LTC Bullet:  Using Life Insurance Death Benefits to Fund LTC

Friday, April 15, 2016

Seattle—

LTC Comment:  Hybrid policies are not the only way to employ life insurance to fund long-term care according to a national expert and policy advocate after the ***news.***

*** HAPPY TAX DAY:  Oops.  Taxes aren’t due this year until April 18.  How come?  Well usually if April 15 falls on a weekend, the due date for paying the IRS becomes the following Monday.  But this year April 15 falls on a Friday.  So, what gives?  Turns out Friday, April 15, 2016 is “Emancipation Day,” which “marks the day that the Compensated Emancipation Act was signed by President Abraham Lincoln and is observed on April 16,” a Saturday this year.  It’s a legal holiday in DC so public employees get the Friday before off work.  Your belated tax dollars at work. ***

*** LTC CLIPPINGS:  Following is an example of an LTC Clipping we sent to our LTC Clippings subscribers this week.  We try with the clippings to keep our readership abreast in real time of important news, reports and statistics that they need to know in order to stay at the forefront of professional knowledge.  To join the Center or subscribe to our LTC Clippings, contact Damon at 206-283-7036 or damon@centerltc.com.

4/13/2016, “Medicare Help At Home,” by Karen Davis, Amber Willink, and Cathy Schoen, Health Affairs

Quote:  “This blog presents a Medicare Help at Home policy proposal to add home and community-based services to Medicare to enhance financial protection for beneficiaries, provisions to ensure the quality and efficient use of services, and honor beneficiary preferences for independent living and care at home.”

LTC Comment:  Brought to you by the same people who proposed adding deck chairs to the Titanic after the incident with the iceberg. ***
 

LTC BULLET:  USING LIFE INSURANCE DEATH BENEFITS TO FUND LTC

LTC Comment:  There is a lot of money stored up in life insurance that could go to funding long-term care according to Doug Burr, SVP of Finance, Reimbursement & Government Relations at Health Care Navigator, LLC.  We asked Doug to share his ideas on this subject.  He chose to put what he has to say in the context of a new “framework” for long-term care financing.  His article follows explaining his new framework and how using insurance to fund LTC fits into it.

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“Using Life Insurance Death Benefits To Fund LTC”
by
Doug Burr
 

For decades I have been reading newspaper articles, public policy analyses and detailed academic research reports all discussing the issues related to planning for and paying for long term care (“LTC”) services.  It is true that consumers generally do not want to think about potentially needing LTC services and certainly do not want to think about how much it costs to be completely dependent on other people for daily living activities.  However, the reality is that the majority of us will need some LTC services at some time in our lives. 

It is also true that the government - by allowing many exclusions, exemptions and special provisions in defining eligibility for the Medicaid safety net program - has both confused consumers and crowded out private market solutions and the will of individuals to take on that responsibility for themselves.  It is now a widely accepted practice for consumers to structure their retirement and estate plans in order to optimize access to government benefits instead of attempting to plan for and pay for their own eventual LTC needs.  And who would blame them…it’s easy to do and “free.” 

We need to change the motivation for and drivers of planning for LTC needs and refocus the roles that are and should be played by individuals, families, governments and private enterprises.  To do so we need to take portions of policy ideas historically proposed by competing political spectrums.  Only when we have everyone disliking something will we know that we have a plan that represents a valid compromise.

There is no one size fits all right option when it comes to LTC planning.  Therefore, allow me to propose a framework that has sufficient flexibility to accommodate a variety of planning options and government benefit programs.

Proposed Framework
(all dollar figures are purely arbitrary and for illustration purposes only)

The current Medicaid benefit program for the over age 65 Aged Blind and Disabled (“ABD”) populations would be replaced with a federal catastrophic safety net program that has a front end means tested LTC lifetime deductible.  There would be a stringent hardship application process for the truly needy that would allow for a lower lifetime deductible.  This change could be phased in over time with notices and educational materials provided to consumers as part of Social Security benefit packages mailed out on each person’s 35th, 45th and 55th birthdays.  These materials would educate consumers about their role in paying – on the front end - for a portion of any LTC services they may need.  The lifetime deductible could be set somewhat above the current institutional LTC utilization length of stay and cost (e.g., 1 year at $225 per day = $82,125…so let’s call it $100,000).  Any person who plans to and meets their lifetime LTC deductible would become eligible for the catastrophic benefit (by entering through the “front door” of the framework).

