to-Consumer vs. Producer?

When it comes to developing new business, the producer is still king. But is a direct-to-consumer strategy a threat to the producer? The answer is—it depends. The pervasive products sold through this channel are simplified issue and are not products that producers focus on. Yet there is a big and underserved market for lower amount policies and the direct-to-consumer approach is the ideal way to reach them. By adding a risk triage approach to the screening process, companies are better qualifying the leads they generate and opening up the door to sell higher amounts and/or offer additional products and riders.

According to Tom Fiordimondo, “Premiums generated through direct-to-consumer marketing constitute a single-digit percentage of the industry total as compared to producer generated premium—and that may always be the case. Web portals, a form of lead generation, have been on the rise and tend to generate higher face value policies. Producers themselves are actually very skilled users of direct-to-consumer marketing as a source of lead generation and carriers also use the same to generate leads for producer channels. As opposed to the producers, we tend to look at all marketers in the direct-to-consumer space as our real competitors (sellers of Thigh Masters and Ab-Blasters included). We are competing for airtime and eyeballs on our mail pieces, and we are all after the same thing—the attention of the consumer and their willingness to pick up the phone and act now.”

Conclusion

Traditionally, underwriting and marketing operate in silos. The real time nature of leads generated through direct-to-consumer marketing efforts open up the opportunity for underwriting and marketing to work together as partners. Marketing can inform Underwriting of what is happening in the marketplace with competitors’ rating and pricing relative to a particular product being promoted, and underwriters get an opportunity to interact with the applicant without any mediation or management by producers. Underwriting can help inform Marketing about what kind of applicants are responding to a promotion and if the products and pricing are compatible with the messages and mediums being used to drive responses. Both sides can benefit from real time gathering and deciphering of market intelligence, which allows for testing marketing campaigns and product mixes before incurring the expense of a major product introduction.

By adding a direct-to-consumer capability: insurers are bolstering both their marketing and underwriting capability, opening up a channel that is ideally suited to reach underserved market segments, communicating directly with consumers in a cost effective manner, and helping to drive more revenue to the bottom line.

Original version published in On the Risk September, 2007 as Underwriting in the 21st Century: Exploring the Direct-to-Consumer Channel
"Reprinted with permission of ON THE RISK, Journal of the Academy of Life Underwriting www.alu-web.org"

Mastering the APS Paradox

2008-03-06T17:28:00.001-08:00

published September, 2006 - On the Risk and InsuranceNewsNet, February, 2007, InsureIntell, February, 2007, ProducersWEB, September, 2007

Mastering the APS Paradox

Executive Summary
In the first two articles we discussed the importance of distribution and underwriting working together in partnership, as well as the need to breach operating silos across the lifecycle of an insurance policy. We also examined market dynamics such as staff attrition, lack of training and long-term career development, and the emergence of global automation and outsourcing all of which are posing serious questions for the insurance industry.

It is our supposition that underwriters in the 21st Century are uniquely positioned to benefit from these dynamics by taking advantage of technology and outsourcing solutions to help manage the stresses caused by fluctuating volume cycles and the ever increasing impact of staffing challenges. Another challenge to consider in underwriting (and claims) is time and cost effective use of the Attending Physician Statement (APS). In this installment we will discuss tools available to better manage the process of acquiring and then utilizing the APS as a productivity driver—and not a productivity detractor.

Introduction: The Paradox
Attending Physician Statements (APS) have long been an industry paradox. On the one hand they are an important source of information about an applicant’s insurability, but they are also inconsistent, duplicative, voluminous, and expensive to procure. Why do companies use an APS? Simply defined, an APS contains information from medical records to allow proper pricing of mortality or morbidity risk according to company guidelines. The goal of every insurer is to cut down on their reliance/volume of APS’—and innovations in risk management such as tele-underwriting, rules based engines, and pharmacological databases have contributed significantly to that end. None the less, the APS is an indispensable tool that will continue to play a role in the risk evaluation process for the foreseeable future.

Underwriting departments are back logged with more trial apps and higher case volumes than ever before. Simultaneously, they are understaffed and as a result, high-value resources (senior level underwriters) are being asked to perform administratively driven functions. The result of diverting the time of experienced underwriters in this way is:

· Decreases in productivity and case review cycle times
· Opportunity and real costs per case are on the rise
· A measurable decline in morale permeates the industry

As the saying goes, “you get out of something what you put into it”, and in the case of an APS, certain companies are getting more value and return on investment from how they handle an APS as compared to others. As the population ages and becomes more affluent, the volume and complexity of the typical APS has risen considerably. This simple fact has placed an increased burden on already over taxed underwriting departments and has added to the friction between producers and underwriters. The question is: How does one balance the desire for expeditious decision making with the need for prudent risk management?

