Life Insurance and Annuities to pay for Long Term Care: What You Need to Know Today
PART I: INTRODUCTION
In the story of the squirrels preparing for winter, one industrious squirrel gathers nuts all summer long to build up his family’s reserves for winter. The other enjoys the summer days frolicking and living day-to-day. Well, we all know what happens when the long cold winter sets in…..
This story is less a fairy-tale and more of a wakeup call. People are warned to plan for the future almost constantly over the course of their adult life. But we know the reality is too few actually heed the warnings and they don’t secure insurance or financial products that can mitigate their future risks. Maybe they don’t believe they will need long term care or if they do, they will be able to cover it when the time comes. Or maybe they want to plan, but are too busy or too pinched dealing with today’s expenses of a home, vehicles, raising kids, college tuitions, support payments to a former spouse, or maybe they are paying for the costs of long term care for their parents.
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. One of the fastest growing areas of funding long term care is in the area of “crisis management”. There are tools available to financial and legal advisors who work with families in the arena of long term care planning that can help pay for the costs of care at the time that it is needed. One tool that is becoming more prevalent is settling life insurance policy death benefits into structured vehicles that will pay for the costs of senior retirement living and long term care.
To put this concept in perspective, understand that there are less than 10 million long term care insurance policies in-force today (1). By comparison, there are over 100 million life insurance policies in-force today (2). Seniors allow about $100 billion worth of policies lapse or be surrendered annually (3). In fact, 88% of life insurance policies sold will never actually pay out a death benefit because the owner will abandon it at some point before they pass away (4).
They do this without realizing it is their legal right to settle the policy while they are still alive for the present day value and receive a significant percentage of the death benefit as a cash-out payment. After years of making premium payments, the owner of the policy can use it to help cover their retirement and long term care costs. Would you abandon your home without selling it after years of making mortgage payments? Of course not, and no one should abandon a life insurance policy after years of making premium payments if they are able to settle it instead.
Fail to Plan?
If you did not plan for the possibility of long term care, what do you do when what was not supposed to happen in-fact happens? What do you do when you or your loved one is confronted with an unexpected need for long term care?
A life insurance policy can still protect your loved ones while you are alive. You bought it to protect them in case you died—but it’s important to realize the same policy can protect your family from certain tragedies brought on by insufficient financial means and/or the need for long term care:
- You don’t need to become a physical or financial burden on your spouse or children
- You can avoid the physical and financial toll for you or family members by being forced into the roll of a caregiver
- You can avoid the sudden disruption and resentments this will cause throughout your family
- You can stop the drain of income and assets that supports your family today and in the future
Here’s the good news—there are options with a life insurance policy today that can help make sure you don’t need to go from being the caretaker and leader of your family to the one who needs to be taken care of.
The Fundamental Problem:
The costs of long term care are increasing every year, but most families and advisors do not understand what they will be confronting when it is time to start paying for care. Too many people wait until they are in the middle of a crisis situation before they start trying to figure out how the world of long term care works. Long term care is a topic people don’t want to discuss and it’s a very expensive proposition. Families go broke quickly trying to provide for a loved one. Compounding this problem is that most don’t know the differences between Medicare and Medicaid, and what you must do to qualify. They don’t know the differences between Home Care, Assisted Living and Nursing Home care. They don’t know what is and is not covered between public and private pay. They don’t understand the growing array of long term care insurance, annuity and life insurance products. They don’t know about immediate options to fund long term care like life settlements and how that can fund a tax-free Long Term Care Benefit Plan or an IncomeAssurance Immediate Need Annuity.
Long Term Care Insurance products are an excellent option to consider if you are young and healthy enough to qualify, and if you can afford to make premium payments for an undetermined number of years into the future. But, there are also private pay options for people who failed to plan, and all of a sudden find themselves in a position that they need to cover the expensive costs of senior living and long term care.
Are you a Solution Provider?
Any type of life insurance policy can be settled while the owner is still alive for a cash payment that will pay out the present-day value of the policy’s death benefit. With this sudden realization of funds from a “dead asset”, a couple of options designed to protect and efficiently administer the money for long term care expenses becomes possible:
- The person can enroll the funds into a tax-free Long Term Care Benefit Plan designed to make monthly payments to any form of care they choose.
- A medically underwritten IncomeAssurance Immediate Need Annuity will provide a guaranteed income stream to help cover retirement and long term care expenses for life.
