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?
Tuesday, June 21, 2011
Tuesday, May 24, 2011
Driven by crisis, alternative solutions emerge to pay for long term care
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.”
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.”
Sunday, April 17, 2011
LTC funding crisis driving search for alternatives
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 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
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
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
Monday, February 7, 2011
New Disclosure Requirements for Insurers—What NCOIL’s Life Insurance Consumer Disclosure Model Act Means to Your Client
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.
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.
Tuesday, February 1, 2011
Life Insurance Consumer Disclosure Law: A Life Boat in the Eye of the Storm
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.
“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.
Monday, January 10, 2011
Funding Long Term Care with Life Insurance: Trend Catches On
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
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
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