Time to take a second look at life insurance and MedicaidArticle added by Steve Savant on June 11, 2014
Steve Savant

Steve Savant

Scottsdale , AZ

Joined: January 28, 2005

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By Steve Savant and Alex Sirotkin

Present state of affairs: not great and not getting better

Medicaid is the largest health insurance program in the U.S., covering over 62 million Americans. In other words, roughly 1 out of every 5 people in this country are now enrolled in the Medicaid program. Medicaid is bigger than Medicare. Medicaid also serves as the dominant source of the country’s long-term care financing. In 2011, 63 percent of all nursing home stays were financed by Medicaid. Are we the only ones who thinks this is crazy?

The projections? Worse

The number of people using nursing facilities, alternative residential care places, or home care services is projected to increase from 15 million in 2000 to 27 million in 2050. Most of this increase will be due to growth in the older adult population who need such service. Although people of all ages may need long-term care services, the risk of needing these services increases with age. We know, it’s obvious.

But what’s not as obvious is the projections on tomorrow’s need — that over two-thirds of individuals who reach age 65 will need long-term care services during their lifetime. The aging baby boomer population is expected to become much older, with the number of Americans over age 65 projected to more than double, from 40.2 million in 2010 to 88.5 million in 2050. The estimated increase in the number of the “oldest old” — those aged 85 and over — is even more striking. The oldest old are projected to almost triple, from 6.3 million in 2015 to 17.9 million in 2050, accounting for 4.5 percent of the total population. And that’s just today’s best guess.
Where will the money come from?

One possible answer, determined on a case-by-case basis, might be from the value presented by a life insurance policy owned by a long-term care recipient. Since the money will be needed while people are living, we are generally talking about either:
  • The cash surrender value (CSV) if any; or
  • a discounted present value (DPV) offered by the life settlements market — by definition, an amount greater than the CSV.
Medicaid prohibits an enrollee from owning a permanent life insurance policy where the face amount is in excess of $1,500. Yes, the face amount. (We always get the funny feeling that someone slipped up when writing the regs. Tell me, are there any permanent policies with face amounts below $1,500?) So, applicants must divest themselves of these permanent policies if they are to qualify for Medicaid. The cash they get for the policy could be used to extend their private pay at a long-term care facility. Or they may pay for advance funeral arrangements, which are, to an extent, exempt from the Medicaid analysis.

Life settlements to the rescue?

We're not so naïve as to think that this creation of value will solve the long-term care/Medicaid crisis that we presently face. But as an advisor, it is good to be aware of all the options; and it may help on a case-by-case basis. The life settlements market presents an option that should be considered in conjunction with other financial choices, especially the current market, which is hungry for policies.

There are more investment dollars seeking a rate of return than there are policies being offered for sale. The law of supply and demand dictates that rates of return for investors should be in decline, and wouldn’t you know it, they are! Couple the supply side dilemma with lower-than-low bond yields, and investors should be happy with even high single digit returns. Lower yield = higher purchase price.

We’re not unaccustomed to seeing 50 percent of face being paid for a policy; where LEs are less than two years, the purchase price is at an even higher percentage. As every broker or provider will, or at least should, tell you, every case is different. Bottom line, it is not only to your and your client’s benefit to add this arrow to your quiver, it may be your fiduciary obligation to do so.

But from a more global perspective, what we're really suggesting is that for many, life insurance will just not be affordable or necessary for the purposes for which it was put into force. Putting it another way, people will not be thinking about ways to take care of their loved ones upon their death — i.e. legacy. Rather, they will be thinking about how not to burden their loved ones while they are still alive.

Remember, life settlement options can really make the difference for cash strapped seniors who have seasoned life insurance policies that have outlived their original planning purpose.

Much of the above was excerpted from the National Center for Health Statistics report entitled “Long-Term Care Services in the United States: 2013 Overview.”
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