It is important to emphasize that these options are designed to address immediate need to fund retirement living and senior care expenses. In fact, the older and more impaired their health condition, the more they will get when settling their policy and enrolling in either the Benefit Plan or the Annuity. It is a morbid concept, but the older and sicker you are the more money you can get with this approach to help pay for your long term care costs. Long Term Care Insurance is purchased before a person needs senior care. The younger and healthier a person is when they purchase insurance, the lower the premium payments will be and the more option they will have. A person who would qualify to purchase long term care insurance would be too young and healthy to enroll in the Long Term Care Benefit Plan or the IncomeAssurance Immediate Income Annuity. By comparison, a person who qualifies to convert a life insurance policy into a Long Term Care Benefit Plan or IncomeAssurance Immediate Income Annuity would be too old or sick to buy long term care insurance. If a person owns long term care insurance and life insurance they can convert the life policy into either option and use both together to make sure they maximize their senior care options.
PART II: SOLUTIONS
For decades, the owner of any type of life insurance policy has had the legal right to sell the policy, as an alternative to lapsing, surrendering or taking loans out against their policy. The Supreme Court case of Grigsby v. Russell (1911) established the policy owner’s right to sell an insurance policy to another party (5). Justice Oliver Wendell Holmes noted in his opinion that life insurance possessed all the ordinary characteristics of property, and therefore represented an asset that a policy owner could sell without limitation. Wrote Holmes, “Life insurance has become in our days one of the best recognized forms of investment and self-compelled saving.” This opinion placed the ownership rights in a life insurance policy on the same legal footing as more traditional investment property such as stocks and bonds. As with these other types of property, a life insurance policy can be sold to another person at the discretion of the policy owner.
The Life Settlement and Viatical secondary market for life insurance policies is a highly regulated market where institutional buyers will offer bids to buy the death benefit of a life insurance policy from the owner for many multiples above the cash value. To qualify, the policy must be in-force for more than two years, the seller must be above the age of 65, and they should have some prevailing health conditions that would be verified through the review of medical records. The policy owner would authorize the potential policy buyer to review their current health status and to also review their policy.
To qualify a review of medical records is necessary to determine the current state of health of the insured. Think of this underwriting process as the reverse of when you apply for insurance. Unlike qualifying for life, health or long term care insurance; in a settlement, the sicker you are the more you will receive as a higher level percentage settlement of the death benefit.
All types of life insurance can qualify for a settlement. Term, Universal, Whole, Variable, Group, Federal and Military life policies are all eligible. The smallest death benefit that will qualify is $50,000. Polices must be in-force a minimum of 24 months. Outstanding policy loans are allowable, but the loan amount will be deducted from the total face amount of the policy. A current policy illustration will be ordered to analyze and verify these policy factors.
Fiduciary Responsibility considerations:
Now, insurance companies and agents are being held legally liable for not informing clients about their right to a cash settlement for an unneeded life insurance policy. For example, a Rancho Mirage, Calif., couple filed a class-action lawsuit seeking punitive damages, treble damages, restitution and an injunction against Lincoln in 2012 in U.S. District Court in Riverside, Calif., (Larry Grill et al v. Lincoln National Life Insurance Company - California Central District Court) alleging that they may have been able to sell their policy rather than reducing their coverage if their agent had told them about the life settlement market (6).
Also, for long term care planning liability purposes, State Filial Responsibility Laws (filial support laws, filial piety laws) are laws that impose a duty upon adult children for the support of their impoverished parents and can be extended to other relatives. These laws can include criminal penalties for adult children or close relatives who fail to provide for family members when challenged to do so. 28 states and Puerto Rico have filial responsibility laws in place. (Wikipedia) and http://law.psu.edu/_file/Pearson/FilialResponsibilityStatutes.pdf . In 2012, John Pittas, a 47-year-old restaurant owner was sued by a nursing home company for $93,000 in expenses incurred by his mother over a six month period after she was denied Medicaid eligibility. The Superior Court of Pennsylvania (Health Care & Retirement Corporation of America v. Pittas Pa. Super. Ct., No. 536 EDA 2011, May 7, 2012) found in favor of the nursing home based on “filial responsibility law” (which is on the books in 28 states), and the son was forced to re-pay the entire costs for his mother’s care (7). The court finding even granted discretion to the nursing home company to seek payment from any family members it wished to pursue.
Over $100 BILLION of life insurance is abandoned every year by seniors who could have sold the policy for as much as 60% or more of the death benefit. Policy owners pay premiums to the insurance company for years—they should not abandon a policy by lapsing or surrendering it before determining what its present day re-sale value. It is the fiduciary responsibility of advisors to inform clients of their legal right to sell their unneeded policies for a cash settlement that could be used to pay for the costs of long term care.
