The recent passage of a New York law that will allow the proceeds of an accelerated death benefit to be used to pay for nursing home costs is another example of the growing national trend of using life insurance policies as a means to pay for long term care. The bill, signed into law by Gov. Paterson on Dec. 14, 2010, expands the definition of "life insurance" to include the ability to provide a living benefit to pay for long term care. It allows for those who have been residents of a nursing home for at least three months to apply the proceeds of an accelerated death benefit toward their costs of housing and care. The bill does not provide for payment toward assisted living, home health care, or other forms of senior housing and care.
The goal of this law, first introduced into the New York Assembly in 2008, is to offset the costs of New York's Medicaid program paying for a nursing home stay by extending the spend-down period of a life insurance policy if it has an accelerated death benefit rider. The bill's author, State Sen. Jeff Klein, cited the high costs of New York's Medicaid program paying for a nursing home stay as the driving force behind the new law's passage. He stated that New York's Medicaid program spends more than $23 billion on long term care, and that this new law could save the state approximately $1 billion over the next five years. He also pointed out the wide disparity between owners of long term care insurance and life insurance in New York -- with 400,000 residents owning LTCI, versus 9 million who own life insurance.
"We're supportive of it, as it gives seniors more flexibility in planning for their future," said Richard Herrick, president and CEO of the New York State Center for Assisted Living.
This law, as well as other options using life insurance to pay for the escalating costs of long term care, have really begun growing over the last couple of years. Factors driving this trend include the explosion of baby boomers reaching retirement age, anemic sales and significant disruption in the long term care insurance market, and a realization that billions of dollars worth of life insurance is abandoned every year.
Consumer disclosure law emphasizes policy conversion over abandonment
For many policy owners, life insurance is an easily abandoned illiquid asset. The vast majority of in-force life insurance policies will never pay a death benefit because they either expire, lapse, or are surrendered for cash value. The New York law, as well as other legislative and market activities, point to the growing realization that life insurance policies are an asset well-suited to help pay for long term care. Too few seniors realize that their policy could be used for purposes other than a death benefit, but the word is rapidly spreading among policy owners and lawmakers.
Another recent example of legislative action in support of using life insurance as a tool to help pay for long term care costs is last month's passage of NCOIL's Life Insurance Consumer Disclosure Model Law. (Versions of the law have already passed or are under consideration in Oregon, Washington, Maine, California, Wisconsin, and Kentucky.)
"It is imperative that policyholders understand that they have alternatives to merely lapsing or surrendering their policy," said NCOIL President Rob Damron upon the model law's unanimous passage. "The model would require a clear notice to consumers, listing eight available options, including accelerated death benefits, conversion to long term care, and the possibility of a life settlement."
In the law, life insurance companies are legally required to inform policy owners older than 60, or if they have a terminal or chronic condition, that they have eight alternative options to consider before lapsing or surrendering a policy - and one of them is converting a life insurance policy into a long term care benefit plan.
The long term care conversion option opens up the ability to use a life insurance policy for long term care to an even wider population than the New York accelerated death benefit law. There is no minimum requirement of three months' residence in a long term care facility, and unlike long term care insurance, there are no waiting periods to receive benefit payments. Policy owners unable or unwilling to keep their life insurance in force can convert their policy to pay for the costs of assisted living and home health care, as well as for nursing home care.
The life settlement option
Life settlements are another alternative to abandoning a life insurance policy, and are specifically listed in the disclosure law in the states and in the NCOIL Model. In 2009, Conning and Company published its annual report on the life settlement industry, and in it, analyzed this option's potential to pay for long term care:
"This new source of policies represents a potential alignment of life settlements, long term care providers, and state governments. Both state governments and the long term care industry are working to find a solution to the budgetary threat to Medicaid created as aging baby boomers impoverish themselves in order to have the state pay for nursing home care."
As another potential outlet to convert life insurance policies into the means to pay for long term care, life settlements have both pros and cons. On the plus side, life settlements can be a good option for high-net-worth clients with large policies looking to move into independent living communities or continuing care retirement communities (CCRCs). These environments can be quite expensive, and the typical profile for this population is more aligned with a life settlement scenario, i.e., high-net-worth and a longer life expectancy akin to the industry's typical horizon of 10 or more years. For many people looking to access this form of senior living, their home's value may have been negatively affected by the current economic situation, leaving them to seek alternative resources to bridge the gap. A life settlement might help them access the present-day value of what may be their most valuable, but illiquid asset.
The challenge for those in the larger, middle class population who own life insurance policies with a face value of $500,000 or less is that those policies may be too small for a life settlement. This, of course, is the population most inclined to abandon their policy, and to look to Medicaid to pay for their long term care costs. This is the population that the New York State Assembly, NCOIL, and the states that have passed the disclosure law are trying to help through the use of their life insurance policies.
Fortunately for millions of Americans in need of long term care, they now have multiple options to get the best use of a life insurance policy to meet their immediate needs.
Chris Orestis is president and founder of Life Care Funding Group; a 15-year veteran of both the life insurance and long term care industries; and a frequent speaker, featured columnist, and contributor to a number of industry publications. His blog on senior living issues can be found at www.lifecarefunding.com/blog. He can be reached at 888-670-7773 or firstname.lastname@example.org.
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