By Chris Orestis
In observance of Life Insurance Awareness Month, it is important for policyowners to be aware of the life insurance asset that they own.
Life insurance policies are one of the most misunderstood and undervalued assets a person will ever own. And make no mistake, a life insurance policy is legally recognized as an asset with personal property ownership rights. Think of a life insurance policy the same way you would your home. You make mortgage payments on a monthly basis. Would you one day just drop your keys in the driveway and abandon your home? Of course not. You would sell your property for its highest market value. A life insurance policy is no different. After years of making premium payments, why would the owner abandon this other property without obtaining its full market value?
Life insurance policies have a hidden value that the vast majority of owners are unaware is readily accessible. Seniors in particular are most at risk to lapse or surrender their life insurance policies. In fact, Conning and Company projects that over the next 10 years as much as $185 billion of in-force death benefit will be abandoned every year by seniors who may have qualified to exchange their policy in the secondary market for full market value. These seniors are needlessly throwing away polices that can be converted to other uses, such as helping pay for long-term care, because they are not aware of their rights.
When you consider that there are fewer than 8 million in-force long-term care insurance policies and more than 150 million in-force life insurance policies, the use of the life insurance policy asset as a vehicle to pay for long-term care becomes a critical awareness issue in this country.
Long-Term Care Funding Crisis
As many as 10 million people are accessing long-term care supports and services every year. It is estimated that an additional 850,000 people enter nursing homes or assisted living communities, or access homecare services each year. This costs about $145 billion annually. That is just a portion of what is spent overall on long-term care, but at least a third of those costs are paid by the consumer out-of-pocket. That is a very large market segment paying billions of dollars for care every year. This large market segment also owns billions of in-force death benefit with significant market value.
Navigating the “long-term care industrial complex” is very stressful for families that have failed to plan or have inadequate resources to cover these costs. It is a subject families would prefer to ignore. Far too many agents have had the experience of hearing from someone they spoke to in the past about planning for their future with an LTCi policy, only to decide not to buy because “it won’t happen to me.”
The reality is that 70 percent of people ages 65 and older will need some form of long-term care support and service in their lifetime. And of course, that same person who said they would never need it ends up calling you back one day and says, “We need to buy that policy right now!” Obviously, that person will be declined for coverage. Until recently, you would not have much of a choice but to tell them it’s too late and you can’t help them.
Long-Term Care Funding Solution
Whatever the cause, the vast majority of people will be unprepared to shoulder the costs of long-term care when their time comes. But there are solutions to help many of those people who failed to plan. In fact, one of the fastest growing areas of funding long-term care is in the area of “crisis management.” Financial and legal advisors who work with families in long-term care planning have tools available that can help pay for the costs of care at the time that it is needed. One tool that is becoming more prevalent is exchanging life insurance policy death benefits on the secondary market into structured vehicles that will pay for the costs of senior retirement living and long-term care.
The policyowner can roll the funds into a tax-free long-term care benefit plan designed to make monthly payments toward any form of care they choose.
The policyowner also can roll the funds into a medically underwritten immediate need income annuity that will provide a guaranteed income stream to help cover retirement and long-term care expenses for the rest of their life.
It is important to emphasize that these options are designed to address an immediate need to fund retirement living and senior care expenses. In fact, the older a policyowner is and more impaired their health condition is, the more they will get when exchanging their policy and enrolling in either the benefit plan or the annuity. It is a morbid concept, but the older and sicker a policyowner is, the more money they can get with this approach to help pay for long-term care costs.
A long-term care benefit plan is an irrevocable benefit, insured by the Federal Deposit Insurance Corp., that is professionally administered with payments made monthly on behalf of the individual receiving care. The entire proceeds from the policy exchange are placed into the account and then, at the direction of the family, the monthly payments are made directly to their choice of care provider.
If care needs change, and the family wants to change care provider and/or the monthly payment amount, all they need to do is provide 30 days’ notice to adjust the account instructions. This option extends the time a person would remain on private pay and it delays their entry onto Medicaid. It is a unique, tax-free financial option to pay for care. All health conditions are accepted, and there are no wait periods, no care limitations, no costs to apply, no requirement to be terminally ill, and there are no premium payments.
In addition to being a Medicaid-qualified spend-down inside the look-back period, the benefit account is tax free because the policyowner is diagnosed as chronically or terminally ill, and the funds are spent only on care. Policy owners use their legal right to convert an in-force life insurance policy to enroll in the benefit plan, and immediately direct monthly payments to cover any form of senior care they choose: homecare, assisted living, nursing home, memory care or hospice.
Advantages to a long-term care benefit plan. The client can spend down to Medicaid, and can set and adjust the monthly payments at whatever level they need to cover private pay costs as long as funds remain in the account.
Disadvantages to a long-term care benefit plan. The policyowner is selling the policy for its present-day value and they or their beneficiaries will no longer be able to collect the death benefit.
An immediate need income annuity is a medically underwritten single premium immediate annuity designed to create a guaranteed monthly income stream for the life of the annuitant. The monthly income payments can be used for any purpose such as living, medical or long-term care expenses.
With medical underwriting, monthly income payments may be larger for annuitants who are less healthy and in need of care as compared to traditional single premium immediate annuities. They can also include annual cost-of-living adjustments to the monthly payouts and purchase death benefit options as a hedge against premature death.
This financial vehicle helps create certainty for a family by providing a guaranteed lifetime stream of income payments for older, less healthy care recipients who need long-term care now or in the near future. Although the income can be used for any purpose, this annuity is designed to help offset the cost of long-term care for people ages 70 and older who have adverse health conditions. Because the annuity is medically underwritten, monthly payouts from this annuity may be larger for individuals who are less healthy and in need of care.
Advantages to a medically underwritten immediate need annuity. A guaranteed monthly stream of income to supplement costs of living and care. Early death benefit protection. Enhanced death benefit riders and cost of living adjustment riders. Stop-loss to preserve or delay need to liquidate other assets/income.
Disadvantages to a medically underwritten immediate need annuity. The annuitant can lose a portion of their initial principal if they die earlier than expected.
The only thing preventing policyowners from turning their asset into a solution is awareness. Advisors need to educate consumers about their legal rights as the owner of a life insurance policy and the fact that a death benefit can be exchanged for its true market value. The policy can be turned into living benefits to help fund long-term care needs. There is almost $200 billion in death benefit abandoned by seniors every year. With more awareness, this major asset pool could be rescued and redeployed to help millions of families struggling with the costs of retirement and long-term care.