Here are three options to consider once the seller of the policy receives their settlement:
- Take a cash settlement and “self-insure” to cover the costs of retirement and long term care
- Enroll the funds into a tax-free Long Term Care Benefit Plan to cover monthly costs of care
- Deposit the funds into an IncomeAssurance Immediate Need Annuity to secure a guaranteed stream of income for the rest of your life
What are the 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 they want as long as funds remain in the account; Cash final expense and all account funds go to family if death balance; Preserve or delay need to liquidate other assets/income.
What are the disadvantages to a Long Term Care Benefit Plan– – The policy owner is selling the policy for its present day value and they or the beneficiaries will no longer be able to collect the death benefit.
What are the advantages to an IncomeAssurance 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 COLA riders; Stop-loss to preserve or delay need to liquidate other assets/income.
What are the disadvantages to an IncomeAssurance Immediate Need Annuity– The annuitant can lose a portion of their initial principal if they die earlier than expected.
Long Term Care Benefit Plan:
A Long Term Care Benefit Plan is an irrevocable, FDIC-insured Benefit Account that is professionally administered with payments made monthly on behalf of the individual receiving care. The entire proceeds from the policy settlement 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 private pay and delays their entry onto Medicaid. It is a unique, tax-free financial option to pay for care 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.
In addition to being a Medicaid qualified spend-down inside the look back period, the Benefit Account is tax free because the funds are spent on care. Policy owners use their legal right to convert an in-force life insurance policy to enroll in the benefit plan, and are able to immediately direct monthly payments to cover any form of senior care they choose: Homecare, Assisted Living, Nursing Home, Memory Care, and Hospice.
All types of life insurance can qualify to be converted into a Long Term Care Benefit including term life policies, whole life, universal life and group life. Cash value does not matter in a policy conversion because it is the death benefit that is being converted into a “living benefit”. There are no costs or obligations to apply for a policy conversion. The underwriting process is simple, and the entire enrollment from beginning to end takes about 30 days. Once a policy has been converted and the Long Term Care Benefit is set up, monthly payments immediately start being made to any form of senior care that is desired without any elimination or wait period.
A Long Term Care Benefit Plan is not long term care insurance, and it is not a policy loan that costs fees and interest and must be paid back. When a policy owner converts their life insurance policy into a Long Term Care Benefit Plan, there are no fees, no premium payments, no interest charges and nothing ever needs to be paid back. The policy owner is actually obtaining the maximum present day value of the policy and protecting the funds in an irrevocable Benefit Account that keeps them private pay. The policy is no longer considered an asset that could count against them for future Medicaid eligibility.
A woman had been researching assisted living communities for her mother. They had also been looking for financial assistance because the monthly costs were more than they could afford. Her mother owned a life insurance policy and they had contacted the insurance company about accessing the accelerated death benefit. At fifty-five, she was afflicted with a rare, degenerative condition and could no longer care for herself. But the insurance company denied their claim. The assisted living community told them that they could convert the policy into a Long Term Care Benefit Plan instead. The mother moved immediately into the community so that she could start receiving the care and support she needed.
- Gender/ Age: Female / 55
- Policy Size: $200,000
- Policy Conversion: $119,000
- Monthly Benefit: $5,600
- Benefit Duration: 20 months
- Funeral Benefit: $7,000
*The case example is for illustration purposes and does not represent future offers, statements, percentages or amounts. Actual results will vary.
- The benefit account is irrevocable, managed by a third-part account administrator and the money can’t disappear.
- The money in the account can only be used to cover senior living and long term care costs.
- Benefit payments are made on a monthly basis and are paid directly to the care provider.
- The account provides a funeral expense benefit and if there are any additional account balances after death, it will all transfer to the named account beneficiary (one or more people).
- The monthly payments are adjustable and can change to meet changes in costs of housing and care.
- The account can be used to pay off outstanding balances.
- The process to enroll is quick and can be done in 60-90 days with payments starting immediately once the Benefit Account is funded.
- The Benefit payments are tax-free; are a Medicaid qualified spend-down; and qualify to be used with the VA Aid & Attendance Benefit.
- The Long Term Care Benefit Plan has been available to cover senior housing and long term care costs since 2007, and is offered by thousands of senior care providers, financial advisors and legal professionals across the country.
Is a Long Term Care Benefit Plan Medicaid Qualified?
