Seniors beware of life insurance loan and credit funding programs that could disqualify you from future Medicaid eligibility.
Seniors that own life insurance policies can convert their death benefit into a living benefit to help pay for Senior Care Services. The practice of converting a life insurance policy into a Life Care Benefit has been an accepted method of payment for Private Duty In-Homecare, Assisted Living, Skilled Nursing, Memory Care and Hospice Care for years. Instead of abandoning a life policy because they can no longer afford the premium payments and/or they intend to eventually apply for Medicaid eligibility; policy owners have the option to take the present-day value of the policy while they are still alive to convert the policy into a Life Care Benefit – Long Term Care Benefit Plan. By converting the policy in this manner the senior will remain private pay longer and be able to choose the form of care that they want, but will be Medicaid eligible when the Benefit is spent-down.
Life Insurance Loan Programs
Sensing demand in the Senior Care market, new companies have recently sprung up that offer lending programs against life insurance policies like life insurance loan programs. For estate planning purposes, taking a loan against a policy could make sense but for the use of funding Senior Care a life insurance policy loan can create unforeseen problems for the policy owner. First, if a person takes a life insurance loan (kind of like a reverse mortgage on a life policy) they will need to understand the fees, interest rates, and how the policy becomes collateral for the loan that must be re-paid upon death of the policy owner. Because ownership of a life insurance policy counts against the individual for Medicaid eligibility, the fact that a life insurance loan keeps the policy in the owner’s name because it is now secured collateral will disqualify the person from future Medicaid eligibility. Also, there are no protections provided for the funds that come from the loan, and they must be safeguarded and precisely administered by someone in the family to make sure they are used to pay for Senior Care. Funds procured in this way and not spent-down exactly right to pay for Senior Care inside the mandated 5 year look back period would be another disqualification for Medicaid eligibility.
The correct use of a life insurance policy to pay for Senior Care is through the conversion of the policy into a Long Term Care Benefit Plan. The Life Care Benefit protects the funds in an irrevocable; FDIC insured account which is professionally administered to make monthly payments to the senior’s choice of care provider. The Benefit can be used to pay for Private Duty In-Homecare, Assisted Living, Skilled Nursing, Memory Care and Hospice Care and the account is structured as a Medicaid qualified spend-down. If the senior spends through the entire account they are then able to seamlessly transition to Medicaid. The account preserves a funeral expense benefit, and/or if the account owner should pass before using the entire account then any remaining balance is paid out to a named account beneficiary. Also, if a person’s needs change the benefit can change as well—for example a person could start with Homecare at $2,500/mo. and after six months could move to Assisted Living at $5,000/mo. with just 30 days’ notice. None of these perks are available with a life insurance policy loan program.
Policy owners have the legal right to convert their policies into a Medicaid qualified Life Care Benefit in every state; but multiple states have introduced specific Medicaid Life Settlement laws mandating that their Medicaid departments inform citizens about this preferred option for the use of a life insurance policy. States want to make sure their citizens are being informed of their right to convert a life policy to pay for Senior Care and allow them to remain private pay for as long as possible before possibly needing to move over to Medicaid. Policy loans are not included in these laws because of lack of protections and the problems they pose for seniors looking to remain private pay without losing their ability to qualify for Medicaid in the future.
In a 2011 Wall Street Journal story entitled, Life-Policy Loans Under Scrutiny, they reported on a raid by Federal agents on the offices of a company providing Life Insurance Loans: A recent federal raid on a little-known Florida lender has turned up the heat on an obscure corner of the financial world, where life insurance policies are held as collateral for high-cost loans. Agents from the Federal Bureau of Investigation and other authorities descended upon the offices of a Boca Raton-based firm that makes loans almost exclusively to older people.
Before a senior allows a policy to lapse or be surrendered they should understand what their rights and options are to use that life insurance policy to pay for Senior Care. They should also understand the difference between policy conversions that are an endorsed and approved funding method for Senior Care; and life insurance loans that pose problems for covering Senior Care and future Medicaid eligibility.