Issue Brief on Life Insurance Policy Conversions
The United States Supreme Court codified as law the legal right of property ownership for life insurance policies in 1911. The owner of a policy has the legally protected right to convert their asset from a life insurance policy into a long care benefit plan by accessing the private, secondary market. There is almost $30 trillion of in-force life insurance today in the United States. Comparatively, there is less than $10 trillion of home equity in the United States and the amount of in-force long term care insurance is measured only in the billions. At a time when LTCi sales should be exploding, the market instead has been suffering from significant disruption from rate increases on existing policies and major carriers such as MetLife ceasing to sell policies. Additionally, the economy’s impact on the housing market has seriously dampened the ability of seniors to access home equity to pay for long term care, which for years was the primary source to fund long term care and part of a Medicais pend down regimen, but that has not been the case since 2008. As for owners of life insurance; the middle class, “small face” policy owner with under $500,000 of death benefit cannot access the life settlement market as an option either.
With 10,000 Baby Boomers turning 65 every day, the United States has officially entered the “long term care funding crisis” era. New approaches to fund long term care must be developed, and converting life insurance policies is an option quickly gaining ground. Unfortunately, owners of life insurance policies are not aware of their legal rights and options, and millions of seniors are stranded with polices that have outlived their insurable interest, they can no longer afford, and are counted against them as a dis-qualifying asset for Medicaid eligibility. But, 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.
Life Insurance Conversion and Medicaid
Life insurance is an unqualified asset for Medicaid eligibility, and billions worth of policies are regularly abandoned by uninformed seniors as they enter their “long term care years”. Converting a life insurance policy into a long term care “Assurance Benefit” plan is a Medicaid qualified spend down of the policy, and it extends the time a person remains “private pay” before going onto Medicaid. States are under tremendous budget pressure to keep pace with exploding demand to cover long term care needs with tax payer money, and they are quickly realizing the savings that can be found for their beleaguered budgets by delaying entry onto Medicaid through the use of Medicaid qualified policy conversions.
The Assurance Benefit is not a long term care insurance policy, annuity, any form of hybrid life/LTCi policies, or an accelerated death benefit– it is actually the exchange of a life insurance policy for a long term care benefit plan at the time that care needs to be paid. The Long Term Care Benefit Plan is a unique financial option for seniors because there are no wait periods, no care limitations, no costs to apply, no requirement to be terminally ill, and there are no premium payments. 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 direct payments to cover their senior housing and long term care costs.
It is in the better interest of seniors and their family to convert a death benefit into a long term care benefit and then apply the maximum private market value of the policy towards their health care needs. If a policy can be converted into the means to cover the costs of long term care for an extended period, and keep the insured off of Medicaid that much longer, it is in their best interest and that of the state’s tax payers. The Assurance Benefit policy conversion is a private sector solution that addresses the financial needs of the senior and can also help stressed state budgets by extending the spend down period for a senior before they would go onto Medicaid.
Introduction: The Medicaid Problem Grows
Medicaid was created on July 30th, 1965 as a part of President Lyndon Johnson’s “Great Society”. At that time the entire GDP of the United States was $791.1 billion, and no one could have predicted that by 2009 the U.S. would spend over $2 trillion on health care in a single year. Ironically, the last of the baby boom generation had been born by the time Medicare and Medicaid was first enacted, and on January 1, 2011, 10,000 Baby Boomers started turning 65 every day at a pace that will continue uninterrupted for twenty straight years. The combination of this demographic “Silver Tsunami” and a fractured U.S. economy could not have come at a worse time for the big three entitlement programs. Social Security, Medicare and Medicaid are all in the red and creating havoc for government budgets at the federal and state levels. According to Chairman Ben Bernanke, this has become the number one concern of the Federal Reserve about 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, paying for 43% of all long term care services while only 31% was covered “private pay”.