A Long Term Care Benefit Plan is the sale of an in-force life insurance policy to fund an irrevocable Benefit Account that is professionally administered with tax-free payments made monthly on behalf of the individual receiving care. This option extends the time a terminally or chronically ill person would remain private pay and delays their entry onto Medicaid. By obtaining the fair market value for the life policy, and then at the direction of the policy owner putting the funds into an irrevocable bank account which can only be administered third-party to pay for Medicaid/Medicare qualified long term care services; the Long Term Care Benefit Plan is a regulated and Medicaid qualified financial vehicle to help cover the costs of long term care.
Is a Long Term Care Benefit Plan Tax-Free?
In many cases, the proceeds received from converting a life insurance policy insuring the life of a chronically or terminally ill individual into a Long Term Care Benefit Plan will not be subject to U.S. federal income tax. As a general rule, proceeds from the sale of a life insurance policy are subject to U.S. federal income tax; however, the Internal Revenue Code provides special exemptions for sales of life insurance policies insuring the lives of individuals who are terminally ill or chronically ill. In the case of a terminally ill insured, the proceeds from the sale of the policy will not be subject to U.S. federal income tax regardless of how the proceeds are used. And, if the insured is chronically ill, the proceeds will not be subject to U.S. federal income tax so long as they are used solely to pay for qualified long-term care services. In addition, the current estate and gift tax exclusion is more than $5 million. Therefore, unless the insured has an estate in excess of the exemption, any residual amount of the Long Term Care Benefit which remains in the account when the insured dies may pass to the account beneficiary (one or more people) tax-free. If the policy owner and insured are not the same person then, in the case of a chronically ill insured who passes while funds remain in the Long Term Care Benefit Account, the policy owner will be required to pay U.S. federal income tax on any residual amounts remaining in the account.
Please note that the actual tax treatment of the proceeds from the sale of a life insurance policy will depend on many factors, including but not limited to who owns the policy, the health of the insured, the use of proceeds, the size of the estate and the state in which the policy owner lives (for purposes of state taxation). This material does not constitute tax, legal or accounting advice, and neither Life Care Funding, LLC nor any of its agent, employees, or representatives are in the business of offering such advice. The information above cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. Anyone interested in selling a life insurance policy in order to fund Long Term Care Benefits should seek professional advice based on his or her particular circumstances from an independent tax advisor.
Income Assurance Immediate Need Annuity:
An IncomeAssurance Immediate Need 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 from an IncomeAssurance Immediate Need Annuity 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 untimely 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, including medical and living expenses, this annuity is designed to help offset the cost of long term care for people ages 70 and older with 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.
- Designed to help people who may need long term care now.
- For people who have adverse health conditions, monthly income payments may be higher than other traditional income solutions.
- Monthly payments will continue as long as the annuitant lives.
- Monthly income remains the same unless optional cost of living adjustment selected. Monthly income will not be affected by any future changes in health.
Once monthly income begins – by check or electronic funds transfer (EFT) –payments can be used for any purpose such as long term care expenses, living expenses or enjoying time with family and friends.
An IncomeAssurance Immediate Need Annuity gives you the flexibility to add optional features and create an income solution for your unique circumstances. Optional features are only available at issue and require additional premium to provide the same guaranteed initial monthly income payment.
Early Death Benefit:
If the annuitant dies within six months from the contract date, an early death benefit will be paid. The early death benefit is equal to the single premium multiplied by the applicable death benefit percentage (as shown in the table) less all income paid.
Optional Enhanced Death Benefit:
The owner can select life income with a protected period of one to five years and receive an enhanced death benefit. If the annuitant dies within the protected period, the enhanced death benefit is the greater of the minimum benefit amount, less income payments received, and the early death benefit. The minimum benefit amount is the sum of the monthly income payments for the number of months in the selected protected period, excluding any additional prorated amount included in the first monthly payment.
Optional Cost of Living Adjustment:
The owner, at issue, can select an annual cost of living adjustment of 1% to 8%. Monthly income will increase at the rate selected on each contract anniversary, compounded annually.
Their mother had a stroke a year ago, and is a diabetic who in recent months has taken several falls.
After careful research on her current assisted living facility and several other facilities, they were better informed about the broad spectrum of care available, but became very worried about her outliving her money. They determined that annual care and living expenses would be $40,000 a year and are likely to increase over the next few years.
Currently, in addition to a small pension and Social Security income, their mother has over $325,000 in savings.
She plans on using her pension and Social Security income to pay for part of her care and for other expenses, like gifts for her family and friends.
They all sat down with their financial advisor, to discuss options for using some of her savings to provide greater sense of security with an IncomeAssurance Immediate Need Annuity.
