Saving the Medicaid system one life insurance policy at a time
By Steve Savant
Co-written by Alex Sirotkin
Recall the old adage, “If you want something done right, do it yourself"?
What can we expect from our government? Judging from the polls, most would say "not much." It is amazing that with our nation’s budgetary problems, and the pending bankruptcy of programs designed for seniors — Medicare and Social Security — politicians are more concerned about mid-term elections. So, in the meantime, nothing gets done. Nothing.
But did you know that Medicaid has surpassed Medicare as the nation’s largest health care program? It is the fastest growing part of most state budgets and funds nearly two-thirds of all nursing home residents. Medicaid has become a runaway train of an entitlement. So how, you ask, can you personally help to at least slow down this train’s increasing need for fuel (funding)?
Well, here is a modest answer; but again, as mom says, “Every little bit helps.” Did you know that permanent life insurance policies are counted as an asset for Medicaid purposes and that they must be “spent down” prior to qualification?
Practically speaking, what happens? Often, the policy gets cashed out for the cash surrender value (CSV) from the life insurance carrier; or worse, the policy is lapsed if no CSV. But what most elder care professionals and seniors themselves do not know is that there is a legal option to sell that same policy for an amount greater than the CSV. This concept even applies to term policies, which, by design, have no CSV. This is a financial option — not an imperative — and it costs nothing for someone to have the value of one’s life insurance policy determined by a licensed entity. Again, it costs nothing to find out the market value of the policy.
Let’s say Edith, who is a private-pay patient in a senior facility, is running out of funds. Her POA comes to an elder care attorney (or Medicaid consultant) to find out what she needs to do to qualify for Medicaid quickly. Likely, no planning has been done and the matter has become urgent.
She has a $50,000 permanent life policy with a CSV of $15,000. This policy is an asset and must be spent down before she can qualify. Sure, she can cash the policy in for the $15,000, but that would be a worst-case scenario. A suggestion is made that perhaps the POA should consider a sale of the policy instead, as it will cost nothing for a valuation. Based upon Edith’s health and the cost of premiums going forward, the POA gets a bona fide offer from a licensed buyer for $30,000, or double the CSV. The consultant/attorney suggests that part of the funds be used to pre-pay for a funeral, and the balance be paid to the facility to extend Edith’s private pay care. The idea of an investment fund buying Edith’s policy by paying her cash today and benefiting at the time of her death is off-putting and even macabre to some. In actual fact, however, Edith is making use of the present market value of her policy today, when she needs the money most. She needs the money now, and she must dispose of the policy in any event to become Medicaid compliant. In this case, she is maximizing the return on her asset by selling, rather than surrendering. Edith is acting like a sophisticated capitalist, and the transaction is a proverbial “win-win."
Are there any losers at all in this transaction? Under this scenario, where the policy is purchased and kept in force, it is now likely that the insurance carrier will have to pay out a death benefit after all. It is the carrier that loses its opportunity to terminate its obligation to pay the death benefit later, by paying the CSV today. Arguably, had the carrier paid the CSV, it would have merely paid Edith the money that she saved over the years within the policy structure. In any event, the carrier is the likely loser in this situation.
But some say that Edith won’t care about maximizing her return. She just wants to get onto Medicaid. Regardless, her senior care facility will benefit from additional private pay funds. Likewise, Edith’s qualification for Medicaid will be somewhat delayed, and the mounting costs of Medicaid will have been reigned in, or forestalled, if only a little. When you see that a client has a life insurance policy, if appropriate, ask her if she is aware of the option to sell that policy. You may not be saving the entire Medicaid system, but again, as mom says, every little bit helps.