The LTC benefit plan: Using life insurance to pay for long-term careArticle added by Chris Orestis on February 26, 2014
Chris Orestis

Chris Orestis

Portland, ME

Joined: August 21, 2010

When Medicaid was created on July 30th, 1965, the entire GDP of the United States was $791.1 billion, and no one could have predicted that by 2013, the U.S. would spend over $2 trillion on health care in a single year. Today, Social Security, Medicare and Medicaid are all in the red and are creating havoc for government budgets at the federal and state levels. According to the Chairman of the Federal Reserve, this has become the number one concern about the future of the U.S. economy. State budgets have been impacted particularly hard by shrinking tax dollars and growing Medicaid enrollment brought on by the economic crisis and an aging population.

Over 10 million Americans now require long-term care annually, and Medicaid is the primary source of coverage. According to the Kaiser Family Foundation, Medicaid spent $427 billion in 2011, almost doubling since spending $240 billion in 2009. With 10,000 baby boomers turning 65 every day for the next 20 years, the United States has officially crossed the tipping point into the long-feared era of the “long-term care funding crisis." New approaches to fund long-term care must be encouraged, and converting life insurance policies into a long-term care benefit plan is an option that has grown into a mainstream and accepted financial solution.

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

In 2009, Conning and Company analyzed the emerging use of life insurance policies to pay for long-term care as part of their Strategic Research Series. In the paper they surmised:
    Both state governments and the long-term care industry are working to find a solution to the budgetary threat to Medicaid created as aging baby boomers impoverish themselves in order to have the state pay for long-term care. What is new is the concerted effort to integrate life insurance policies and long-term care providers. This new source of funds represents a potential alignment of long-term care providers and state governments.
States are under tremendous budget pressure to keep pace with exploding demand to cover long-term care needs with taxpayer money. They are quickly realizing the savings that can be found for their beleaguered budgets by delaying entry onto Medicaid through the use of life insurance policy conversions into long-term care benefit plans. State legislative leaders across the country are taking action with consumer protection disclosure laws and legislation to encourage consumers to convert their life insurance to pay for long-term care as an alternative to abandoning their policies. Policy owners are being encouraged to use their legal right to convert an in-force life insurance policy into a long-term care benefit plan and direct payments to cover their senior housing and long-term care costs.

The vast majority of long-term care is paid for by Medicaid. To qualify, the applicant must meet asset and income limits that would put them below the poverty line. A standard practice is to “spend-down” assets to meet these limits. For owners of a life insurance policy, they will often lapse or surrender their policy so that it will not either count against them as an asset or expose their heirs to asset recovery action by the state to claw back the death benefit.
But there is a better option for seniors who own a life policy than just abandoning an asset they had made payments on for years. A long-term care benefit plan converts a life insurance policy’s death benefit into a “living benefit” that will allow them to remain private pay and choose the form of care that they want. The long-term care benefit plan pays out the present-day value of a policy and protects the funds in an irrevocable, FDIC-insured benefit account that makes monthly payments directly to the care provider. Because the funds are protected and only used for care, it is a tax-advantaged, Medicaid-qualified spend-down of an asset that far too many seniors abandon as they move towards long-term care.

The National Conference of Insurance Legislators (NCOIL) understood the implications of billions of dollars of life insurance policies in the hands of seniors being discarded when they unanimously passed the Life Insurance Consumer Disclosure Model Act in November 2010. This consumer protection law requires that life insurance companies inform policy holders above the age of 60, or with a terminal or chronic condition, of approved alternatives to the lapse or surrender of a life insurance policy, including “conversion to a long-term care benefit plan."

The Supreme Court case of Grigsby v. Russell (1911) established a life insurance policy owner’s right to transfer or convert the use of an insurance policy. This ruling placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as real estate, stocks and bonds. As with these other types of personal property, a life insurance policy is an asset and can be converted to another use or transferred at the discretion of the policy owner. A policy owner’s legal right to convert an existing life insurance policy into a long-term care benefit plan is not to be confused with a long-term care insurance policy, accelerated death benefit (ADB) rider, annuity, a hybrid life/LTCI product, or a loan. This conversion option allows for the private, secondary market exchange of a life insurance policy for a long-term care benefit plan at the time that care is needed. The benefit plan is a private market long-term care funding option and is not issued by a carrier, not restricted to life policies that contain a conversion or accelerated death benefit rider, and conversion options for the owner are not restricted to only the issuing carrier.

The long-term care benefit plan concept first emerged in 2007. Since then, this form of funding for long-term care has been embraced by the long-term care industry, the press and political leaders across the country. All home care, assisted living and nursing home companies now accept this form of payment; and the emergence of this funding option has been covered in the Wall Street Journal, New York Times, Kiplinger’s and numerous industry trade publications, and on CBS, FOX, PBS and Bloomberg radio programs among others. Legislation specifically endorsing the long-term care benefit plan concept has been introduced in the state legislatures of CA, FL, KY, LA, MA, ME, NJ, NJ and passed into law in TX all in 2013.

Long-term care are providers, insurance agents, financial planners and elder law experts are all on the same page with political leaders about this issue. It makes no sense that seniors in need of long-term care would abandon life insurance policies when the option to convert those policies into a monthly long-term care benefit stream is readily available. The owner of a life insurance policy with an immediate need for senior care services of any form can turn a death benefit into a “living benefit” that will keep someone private pay and delay their need for Medicaid.
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