State legislatures take action in 2013 as billions of dollars of life insurance policies are abandoned by seniors on a Medicaid spend-down path

By Chris Orestis

Life Care Funding Group


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 a legally recognized asset that can help them in a number of ways, and simply walking away from a policy is their worst possible option.

The long-term care benefit conversion option is designed to serve a large but ignored population. This population of middle market life insurance policy owners with polices under $500,000 of death benefit value end up either lapsing or surrendering their in-force life insurance because they can no longer afford to pay the premiums and/or they are on a Medicaid spend-down path. Owners of small face policies with an immediate need for long-term care are not ideal candidates to purchase a long-term care insurance policy.

As an alternative to policy lapse or surrender, the long-term care benefit conversion is an immediate option to use their life insurance policy to pay for long-term care. The in-force life insurance policy can be converted to a long-term care benefit account in as little time as 30 days and then administered by a third party with payments made every month directly to the enrollee’s choice of long-term care provider: home health, assisted living or nursing home.

For families with the need to pay for long-term care but who are unable or unwilling to keep their life insurance policy in-force by maintaining premium payments, the long-term care benefit conversion option is a much better choice than abandoning a policy. Policy owners use their legal right to convert an in-force life insurance policy to enroll in the benefit plan and are able to immediately fund their care through a guaranteed monthly payment stream for the entire benefit period.

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 are also realizing that there is tremendous value to be found in converting life insurance policies to help pay for the costs of long-term care.

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 spent towards cost of care before the owner will qualify for Medicaid.
Any death benefit retained by the estate is exposed to probate action by federally mandated asset recovery action totake back any amounts spent on Medicaid-covered long-term care. All state Medicaid applications specifically ask if the applicant owns life insurance and requires full policy details. Failure to disclose and comply is fraud.

The owner of one or more policies has a variety of options to consider:
  • A policy with more than a minimal amount of cash value must be surrendered back to the insurance company, with the proceeds spent down on care.

  • A policy with no cash value does not need to be liquidated, but the death benefit will be subject to federally required Medicaid recovery efforts to return the money spent on care.

  • Many states will exempt a small “final expense” policy if the full death benefit value is assigned to a funeral home.

  • Third-party assignment or transfer 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 (five-year) 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 as private pay, while preserving a portion of the death benefit until exhausted.
Because life insurance is an unqualified asset for Medicaid applicants, 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 into a long-term care benefit plan instead of abandoning it, the policy owner’s care can be covered as a private pay patient over an extended time frame.

Instead of abandoning the policy and going immediately onto Medicaid, the life insurance asset is spent down in a Medicaid-compliant fashion — while preserving a portion of the death benefit for the family during the extended time period.
Understanding the implications of billions of dollars in asset value that could be converted and spent on long-term care instead of just being abandoned, state legislatures across the country have begun taking action to educate the consumer about their legal rights to convert a life insurance policy.
  • In 2011, the state of Connecticut introduced study bill SB 1153, an act "establishing a task force to study life insurance policy, annuity conversions and the provision of certain notifications by life insurance companies."

  • In 2012, Louisiana passed study bill SCR-66, "to establish an advisory work group within the Department of Insurance to examine options that may be available to allow an insured under a life insurance policy or contract holder of an annuity to fund long-term care benefits.” The Louisiana work group has concluded their meetings and a legislative proposal has been issued.

  • In 2012, the state of Florida passed HB 5001, “to examine methods to allow an insured under a life insurance policy or the contract holder of an annuity to convert the policy or annuity to a long-term care benefit. The agency shall submit a report of findings and activities of the work group, including recommendations and proposed legislation, no later than January 15, 2013.” The Florida study group has concluded their meetings and a legislative proposal has been issued.
In January, 2012, the Center for Economic Forecasting and Analysis (CEFA) of Florida State University analyzed the tax savings impact of converting life insurance policies into long-term care benefit plans on the Florida Medicaid budget. In their analysis, CEFA “scored” the annual savings for Florida’s tax payers at approximately $150 million. The savings come from extending the time Medicaid applicants with a life insurance policy can remain private pay, delaying entry onto Medicaid by first converting their policy to a private, long-term care benefit account.

It is common sense that the best interest of policy holders is to make decisions with full disclosure of their rights and options. 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 a legally recognized asset that can help them in a number of ways, and simply walking away from a policy is their worst possible option. Expect more legislative action like this to be introduced throughout the country, and as we enter 2013, legislative action on the findings of these study groups has begun.