To qualify to count against the lifetime deductible any incurred LTC costs would need to be for services that are defined as covered by the new federal catastrophic LTC benefit and be incurred after the person is found to meet the institutional level of care requirement either due to physical or cognitive deficits as defined in the state in which he/she lives.  The dollar amount applied against the lifetime deductible for the individual would be based upon the fee schedule payment under the catastrophic LTC benefit program for the service received that was in effect at the time the service was provided.

The lifetime deductible could be means tested by adding $10,000 to the lifetime deductible for every $1,000 of monthly retirement income in excess of a threshold – say $20,000 - AND for every $100,000 of non-family farm real estate assets in excess of a threshold – say $2,500,000 - as measured at the earlier of (i) the year in which the person first draws a social security or pension benefit or (ii) the year in which the person reaches the age of 70.  Hypothetically, a person who first draws Social Security in the year they turn 67 and reports income equal to $25,000 per month and has $8,000,000 of (fair market value) real estate holdings would have a lifetime LTC deductible of $700,000 ($100,000 + {[($25,000-$20,000)/$1,000]*$10,000} + {[($8,000,000-$2,500,000)/$100,000]*$10,000}) prior to being eligible for the catastrophic benefit. 

You could also adjust the LTC lifetime deductible downward on a similar basis as described above to account for low income people, but not to less than some reasonable level (e.g., 200% of FPL).  The only way to get a lower lifetime deductible would be to apply through the proposed hardship process.  For anyone applying through the hardship process (the “back door” of the framework) there would be no exclusions from countable income or assets.

The “premium” for the new catastrophic LTC benefit could be paid jointly by the state and federal governments.  The federal government could cover the lion’s share of services it considers “mandatory”.  Each state could choose from a menu of “optional” services for which it would be responsible for most or all the calculated premium.  This could likely be done in a budget neutral manner over the first decade of implementation with savings occurring in future periods as larger and larger portions of LTC costs are borne by the private sector.

Using Life Insurance Death Benefits to Pay for LTC

The new framework encourages consumer friendly funding mechanisms that already have broad acceptance as means to meet the lifetime deductible amounts.  I envision insurance companies offering consumers the opportunity to convert a portion of existing term life policies to some form of permanent coverage for the expressed purpose of meeting the LTC lifetime deductible and consumers using this life insurance death benefits for this purpose with the federal LTC catastrophic benefit serving as the safety net it was intended to be all along.  The current practice of Medicaid paying for services and then trying in vain to recover crumbs through a tortured estate recovery process would end.

According to the ACLI 2015 Fact Book there were 142.7 million life insurance policies in force in the United States for individuals with a total death benefit of $11.8 trillion.  Envision a consumer whose lifetime deductible is the hypothetical $100,000 and who owns a life insurance policy with a $150,000 death benefit when he/she first needs qualifying LTC services.  The consumer could either (i) sell the policy in a viatical-like transaction that creates a tax advantaged LTC trust account that is managed by an independent fiduciary to be used only to pay health care providers for covered services or (ii) enter in to a legally binding primary collateral beneficiary agreement naming the new federal benefit program as primary beneficiary of the policy up to the amount of the LTC lifetime deductible. 

To put it in perspective, a Federal Reserve report issued on June 11, 2015 indicated that home equity in the first quarter of 2015 had risen to $11.7 trillion – the highest it had been since 2007.  This means that life insurance for individuals is on par with home equity as a potential funding source for LTC and it is so without possibly stripping heirs of a home.

Several states have already considered legislation that “marries together” current Medicaid eligibility provisions with life insurance death benefits.  Despite this legislative activity in a few states many life insurance policies currently lapse at the point of Medicaid application due to the practice of case managers advising people to withdraw cash value from the policy resulting in these policies delivering no value to anyone. 

I like to think of it this way.  During and after World War II the leaders of our nation asked its citizens to pay for the war by purchasing war bonds.  They did and in one generation the war was paid off.  What if life insurance was thought of as the vehicle capable of paying for the Baby Boomers’ aging war?  What if death benefits became the path to quality of life by providing economic security and mitigating the stress that occurs when facing need for LTC services?   I think we could win this war.

Doug Burr is Senior Vice President of Finance Reimbursement & Government Relations at Health Care Navigator, LLC.  Reach him at dburr@hcnavigator.net.