From the December 19, 2011 issue of National Underwriter Life & Health Magazine • Subscribe!

Making Up the Difference

As the Super Committee falters in its effort to reduce federal spending, mandated budget reductions create further pressure on the funding of long-term care

Photo credit: ddpavumba Photo credit: ddpavumba

Earlier this year, the so-called Super Committee could not overcome partisan differences over spending cuts and new revenues (taxes) within their mandated deadline and conceded defeat. That unfortunate outcome triggers mandated reductions in the federal budget of $1.3 trillion that will have an immediate impact on Medicare and Medicaid. This will be particularly disruptive for seniors and long term care providers already trying to absorb the 11.1% rate reduction that CMS instituted in October, 2011. After the demise of the CLASS Act, the long term care funding infrastructure of the United States is facing extreme pressure. Lackluster sales, rate increases and carrier casualties in the LTCi market combined with additional entitlement cuts as a result of the Super Committee outcome will conspire to make an already precarious situation worse.

Further compounding the problem is the fact that 10,000 Baby Boomers started turning 65 on a daily basis this year and that pace will continue uninterrupted for the next 20 years. The availability of public dollars to pay for this is shrinking while the demand for long term care services and the costs of care continues to rise annually.

According to the 2010 MetLife Mature Markets Institute Annual Study, costs for all forms of long term care services continue to rise:

The national average cost of staying in a semi-private room in a nursing home grew to $198 per day / $72,279 annually and a private room at $229 per day / $83,585 annually.

The national average cost of living in an Alzheimer’s unit is $228 per day / $83,220 annually.

The national average cost of living in an assisted living facility reached $3,131 per month / $39,516 annually.

The national average cost for private-pay home healthcare is now at $21 per hour.

People do not understand and are not prepared to pay the costs of long term care. In years past, seniors could rely either on the government, family, or equity in assets such as a home to offset a lack of savings. In today’s new economic reality, family members are struggling to take care of themselves, the government is making cuts and building barriers to entry for long term care coverage, and the value of assets such as homes have been eviscerated. In fact, today there is currently three times more in-force life insurance in the United States at almost $30 trillion (NAIC) than there is home equity with less than $10 trillion (Zillow Home Equity Index).

For the first time in American history there is more debt than equity in America’s homes. For seniors unprepared for long term care this new reality is a big problem. One of the most reliable sources of long term care funding for years has been home equity and then government backstops once assets have been depleted. This mix is now severely disrupted and a search for additional assets to help unprepared seniors pay for long term care is on.

One non-depreciating asset that has been getting more attention as a resource to help pay the costs of long term care is life insurance. Life insurance is legally recognized as personal property and the owner has the right to use this asset in a number of ways including converting the policy to pay for long term care while still alive. Policy owners for the most part do not understand their legal rights of ownership and the various options available to them. The insurance industry prices and makes profits from the fact that millions of people are paying billions of dollars in premium payments for policies that in the end will be abandoned. The shame of this situation for the consumer is that there are numerous options for them to explore before surrendering or lapsing a policy.

The National Conference of Insurance Legislators (NCOIL) understood the implications of billions of dollars of life insurance policies in the hands of seniors being discarded annually when they unanimously passed the Life Insurance Consumer Disclosure Model Act in November, 2010. The law requires that life insurance companies inform policy holders above the age of 60, or with a terminal or chronic condition, that there are specific alternatives to the lapse or surrender of a life insurance policy. NCOIL President Rob Damron (KY), upon unanimous passage said, “It is imperative that policy holders understand that they have alternatives to merely lapsing or surrendering their policy.”

The disclosure law is an important consumer protection victory for people requiring long term care because it will increase their awareness about the best use of a life insurance policy’s death benefit while still alive. The senior care industry and law makers are recognizing the opportunity to convert life policies into a method to pay for the high costs of senior housing and/or long term care. Among the options specifically included in the NCOIL Model Law is for a policy owner to “convert a policy into a long term care benefit plan”. For families unable or unwilling to keep their policy in-force by maintaining premium payments, the conversion option to pay for long term care is a much better choice than abandoning the policy.

States have been taking action in support of consumer rights to use life insurance policies to pay for long term care. In addition to those states adopting the NCOIL Consumer Disclosure Model Law; New York passed a law mandating that the owner of a policy with an accelerated death benefit (ADB) rider can trigger the benefit if they have been living in a nursing home for at least three months. There are 153 million owners of life insurance policies in the United States. Comparatively, there are 8 million owners of long term care insurance policies. With that disparity as a back drop, as many as a dozen other states are now looking at passing laws that combine conversion of a life insurance policy of any kind to a “long term care benefit plan”, the disclosure requirements of the NCOIL model, and the ADB trigger for nursing home residents.

The adoption of laws of this type in the states is a direct response to the explosion of Baby Boomers reaching retirement age, anaemic 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 by people who do not know their legal rights or options.

Providers of long term care services such as nursing homes, assisted living communities and home health agencies, as well as state governments, are realizing that there is tremendous value for the consumer in converting life insurance policies to help pay for the costs of long term care. 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 payout and the life insurance asset can be spent-down in a Medicaid compliant fashion.

“Our goal at Emeritus is to ensure that seniors are properly cared for, and part of that goal is to help families with the financial decisions and details involved in caring for their loved ones,” said Jayne Sallerson, EVP, Sales & Marketing at Emeritus Senior Living (NYSE: ESC), the largest assisted living provider in the world. “Many seniors and families are unaware that their life insurance policies are valuable assets and can be converted to pay for long term care, and as a result some let active policies lapse. We hope that we can help educate seniors about their resources, so that more seniors can have access to the long term care that they need.”

With traditional resources to pay for long term care on the decline, it will take creative private market solutions and the use of non-traditional assets to make up the difference. 

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