Alternative funding solution for long term care: Convert a life insurance policyArticle added by Chris Orestis on October 25, 2010
Chris Orestis

Chris Orestis

Portland, ME

Joined: August 21, 2010

My Company

Life Care Funding

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

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

Annual costs of long term care
  • Skilled nursing facility (SNF): $79,935
  • Assisted living facility (ALF): $37,572
  • Alzheimer’s unit: $85,045
  • Home healthcare: $43,065
  • *Met Life Mature Markets Institute 2009
One asset to look at for liquidity is an in-force life insurance policy. A policy owner could look at taking the cash surrender value or a loan against the policy. But for many policy owners, there is little to no cash value, and the liquidity available through these routes would be insufficient. In that case, another option would be to convert their life insurance policy into a long term care benefit plan.

More and more senior care companies around the United States are using this approach to help families overcome a gap in their ability to fund the most appropriate form of senior housing and/or care.

Case study
A family whose father is suffering from cancer wanted him to remain at home . He wanted to remain in the comfort of his own surroundings and with his loved ones for the remainder of his life. They did not have enough money to afford the costs of care at home, but he owned a $250,000 universal life policy, and they all agreed they would rather liquidate the policy and use the proceeds to keep him in place.

There was no cash value in the policy, but they converted the policy into a long term care benefit of 60 percent of the total face value. That level of benefit would be more than enough to cover the costs of care for their father and was a much better alternative then allowing the policy to lapse.

The family was about to let their policy lapse and had no idea that they held a legally recognized asset that they had the right to convert in the most advantageous manner possible. If they had not been informed of their options, they would have discarded the policy and been forced to suffer through with insufficient liquidity.

There has been much debate about how to pay for long term care, but in this and many other cases, converting a life insurance policy to address the immediacy of a health care funding crisis makes all the sense in the world. In the case of converting a life insurance policy to cover a financial shortfall preventing someone from securing the best possible long term care options, there could be no more obvious choice.
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