First—build a better mousetrap
Companies have been struggling for years with the methods and services available to retrieve an APS from a doctor’s office. The cost and reliability of available options have been a challenge for companies seeking only to acquire evidence of insurability in a timely and cost effective manner. Single handedly taking on the task of retrieving an APS from a doctor’s office is clearly not practical in today’s Byzantine environment of HIPAA regulations, special authorizations, myriad copy services, payment requirements, and disorganized medical records departments.

There is no doubt that the advent of technological advances over the last ten and twenty years should have reduced the time and difficulty of retrieving an APS. But the question must be asked: are today’s time frames ranging from fifteen to thirty calendar days as good as it gets? Perhaps a few years ago that was impressive but technology and means of communication have continued to advance—shouldn’t standards and expectations for APS retrieval continue to advance as well?

Raise your expectations, raise your productivity
Companies need to take a hard look at what is acceptable in terms of time service, tracking/status, and success rates when retrieving an APS. If you could shave today’s average time frame by 1/3-2/3-- what would that mean in terms of productivity, field and customer relations, and persistency of applications taken? Underwriting departments are under ever increasing pressure to increase productivity with decreasing resources—the ability to recapture days lost to unnecessarily protracted APS retrieval time frames can’t be ignored. The time has come to expect better results and real time information during the APS retrieval process—and an average of ten calendar days is the new industry standard.

Another APS productivity factor is how underwriting departments handle the information once it arrives: Is the APS imaged or paper? Is it sorted and put into chronological order? Is the APS summarized with the key information presented as a concise health history? Are illegible entries and missing records annotated? Not only is the time it takes to get an APS important, but the circumstances of its arrival and utilization are also key factors that impact productivity.

What is an APS Summary?
An APS that is summarized by a trained and experienced risk management expert can be the difference between dealing with a frustrating burden and working with an important productivity tool. The components of a well constructed APS summary include a health history synopsis that chronologically details tobacco use, medications, prior conditions, lab tests, BP, Cholesterol, HDL, LDL and Cholesterol/HDL Ratio.

But how should companies use their internal, high value resources when it comes to the APS—to perform the laborious administrative task of deciphering and summarizing the medical information or focus on using the medical information to underwrite and make decisions?

A high level underwriter is not necessary to prepare an APS summary. Junior level underwriters and medical professionals can be trained (and are often better qualified) to dissect an APS and create a composite of the applicants medical history. A high level underwriter is necessary to interpret that medical summary against a company’s guidelines and procedures to evaluate the insurability of the applicant and then issue a risk based decision. An underwriter’s focus should be on underwriting and not on sorting records to begin that process.

Consider a visit to a doctor’s office
Think about your last check up. When you arrived at the office the reception area took care of your paper work. When you went in to the exam room an intern or nurse measured your vitals and “summarized” basic medical elements such as height, weight, blood pressure, heart rate, etc. in advance of the doctor’s arrival. The doctor’s time and value is maximized by having a patient composite prepared in advance by trained professionals who know how to deliver a “summary” that allows the doctor to focus on core functions: diagnosis, treatment, and prescriptions.

Henry Ford had it right when he devised the assembly line to manufacture automobiles-- it is the most time and cost effective way to bring a group of trained professionals together to focus on delivering their area of expertise as part of a collective effort to produce the desired end product.

Just like in the doctor’s visit, the components of an APS summary are very specific and play a similarly important role as part of the underwriting process. Specialists with underwriting and medical backgrounds are trained and have experience in the specifics of medical terminology, chronological sorting, reviewing, note taking, annotating gaps and indecipherable entries, and double checking for duplicative entries/records, inconsistencies, and spotting patterns. To ensure quality and reliability of data, very strict quality standards, training regimens, and audit schedules must be in place.

Underwriters supported by this type of “information triage” will be more productive and can underwrite more cases per hour—and therefore become a more profitable contributor to the bottom line.

What should a company look for when outsourcing APS summaries?
An APS summary is a very specialized risk management tool. A minimum requirement to be able to prepare an effective summary is knowledge of medical terminology and pharmacology. Underwriters and medical professionals are well suited to be trained to apply their knowledge and experience in this direction. In the case of a third-party provider of APS summaries, look for a company that offers more than a “one size fits all” approach to APS summaries.
Every insurer’s guidelines and workflow demands are different and an APS summary needs to be customized to match the needs of the underwriters.

Remember—the reason you are looking at an APS in the first place is to give you information about the insurability of an applicant so you can make a sound risk based decision. An APS summary is a productivity tool specifically designed to increase the effectiveness of that process. If you decide to use outside resources to produce APS summaries make sure you are working with an organization that understands your needs
and has the appropriate personnel and processes in place to deliver a high quality tool that is consistent with your guidelines.

