Financing Long-Term Care: The Life Insurance Solution
|BY MORRIS TENENBAUM AND EFFIE BATIS, MA|
|Financing long-term care: The life insurance solution|
As Medicaid tightens and private long-term care insurance grows slowly, many American families have another resource at their fingertips
| Although long-term care insurance has been available for many years, it has not been widely purchased, it can be expensive, and it is filled with gaps that may not cover all expenses. Moreover, if Medicaid eligibility is tightened further, many individuals will be forced to either spend down or pay exorbitant out-of-pocket costs for their long-term care.|
However, most middle-class Americans do own life insurance-and that might pre-sent an answer. As many Americans retire, the primary purpose of life insurance-to ease the financial burdens on families in the event of an untimely death-is no longer present. Most children have left the home and are self-supporting. Although life insurance is available to them as part of their parents’ estate, if out-of-pocket costs for long-term care are required, this presents significant financial burdens for aging individuals and their heirs.
Using and accessing life insurance benefits to pay for long-term care needs (or “life insurance for the living”) is an option. This would allow the benefit normally provided upon death to be paid out during the resident’s length of stay in the long-term care setting.
This is done through front-end spending of a permanent insurance policy that is called the Accelerated Death Benefit (ADB), or Life Benefit. If a policy has this provision, it will pay a percentage of the face value of the policy to the policyholder based on certain conditions. These may vary from state to state but could include diagnosis of a terminal illness or chronic disease, the need for extended long-term care in a nursing facility because of an inability to perform activities of daily living, or permanent confinement to a nursing home. This benefit offers a payout to the policyholder, not the beneficiary, for a specified amount. Policyholders can elect to use the entire ADB, which eliminates their death benefit, or they can use a portion of the ADB, leaving a partial death benefit in place.
ADBs began in 1988 as a way of giving terminally ill AIDS patients a portion of their life insurance proceeds to meet their current needs. This was the impetus for creation of the viatical industry. Viatical settlements were devised in the 1980s for people with terminal illnesses who, needing money to cover their care, would sell their insurance policies to investors for discounted prices-usually 50 to 85% of the face value of the policy. Viatical settlements have been criticized because they have not been heavily regulated and estimates of life span are difficult.
The ADB rider can be added to whole-life insurance policies but not term-life policies because the insured term usually ends at age 65 (although it can be extended). This may be a viable option for individuals who require long-term care services but do not qualify for Medicaid. Living benefits are not subject to federal income taxes. In states such as New York and California, they also are not subject to state income tax. Most companies require that your life expectancy be 12 months or less. Premium payments vary based on the company, with some charging higher premiums for the options, some charging no premium, and others charging only if the rider is accessed. Companies often restrict the amount accessible through this benefit to 50 to 85% of the face value of the policy. New York, for example, allows payment of up to 50 to 75% of the face value. Many insurance companies give policyholders the option to add an ADB at any time, not just when purchasing the policy.
A little more than four years ago, New York State approved legislation that authorized the sale of more diverse life insurance policies that offer ADBs to pay for long-term care services. Conditions for which the ADB can be accessed in New York are terminal illness with life expectancy of 12 months or less; diagnosis of a medical condition requiring extraordinary medical care or treatment, regardless of life expectancy; or certification by a licensed healthcare practitioner of any condition that requires continuous care for the remainder of the insured’s life.
The benefits of life insurance are so pervasive that 69% of American families own some type of life insurance, according to the 2001 Survey of Consumer Finances, an analysis conducted by the Federal Reserve. Individual life insurance protection in the United States has grown at an average annual rate of 5% since 1992, with the American household averaging $118,000 of life insurance coverage. Americans have invested significantly in this benefit that, with some attention and creative thinking, can be used in many ways. In an era of tightening long-term care financing resources, this is an option that merits serious consideration.
Morris Tenenbaum is CEO of Kings Harbor Multicare Center, Bronx, New York (a two-time OPTIMA Award winner) and CNHA Fellow of the American College of Health Care Administrators. Effie Batis, MA, is Director of Operations of the Southern New York Association, a nursing home association representing more than 60 skilled nursing facilities in the New York metropolitan area. For further information, contact Tenenbaum at (718) 320-0400. To send your comments on this article to the authors and editors, e-mail email@example.com. To order reprints in quantities of 100 or more, call (866) 377-6454.
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