After going over the situation and the $40,000 per year they will need to help pay for her current assisted living facility they decided that using a portion of her savings to purchase an IncomeAssurance Immediate Need Annuity would make sense because it would guarantee a monthly income for the rest of her life.
Due to her age and recent health events, an IncomeAssurance Immediate Need Annuity would create an income she can’t outlive and help relieve her concern about increasing living and care expenses for a higher monthly income and substantially less premium than a traditional single premium immediate annuity.
- Gender/Age: Female / 87
- Single Premium: $233,608
- First year annualized income: $40,000
- Annualized income growth rate: 4%
- Cumulative income year 5: $212,365
- Cumulative income year 10: $458,555
*The case example is for illustration purposes and does not represent future offers, statements, percentages or amounts. Actual results will vary.
There are no wait periods and there are no triggering events needed to occur for payments to begin
- Income payments begin immediately
- There are no claims to file
- No activities of daily living (ADLs) requirement
- Income can be used for any purpose, including living and medical expenses
Designed for people:
- Who are concerned about outliving their assets
- Who need guaranteed income they can’t outlive with the flexibility to spend it as they wish
- Who are less healthy and could benefit from a larger monthly income payment than they would receive from a traditional single premium immediate annuity
- Who may need care now, or soon, and whose age and health preclude them from long term care insurance coverage options
- Who may be already receiving care in their home or a facility
- Who want to use only a portion of their assets to create lifetime income, allowing remaining assets to be left as a legacy
PART III: CONCLUSION
What is a responsible plan for the future and how do you handle a CRISIS today?
As an advisor, to help families avoid this kind of tragedy you need to switch your mindset from selling products to providing solutions. There’s no one size fits all policy to help people plan. And there’s certainly no one size fits all approach to dealing with a crisis situation such as this.
There are three critical elements to a responsible retirement plan:
- Protecting lifestyle by guaranteeing income.
- Protecting family legacy by guaranteeing wealth transfer.
- Protecting health, income and legacy from the costs of long term care.
If you have not addressed #3, then when the inevitable time comes for long term care you and your family will be forced to choose if it is #1 or #2 that you must sacrifice first. The costs of long term care can be staggering and a person could easily spend through $100,000 (or much more) over a 12-24 month period. But what if you could use an existing asset such as a no longer needed life insurance policy to cover the costs so that your income and legacy are protected—all while ensuring that your health and lifestyle are lived with quality, dignity, and choice? It is being done by people every day.
Despite the best efforts of legal, insurance and financial advisors to educate people about planning for the inevitable with insurance products and savings; people tend to be too busy trying to keep up with today to worry about tomorrow. But the problems this causes goes far beyond the individual. There is a ripple effect that can engulf family members, employers, tax payers, care providers, and it can also create significant liabilities for advisors.
So the question must be asked of clients regularly: Are you confident that you have planned and saved enough to live comfortably in your senior years? Are you ready to handle long term care for you or a loved one? Sadly, for the majority of Americans the answer to these questions is NO!
This is important because seniors have an overwhelming desire to remain independent, and do not want to become a burden on their family or a ward of the state by entering Medicaid. Unfortunately, the current system to fund long term care has evolved into one that encourages seniors to impoverish themselves and move towards Medicaid as quickly as possible. For the wealthy, long term care costs can be absorbed. For the poor and disabled, government subsidized care is available. But what about the majority of middle class Americans that need access to long term care today? New approaches to fund long term care must be embraced, and using life insurance policies to fund a Long Term Care Benefit Plan or IncomeAssurance Immediate Need Annuity is an option that has grown into a mainstream and accepted financial solution for long term care.
About the Author
Chris Orestis, CSA is the CEO of Life Care Funding and a 20-year veteran of both the insurance and long-term care industries. A former Washington DC lobbyist, he is a nationally known senior care advocate and author of the Amazon best-selling books “Help on the Way” and “A Survival Guide to Aging”, a legislative expert, featured speaker, columnist and contributor to a number of insurance and long term care industry publications. Chris is a frequent guest about senior issues on national radio programs; and has also been featured in the Wall Street Journal, New York Times, USA Today, Fox Business News, and PBS.
Founded in 2007, Life Care Funding was the first to pioneer the concept of converting a life insurance policy into a Long Term Care Benefit Plan. Since the company’s inception, they have built a national network of agents, attorneys, and advisors as well as over 5,000 Homecare, Assisted Living and Nursing Home companies that offer the Long Term Care Benefit policy conversion option to families directly across the United States.