How to Use a Life Insurance Policy to Pay for Long-Term Care
An active life insurance policy is a no-no for individuals who are seeking to spend-down their assets to qualify for Medicaid.
Considered an, "unqualified asset," any life insurance policy with more than $2,000 in value must be dealt with properly before an elder can receive financial assistance from Medicaid. (Learn more about Medicaid and long term care expenses)
Some seniors end up abandoning their policies, or letting them lapse, by ceasing to pay their monthly premiums. Others surrender their plans in order to receive a pre-determined, "cash surrender value," a lump sum of money that varies in value based on how many payments the policy holder has made and what the overall worth of their policy is.
There is, however, a third option that most people fail to consider when facing a Medicaid spend down: converting a life insurance policy into a Long-Term Care Benefit Plan.
What is a long-term care benefit plan?
Anyone in possession of an in-force life insurance policy has the ability to transform that policy into a pre-funded financial account that will disburse a monthly benefit stipend to help pay for that individual's long term care needs. Unlike life insurance, a long-term care benefit plan account is a Medicaid qualified asset. (Learn how life insurance can affect Medicaid eligibility)
The conversion process transfers ownership of a life insurance policy from the original holder, to an entity that acts as the benefits administrator. Because the original owner no longer holds the policy, it won't count against them in the Medicaid spend down process.
The benefits administrator assumes all responsibility for paying the monthly premiums on the policy to the insurance company, and agrees to pay the previous policy holder a series of monthly payments based on the value of their policy. These payments can then be used to pay for a person's home care, nursing home, hospice care and assisted living costs.
If this process sounds unfamiliar, don't worry, you're not alone. Most people don't know that the long-term care benefit conversion option exists.
"For the last 100 years, anyone who's owned a life insurance policy has had the right to do this," says Chris Orestis, co-founder and CEO of Life Care Funding, a company specializing in life insurance policy conversions. "The problem is that most people are unaware that this option exists."
Examples of paying for care by converting life insurance
To give you a better idea of how life insurance policy conversion works, consider the following examples:
Allowing a loved one to age in place
Mary (names have been changed) has been taking care of her husband, Bill, who has dementia, in their home. Lately, Bill's condition has deteriorated to the point where Mary can no longer look after him by herself. Together, Mary and Bill own a life insurance policy worth $20,500. Mary cannot continue to make the payments on this policy and considers letting it lapse. Instead, she ends up converting it into a long-term care benefit plan that pays $350 every month, for 15 months, enough money to hire a home caregiver to help her take care of Bill. She as also able to retain $1,028 in the account for future funeral expenses.
Extending an assisted living stay
The Williams family wants to continue to pay for their mother to live in an assisted living community. However, they keep coming up just shy of being able to cover her monthly expenses. Ms. Williams has a life insurance policy worth $27,000, and her children look in to how much money their mother would receive if she surrendered the policy. They were disappointed to find that the plan would only translate into a few thousand dollars. After hearing about the long-term care benefit plan option, the Williams siblings decided to put their mother's policy through the conversion process. Doing so resulted in a monthly benefit of $975 a month for 12 months—enough to make up the shortfall in their mother's assisted living costs. Ms. William's also got to keep a funeral benefit of $1,357.
The pros and cons of conversion
On the surface, it seems like life insurance policy conversion is a no-brainer, but the method has its advantages and disadvantages.
- There are no monthly premium payments
- You can convert any type of life insurance plan: whole, term or universal
- Monthly payout amounts are adjustable based on how many months a person wants to receive payments. (For instance, a person whose life insurance policy converts into $12,000 in total benefits could choose to receive 12 monthly payments of $1,000, or 24 monthly payments of $500)
- Monthly payouts do not count against an individual seeking to qualify for Medicaid coverage sometime in the near future. A long-term care benefit plan is recognized by Medicaid as an acceptable spend-down during the five year look-back period.
- A long-term care benefit plan is comprised of "private pay" dollars, which means that it can be used to pay for any kind of care—home care, nursing home, assisted living and hospice.
- A special fund is set aside for future funeral expenses
- Anyone wishing to apply for a long-term benefit plan must have an immediate need for some form of acceptable long-term care (see examples above). This is because monthly payments are made directly to a long-term care provider, not the previous holder of the life insurance policy.
- It's not ideal for everyone. Orestis says that individuals with smaller policies ($10,000 or less) are probably better off holding on to their plan, or giving it up it in exchange for the cash surrender value. Also, people who have a life insurance policy with a large cash value built into it (i.e. a $100,000 policy with a $90,000 cash value) are better off taking that cash value than converting it.
It is also important to note that a long-term care benefit plan is not the same as a long-term care insurance plan.
According to Orestis, the biggest benefit of transforming a life insurance policy into a long-term care benefit plan is that it allows a person to remain private pay for a longer period of time. "The process can actually help aging individuals maintain some financial independence and dignity. It helps them exert more control over the type of care they receive," he says.
If you're interested in learning more about this process and exploring other options to help pay for long-term care, try seeking out the services of an independent financial advisor who specializes in the finances of older adults.