Middle class policy owners and their families are caught in the ironically unfortunate position of not being poor enough to automatically qualify for Medicaid, but they are not wealthy enough to access the care they need with enough out-of-pocket funds. In America, the vast middle class market is financially punished for being caught “in the middle” when they reach the point that a loved one requires long term care.
When a family has a life insurance asset to work with, the ultimate decision for those we talk with is based upon: what is the best possible outcome for a life insurance policy in relation to the immediate needs of the loved one and family?
1- The policy owner could keep their policy in force and ultimately the named beneficiaries collect the death benefit which of course is tax free. This option puts the policy owner and the family in the position to answer a couple of questions:
a. What is more important to the policy owner and family—continue to pay the premiums and collect a death benefit at an unknown time in the future, or;
b. Utilize the present day value of the policy to help pay for the costs of long term care for a loved one.
2- The answer to this question is often driven by one of two major factors:
a. Can the policy owner (and/or family) afford to keep a policy in-force by continuing to pay the premium obligations, and;
b. Can the policy owner (and/or family) afford for their loved one to receive the long term care services they require.
An additional factor that must be taken into account for Medicaid applicants is that life insurance is an “unqualified asset” for eligibility. It has been standard practice for years to abandon a life insurance policy if it is within the legally required five year look back spend-down period. But, converting a life insurance policy into a long term care benefit plan is a Medicaid qualified spend-down. Instead of abandoning the policy and going immediately onto Medicaid, the time a person remains private pay is extended while the present day value of the life insurance asset is spent-down in a Medicaid compliant fashion—all while preserving a portion of the death benefit for the family during the extended time period.
When assessing the viability of the Long Term Care Benefit conversion option, families will assess their current needs and all available options are for them to consider maximizing the value of their policy, which typically would consist of the following:
Keep the policy in-force to collect the death benefit
Surrender the policy for any remaining cash value
Consider a policy loan (requires they keep the policy in-force and cover interest payments and fees)
Consider a life settlement (a policy less than $1M will get little to no interest in the secondary market and overall life settlement payouts offer a smaller percentage of face value than an Assurance Benefit conversion provides to fund senior living and long term care)
Consider an accelerated death benefit (if the policy has such a feature and then there are very specific requirements by life insurance companies to verify terminal diagnosis to get approval)
Consider converting the policy to a long term care Assurance Benefit plan