Conclusion
Although companies are constantly looking for ways to reduce their reliance on the APS—it remains an important tool in the underwriting and risk management process. The key to success for an underwriting operation (and claims) is to obtain an APS faster than your competitor and then to extract and use the pertinent information in the smartest, most efficient manner possible. For those seeking to underwrite successfully in the 21st Century-- working faster and smarter will always be the key ingredients.

In today’s stressed underwriting environment—maximizing the value and utility of the APS is just what the doctor ordered.

Original version published in On the Risk September, 2006 as Underwriting in the 21st Century: Mastering the APS Paradox
"Reprinted with permission of ON THE RISK, Journal of the Academy of Life Underwriting www.alu-web.org"

Understanding the Risks of Private Aviation

2008-03-06T17:22:00.000-08:00

published March, 2007 - On the Risk and InsuranceNewsNet, July, 2007 World News Network, July, 2007, ProducersWEB, October, 2007

Understanding the Risks of Private Aviation

Executive Summary

With the tragic accident in 2006 of Yankee’s pitcher Corry Lidle shining a spot light on the potential risks involved with private aviation, some in the life insurance industry have cast a concerned eye on their exposure when covering a licensed pilot. Underwriters are looking for more information to evaluate the latest crash data as well as advancements in avionics and safety technology to better understand and quantify the risks involved with flying. Often a private pilot will be an individual of substantial net-worth and most likely covered by life and disability insurance worth millions of dollars. In this article we will provide some basic reference information to better inform underwriters and claims examiners for cases involving a private pilot. Among the areas that we will cover: aviation basics, levels of licensing, technological advancements, and statistics that categorize and quantify crash scenarios.

Introduction

There are four basic areas to understand when considering risks associated with a private pilot:

Aviation 101:
· Licensing
There are a variety of categories for a private pilot license: Student, Recreational, Private, Commercial, and ATP. Pilots are also rated for flying using visual (VFR) reference and/or instrument (IFR) reference. An instrument rated pilot is able to fly relying solely on their cockpit instrumentation in situations of reduced or zero visibility. Those pilots possessing a license designation of “private pilot” represent the highest percentage of crash totals among the license types. As crashes related to pilot error account for as much as 80% of all incidents; training, licensing and experience are all critical safety measures.
· Aircraft
Private planes are categorized across three classes of fixed-wing general aviation aircraft: single-engine fixed landing gear, multi-engine retractable landing gear and multi-engine. Other classes of aircraft would include jet engine, sport, glider, antique, and homebuilt aircraft such as an ultra-light. Single-engine aircraft account for the highest crash totals, and although multiengine aircraft have far fewer accidents, they are far more likely to be fatal when they do occur. Statistics show that the more complex the aircraft the greater the chances of fatalities in an accident. In fact, the "lethality index” (percentage of accidents that result in death) in a single-engine aircraft is about 10% as compared to multi-engine aircraft at about 50%.
· Flight Hours
Private pilots are also ranked by actual flight hours in a specific type of aircraft. A pilot with less than 500 hours is considered a novice and generates the highest percentage of crash totals. Ironically, pilots with over 4,000 hours are considered very experienced but as a group represent a not insignificant percentage of crash totals—possibly indicative of over confidence and higher risk tolerance for more experienced pilots. Over the last decade there was a 26% decrease in accidents per 100,000 hours flown and a 25% decrease in fatalities.
· Type of Use
There are three categories of non-commercial aviation: personal/recreational, business (uncompensated piloting) and corporate (compensated piloting). In terms of safety, each of these categories is successively safer than the other. Removing commercial aviation from the equation, the remainder of all flying across the three remaining categories breaks down as follows: Personal/recreational aviation accounts for 50% of all flying but 76% of fatal accidents, business use accounts for 15% of aviation and 3% of fatal accidents, and lastly corporate aviation accounts for almost 6% of flying and less than one half of 1% of fatal accidents.

Highlights from crash statistics (2005 AOPA ASF Nall Report - www.aopa.org):
· There has been a 25% decrease in total and fatal accidents over the reported ten year period—and within this period, since 2003, there has been a 7% decrease in accidents and a 3.5% decrease in fatalities.
· 75% of accidents can be attributed to pilot error as compared to less than 8% attributed to mechanical problems.
· Although landing is the leading category of accidents, it is one of the least likely to cause fatalities (due to the slower speed of approach and airport vicinity).
· Pilots using aircraft for training and recreation are 7 times more likely to have an accident than those using aircraft for business (an important distinction for insurance underwriters).
· Weather related accidents have the highest percentage chance (94%) of ending in fatalities (and are one of the most avoidable with proper planning and equipment).

Perspective Based on Experience

In October of 2006, Eli Rowe, CEO of Parameds.com (PDC), addressed the current state of private pilot safety and aviation with over 1,000 of the life insurance and reinsurance industry’s leading risk management experts attending the Fifth Annual Meeting of the Association of Home Office Underwriters (AHOU) in Las Vegas, Nevada. Mr. Rowe, a nationally recognized instrument rated pilot who flies hundreds of hours a year, is a Chief Executive who has worked in the life insurance underwriting arena for well over a decade.

