“NCOIL model may offer respite for middle-class Americans struggling with long term care costs”

We see it in the headlines almost every day. Between the senior population already in the long term care system and the baby boomers now hitting the Social Security and Medicare age at a rate of more than 10,000 per day, it is now safe to say that the long term care funding crisis has arrived.

In the midst of the most persistent economic downturn since the Great Depression, the long term care demand of seniors is growing at a much faster rate than the supply of resources to pay for their care. This demographic and economic disconnect will likely force the government to raise barriers to entry for the three primary entitlement programs: Social Security, Medicare, and Medicaid. It may also result in reduced benefit levels and push more of the responsibility for retirement and long term care funding back on the individual — and the individual’s family.

The wealthy can absorb long term care costs. Government-subsidized care is available for the poorest. But what about the middle-class American who doesn’t fit into either of these categories? A small percentage of people have had the foresight and resources to prepare to some degree through long term care insurance. Unfortunately, in the years when sales should have been skyrocketing, they’ve been declining, and the twin trends of rate increases and carriers exiting the market have been severely disruptive.

A much larger number of people in this category own life insurance, leaving them free to use that asset to pay for long term care. Yet over 90 percent of all life insurance policies lapse or are surrendered, and most middle-market policy owners are unaware that they can use their insurance policy’s death benefit as a living benefit.

Life Insurance Consumer Disclosure Law

State governments have started to recognize the dilemma of policy owners who don’t understand the options that are available to them when they consider surrendering or lapsing their life insurance. There are millions of seniors who have been paying premiums for years, and then abandon their policies at the time when they could most benefit from them. To help address that lack of information, a number of states — including California, Kentucky, Maine, New Hampshire, Oregon, Washington, and Wisconsin — have passed or are considering life insurance consumer disclosure laws. In November, the National Conference of Insurance Legislators (NCOIL) passed the Life Insurance Consumer Disclosure Model Act, and despite life insurance industry opposition, it will be introduced into state legislatures across the country beginning this year.

The law requires that life insurance companies inform policyholders older than 60 or with a terminal or chronic condition that there are eight approved alternatives to the lapse or surrender of a life insurance policy. These options include:

• Accelerated death benefit
• Assignment of policy as a gift
• Life settlement
• Policy replacement
• Maintenance pursuant to terms or riders
• Maintenance of policy through a loan
• Conversion from term to a permanent policy
• Conversion to LTCI or a long term care benefit plan

The law also emphasizes that “policy owners should contact their financial advisor, insurance agent, broker, or attorney to obtain further advice and assistance.”  Violation of the law is considered an unfair trade practice and subject to the penalties established by state law.

NCOIL declared that the final passage of the Life Insurance Consumer Disclosure Model Law is intended to be “a strong stand for life insurance policy owners and would empower consumers through education about their options.”

The timing of this disclosure law could not be better. The “silver tsunami” has begun, economic conditions remain in turmoil with no significant recovery in sight, and the LTCI market is in disarray. Consumers are looking for solutions to their problems — and they may be able to find them in their life insurance policy.

Policy Conversion

One of the newer options included in the model law is converting a life insurance policy into a long term care benefit plan. This option differs from hybrid policies that can be converted into LTCI (which is also included in the list of eight), instead allowing for the actual exchange of a life insurance policy for a long term care benefit plan.

Not to be confused with an insurance policy, the benefit plan is not issued by a carrier and is not restricted to polices that contain a conversion rider or to the issuing carrier. The policy conversion can be completed for any form of individual or group life insurance, and is not subject to the same limitations and wait periods as LTCI. The entire conversion process can be done in less than 30 days, after which a third-party administrator makes payments on a monthly basis to the long term care provider for the duration of the benefit period. If the insured dies before the period is exhausted, then any remaining benefit amount is paid to the family or named beneficiary as a final expense payment.

Long term care service providers have been quick to embrace this alternative form of payment. State governments are also realizing that there is tremendous value in converting life insurance policies to help pay for the costs of long term care. Life insurance is an unqualified asset for Medicaid applicants, and 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 instead of abandoning it, the policy owner’s care can be covered by the long term care benefit plan for an extended period, and the life insurance asset can be spent down in a Medicaid-compliant fashion while preserving a portion of the death benefit.

A Solution For The Masses

It may be some years before a substantial percentage of policy owners use this option. Recently, the concept of using life settlements as a way to monetize a life insurance policy for long term care began to spread, but the challenge there is that life settlement companies focus on high-net-worth individuals with large face policies. For the vast majority of the senior population with life insurance policies worth less than $500,000, a life settlement is not a likely scenario. For most middle-class Americans who require long term care today and own a life insurance policy, converting a life insurance policy’s death benefit may be the best option available. «

This article was provided to us by Life Care Funding Group, a funding source partner with Woodland Ridge. Please contact our office for additional information.