A new model or option when it comes to paying for long term care is centered on transitioning a life insurance policy into a payment source for long term care expenses. It’s relatively new and therefore, for many, it’s a risky option. This week, we explore these new financial products to see if they’re worth the hype.
First, it’s important to understand that each policy will yield different payments. There are a number of moving parts involved, including the age of the individual wishing to convert his policy, his medical history and the policy itself.
Calculations are used to determine how long you’re likely to live, which determines, of course, how much the company can eventually pocket as profits.
In most instances, the life insurance policy is transformed into a pre-funded, irrevocable benefit account that is administered with monthly payments made on behalf of the individual. For many seniors, it’s an option worth consideration because 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. Policy owners simply convert the policy to qualify for the benefit plan. Usually, payments begin immediately and often paid directly to the assisted living facility, senior housing plan or they can be used to cover long term care costs.
In most instances, Medicaid won’t consider the life instance as an asset that would have to be relinquished since it transitions into an irrevocable status. Further, in most instances Medicaid won’t try to collect the proceeds following one’s death as part of the “asset recovery” effort. It’s important to remember, though, that the policy is no longer an asset to the applicant. It belongs to the company that bought it.
One reason this could be a viable solution is the reality that there are many people who feel as though they can no longer afford the premiums to maintain the policies. That means they drop the policies and lose the value they’ve acquired over the years. The policy owner is able to recoup some of the value which is ideal for covering the growing costs of long term care. “People get to a liquidity crunch and paying the premiums doesn’t make sense, so they just walk away,” said Lauren H. Cohen, a finance professor at Harvard Business School who has written about life settlement.
Remember, in most policies, there is no cash surrender value and until the insured dies, there’s simply no value. This levels that playing field to some degree.
Some companies (and there are several) will often pay 40 to 45 percent of the policy’s face value. If it’s someone in his late 70s and with chronic conditions, it may equate to only 20 or maybe 30 percent. Keep in mind, though, this is a rough idea and the unique circumstances dictate the final tally. Also, companies have various payment options. For some, the payments must be paid directly to the long term care provider, an assisted living facility or nursing home. Others will simply send a check to the recipient with no stipulations on how the money is to be used.
So when is this not right? If you need to provide for a spouse or another dependent after death, you’ll probably need to hold on to the policy. In other instances, some with poor health and with only a few months to live will work with their family members to find a way to cover the costs for those few months and then have the life insurance policy pay off its face value and perhaps receive even more than what they paid for the care. Obviously, that’s a better choice for some.
Also, because this is still a new offer, some states are putting together legislation that will protect consumers. For instance, in Texas, new legislation would require settlement companies to fork out a $5,000 funeral benefit to the family of the policy holder after he’s died. And if the company is still directly paying a long-term care provider when an individual dies, the remainder of the converted amount will be paid to a designated beneficiary. The disturbing aspect is that many of the life insurance companies are actually participating in the drafting of some laws. Needless to say, it’s a fine line for any family so it’s important to understand all of the elements.
Have questions about your loved one’s long term care options? Give us a call today to explore what might be available. Be sure to follow us on Twitter and like our Facebook page, too. This way, you’re always in the know of various estate planning laws in New York.
The Law Offices of Barton P. Levine is a member of the American Academy of Estate Planning Attorneys.