Mr. Rowe, owner of a Cirrus SR-22 single-prop aircraft equipped with MFD/PFD and safety parachute, highlighted some of the recent advancements in aviation technology such as real-time satellite weather data-link and WAAS GPS, traffic collision avoidance systems, engine monitoring displays, terrain and ground proximity awareness systems, anti-icing technology, airbag seatbelts, and even the safety parachute that can be deployed in mid-air to save a crippled aircraft from crashing. Mr. Rowe pointed out that Cory Lidle’s plane, which crashed into a building in mid-town Manhattan, had many of these available technologies, and the true reason for the accident as well as the failure to deploy the parachute might never be known for sure. He also pointed out that Lidle would fit into the novice class of pilot experience measured in hours as 500 or less which statistically have the highest accident rate.

“Quite possibly,” Mr. Rowe was quoted as saying, “the headlines about many of the accidents we have been seeing with TAA (technologically advanced airplanes) might be the indirect fault of all these technological advances. The irony, in my opinion, is that some pilots may be suffering from a false measure of extra confidence that his or her equipment is a constant blanket of protection, and possibly a license to take much more substantial risks than might otherwise not have been taken. This false ‘license-to-take-chances’ might be the reason so many Cirrus’s, known to have a built in parachute for the entire plane and loaded with advanced features, have had accidents in-spite of their features.”

During the month of October, 2006, it was noted that there had been three crashes of Cirrus aircraft in less than a month that resulted in eight fatalities—the Lidle aircraft among them. The manufacturer of Cirrus aircraft urged all those operating their planes to exercise prudence when making flight plans and to not challenge the elements, or their own skill levels, with a false sense of security or increased capabilities due to all of the advanced technological and safety features.

“From a mortality and morbidity perspective”, opined Mr. Rowe, “life insurers and re-insurers need to be able to determine whether these increased safety features, that should reduce accidents, instead may possibly contribute to them as more pilots attempt to fly in conditions that might otherwise have prohibited a pilot from taking off, and as such actually increase the risk of an accident -- and ultimately mortality -- triggering a payment of policy.”

Mr. Rowe concluded by saying, “As a private pilot and an insurance industry veteran, I recognize the importance of this type of insight into quantifiable risk statistics and advancements in avionics and safety technology. Insurance underwriters are very detail oriented and constantly on the look out for accurate information to use as a basis to inform their risk evaluation process. With so much recent advancement occurring in safety and avionics and at the same time private aviation so intensely scrutinized in the headlines, the timing could not be better for underwriters to seek out the latest data on the current state of General Aviation and Technologically Advanced Airplanes.”

Conclusion
“The desire to fly is an idea handed down to us by our ancestors who, in their grueling travels across trackless lands in prehistoric times, looked enviously on the birds soaring freely through space, at full speed, above all obstacles, on the infinite highway of the air.” (Wilbur Wright)
“What is it that makes a man willing to sit up on top of an enormous Roman candle, such as a Redstone, Atlas, Titan or Saturn rocket, and wait for someone to light the fuse?” (Tom Wolfe, 'The Right Stuff,’)
Flight is arguably human-kind’s most significant “invention”. The ability to travel by air shrank the globe and made possible the world we live in today. But aviation is not just a statement on the ingenuity of human-kind; it is also a reflection of our adventurous spirit and willingness to take risks while advancing our interests (be they commercial or personal). One cannot separate the science from the art of flying just as one cannot separate the true nature of people: the pragmatist vs. the adventurer.
Perhaps this should be taken into account when measuring the risks associated with a private pilot. Technology in aviation has reached an unprecedented level of advancement and safety, yet the true determining factor of risk (as demonstrated by statistics) lies with the individual. Statistically speaking-- how well you know the applicant is probably more important than what you know about the plane they fly. How much time spent flying a particular class of aircraft is critical. How do they plan to use personal aircraft—business or recreation? Are they thrill-seekers? Will they or won’t they fly in adverse weather or visibility challenged conditions? Do they have the hours and licensing that indicates experience? Even more so than the type of plane an applicant flies--who they are as well as how and when they plan to fly may be the real key questions to measuring risk.
Bibliography
1) Krey, Neil; 2005 NALL Report, AOPA Safety Foundation, 2006
2) Landsberg, Bruce; Safety Advisors and Safety Pilot, AOPA Safety Foundation, various 1996-2006

Original version published in On the Risk March, 2007 as Underwriting in the 21st Century: Understanding the Risks of Private Aviation
"Reprinted with permission of ON THE RISK, Journal of the Academy of Life Underwriting www.alu-web.org"