In plain sight:  An important tool for advisors with clients in need of long-term care

Senior Resources

Financial advisors work diligently to help seniors achieve post-retirement safety and security. But there is one area of financial planning that has become so great a concern it has, literally, been labeled an American “crisis:” The Long-Term Care Crisis.

While news outlets, government agencies, and researchers ponder how to change the course of this crisis, there is one fact advisors need to know: selling a life insurance policy can be a solution for many seniors who need to fund long-term care services and supports.

But first, some background on the crisis:

The PBS Newshour ran the sobering feature, Why Long-Term Care for U.S. Seniors is Headed for ‘Crisis,’ reporting that 70 percent of Americans ages 65 or older will need some form of long-term care for at least three years during their lifetime.

A Yale University study called the long-term care crisis the “older brother” of the health care crisis, presumably because they have the same parents – ignorance and inaction. The report, citing a major public research survey, found that “two-thirds of Americans over 40 have done little or no planning for their care needs. Three-quarters think their spouse will care for them, and almost half think their children and grandchildren will care for them.”

A 2016 report by HealthView Services on the costs of long-term care estimated that a healthy couple aged 65 who retire today will need almost $300,000 to pay for their health care services, or more than half of their social benefits for the rest of their lives. The costs skyrocket when serious health conditions emerge.

The U.S. Long-Term Commission’s 2013 report to the President and Congress outlined the severity of the crisis and categorically listed some 28 recommendations, of which almost none have been addressed.

Compounding this crisis is that long-term care insurance, which was popular among Baby Boomers just a few years ago, has largely gone away, with more than half of the top insurers abandoning the market and raising premiums beyond the ability for policyholders to afford them. The high costs of health care delivery and the sustained low-interest rate environment have made it impossible for insurers to offer reasonably priced premiums.

How will Seniors Pay for Long-Term Care?

The need for costly long-term care services and support can be unforeseen and immediate. For more than 75 percent of nursing home residents, entering the facility was relatively unexpected, with an injury or illness making it impractical to return home or care for themselves. And the first question they’re asked when arriving at a facility is a big one: “How do you plan to pay?”

The problem, of course, is that the majority of people haven’t planned to pay. The vast majority of Americans have neither budgeted nor saved for their own long-term care. And while Medicare (and the alphabet of supplemental plans) can cover a significant chunk of a senior’s health care costs, few realize that Medicare does not cover long-term care costs.

Medicaid, however, does cover long-term care costs (but, importantly, not all). But in order to receive Medicaid, the senior has to exhaust a significant amount of their financial resources—retirement savings, inherited property, money in the bank, etc.

Importantly, in all but a handful of states, in order to qualify for Medicaid applicants are forced to terminate their life insurance policies to access any significant amount of cash value those policies may have in order to spend that money down before they are eligible for Medicaid. Even if the policy has little or no cash value, it is either impractical or impossible for the senior (or their spouse or children) to maintain the policy.

In other words, billions of dollars of life insurance are lapsed or surrendered by arcane Medicaid rules that force seniors to terminate their policies.

Advisors and the Long-Term Care Crisis

It is against this backdrop that financial advisors have to try to help seniors build a “nest-egg on top of a nest-egg” so long-term care needs can be met.

This is where selling a life insurance policy for its fair market value can be a life saver for seniors and their families. Selling – rather than terminating – a policy and using the proceeds from the sale to pay for long-term care has numerous benefits.

For one, having their own money means the senior can choose the level and type of care that best meets their needs. It may be most appropriate for the individual to receive care at an assisted living facility but, in most states, this isn’t an option for recipients of Medicaid. It may also mean that an elderly parent doesn’t have to move in with their adult children. It means, too, that they don’t have to rush to sell off assets just to pay for long-term care.

Selling a Life Insurance Policy is a Valuable Option to the Long-Term Care Crisis

 The average offer price for the life insurance policy of a senior in need of long-term care will be approximately 25 to 40 percent of the death benefit. For an average sized policy of $100,000, this could mean receiving $25,000 or as much as $40,000, which can be used to provide home health care services or skilled nursing care for up to a year, or as much as six months of care in a nursing home. For larger policies, the value received will be even greater. (To learn more about the hidden treasure of a life policy, see Senior Clients Need More Income? This Hidden Treasure May Be the Solution.)

Having their own resources can mean the difference between a senior being admitted into the nursing home of their choosing versus having the county assign them to whatever bed is available in the region. Nursing homes and other long-term care providers welcome private resources to pay for care, even if those resources run out over time and are replaced with Medicaid funds.

This idea of using a life insurance policy to address the long-term care crisis is gaining traction across the U.S. The federal Long-Term Care Commission recommended further study into “the conversion of life insurance policies to long-term care benefit plans.” The National Conference of Insurance Legislators recently renewed its model law on life insurance that requires mandatory disclosures by insurance companies to senior policy owners about “the sale of the policy pursuant to a life settlement contract” and “the conversion of the policy in order to obtain long-term care health insurance coverage or a long-term care benefit plan,” which is another form of a sale of a policy. Six states have adopted this or a similar law already.

And now, as states are faced with the burden of burgeoning Medicaid budgets, new laws are being passed to require Medicaid agencies to tell applicants they can sell their life insurance policies and use the proceeds to fund their long-term care needs. Texas and Kentucky were the first states to pass such Medicaid Life Settlement laws. And similar bills were or are still being considered in New York, Pennsylvania, Massachusetts, Georgia, New Jersey, Florida, Louisiana, Rhode Island, and California.

So, if a senior is in need of long-term care and doesn’t have the resources to pay for it, or can’t do so without destroying their nest egg, consider recommending that they sell, rather than terminate, their policy and use the proceeds to pay for some, if not all, of their long-term care costs.

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