Strapped for cash in a down economy, many seniors are halting premium payments and abandoning their life insurance policies -- right when they're likely to need them most. But life insurance -- including Universal Life -- can be converted to cover long-term care expenses or provide other benefits, and producers are obligated -- sometimes by law -- to let clients know their options.
- Americans, 153 million of them, currently own $10 trillion in life insurance, according to NAIC.
- The National Health Policy Forum estimates that $200 billion will be spent by Medicaid on long-term care services this year alone.
- Forty-six states are looking at a combined budget shortfall of $121 billion entering fiscal year 2011, according to the Kaiser Family Foundation.
Those are big numbers. And here's another one: 10,000 Baby Boomers added their names to the Social Security and Medicare rolls on Jan. 1 of this year -- and this pace will continue, every day, uninterrupted, for the next 20 years! It will be an almost impossible challenge for the government to cover the costs of Social Security, Medicare and Medicaid for so many people, but this is also an opportunity for the life insurance industry to bring solutions to the equation.
Across the country, lawmakers are recognizing that life insurance policies owned by seniors can help cover the costs of long-term care services. A disproportionately high percentage of Universal Life (UL) policies will be surrendered or allowed to lapse every year. For many seniors faced with tough economic choices and the costs of long-term care, the premium payments requited to keep a UL policy in-force are easy to abandon. The irony in this circumstance is that they have paid premiums for years, and now, when they would get the most benefit from a policy, they instead will get little or no value in return.
New disclosure laws in many states
Understanding the implications of billions of dollars of life insurance policies being discarded by seniors annually, the National Conference of Insurance Legislators (NCOIL) unanimously passed the Life Insurance Consumer Disclosure Model Act last November. The model act will be introduced in state legislatures across the country this year.
If passed in a state, the law would require life insurance companies to inform policyholders who are over the age of 60 or have a terminal or chronic condition that there are eight approved alternatives to the lapse or surrender of a life insurance policy. The eight options for consumers to be made aware of in the Model Law are:
- 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 long-term care insurance (LTCI) or a long-term care benefit plan.
The act's intent is to make sure insurance carriers disclose to their policy owners that they have multiple options to consider beyond lapse or surrender. It also encourages policyholders to "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 penalties established by state law.
NCOIL said the act is intended to be "a strong stand for life insurance policy owners and would empower consumers through education about their options." Former NCOIL President Rob Damron, upon unanimous passage, said, "It is imperative that policyholders understand that they have alternatives to merely lapsing or surrendering their policy. 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."
Despite opposition from the life insurance industry, a number of states, including California, Connecticut, Kentucky, Maine, New Hampshire, Oregon, Washington, Virginia and Wisconsin, have already passed or are now considering life insurance consumer disclosure laws for their states.
The states' adoption of this law is a direct response to the explosion of Baby Boomers reaching retirement age, anemic sales and significant disruption in the LTCI market, and a realization that billions of dollars in life insurance policies are abandoned every year by people who do not know their legal rights or options. Expect more legislative action like this to escalate rapidly throughout the country.
LTC conversion alternative to abandonment
For people requiring long-term care, disclosure laws will increase their awareness of opportunities to get the best use of a life insurance policy's death benefit while still alive. Millions of seniors own a life insurance policy, and both the senior-care industry and lawmakers are recognizing the opportunity to convert those policies into a method of payment for the high costs of senior housing and/or long-term care.
One of the options included in the NCOIL model act is for a policy owner to "convert a policy into a long-term care benefit plan." A large percentage of in-force policies are Universal Life and are in danger of being abandoned. For families unable or unwilling to keep their life insurance policy in force by maintaining premium payments, the conversion option is a much better choice than abandoning the policy.
This option differs from UL hybrid policies that can be converted into LTCI because it allows for the actual exchange of a life insurance policy for a long-term care benefit plan. Not to be confused with an insurance policy, an Assurance Benefit Plan is not issued by an insurance company, is not restricted to polices that contain a conversion rider and is not limited to the issuing carrier. The policy conversion can be done for any form of individual or group life insurance and is not subject to premium payments or the same limitations and wait periods as LTCI.
The entire conversion process can be completed in less than 30 days, and then a third-party benefit administrator makes payments on a monthly basis to the long-term care provider for the duration of the benefit period. If the insured should pass away before the benefit period is exhausted, any remaining benefit amount is paid to the family or named beneficiary as a final expense payment.
UL insurance policies and annuities with long-term care riders are available in the market, but these are newer, expensive products. It will be some years before a substantial percentage of policy owners are using this option to fund their needs. Using life settlements as a way to monetize life insurance policies for long-term care is another possibility, but many life settlement companies focus on high net-worth individuals with large face policies. The average size of an in-force life insurance policy is $173,000. For the vast majority of middle-class seniors, challenged to pay for long-term care and owning life insurance with a death benefit of less than $500,000, a life settlement is not a likely scenario.
Providers of long-term care services such as nursing homes, assisted living communities, home health agencies and state governments, are realizing there is tremendous value for the consumer 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 monthly long-term care benefit payouts, and the life insurance asset can be spent down in a Medicaid compliant fashion -- while preserving a portion of the death benefit during the extended time period.
Opportunities for producers
As is the case with any product or service, when consumers understand all the options and benefits available to them, they're more empowered to make a well-informed buying decision. In the case of life insurance, the vast majority of consumers do not understand their legal rights as owners of this asset. Many policy owners mistakenly believe the insurance company owns the policy and that they "rent" the death benefit through premium payments.
In fact, life insurance is legally recognized as personal property, with the same ownership rights as any other asset, such as a home, stock or a vehicle. In the case of life insurance, this is a very strong aspect to highlight with clients.
Once consumers realize that they are in control of their policies and have multiple options available to them, the policy takes on new value. A policy's death benefit is just one level of value. The policy also has present-day value, and the owner is in control of how and when that is accessed. For example, a straight UL policy can be sold at a lower cost but still offer the potential for future use as a means to pay for long-term care. Also, if policy owners are looking to surrender or lapse their policies, they may instead choose to keep the policies in-force, with the knowledge that life insurance can be converted to meet financial needs while still alive.
We now live in an era of economic uncertainty and demographic stress. Government programs will not be able to keep up with the "Silver Tsunami," and significant austerity is in all of our futures. It's estimated that 75% of people will spend all of their assets in less than a year paying for the costs of long-term care on their own. For those that own a life insurance policy, it is an asset that can be easily converted into a vehicle that will help pay those costs. Producers who inform their customers that they have the legal right to many options other than abandoning a policy are doing a great service for their customers -- and for themselves.
Chris Orestis is president and founder of Life Care Funding Group. He's a 15-year veteran of 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 chris@lifecarefunding.com.
