Definition and Overview
A life insurance conversion is the sale, by the policyholder, of their life insurance to a third party in exchange for a defined amount of long-term care services, such as assisted living, in-home, or Alzheimer’s care. One may also use the funds for home modifications to allow aging in place. The program is specifically structured to allow participants to gain Medicaid eligibility. Should the policyholder pass before the defined amount of elder care services has been exhausted, any remaining monies go to a beneficiary designated by the original policyholder.
This is a relatively new option and the language surrounding it is still shifting. One might also hear life insurance conversions referred to as Life Care Assurance, a Long-Term Care Benefit Plan, a Medicaid Life Settlement, or simply Life Care Funding, which is the name of the primary organization responsible for this program’s development.
Converting a life insurance policy into care services provides a higher return than the cash surrender value or a life settlement. It also allows a policyholder to maintain their Medicaid eligibility.
Pros & Cons of Life Insurance Conversions (Life Care Funding)
In this program, the owner of a life insurance policy sells the policy to a third party for an agreed upon dollar value of elder care services. The buyer of the policy takes over the monthly premium payments, pays the care providers’ monthly fees for the policyholder and collects the death benefits when the policyholder passes.
The major benefits to the policyholder are:
1) They immediately receive funding for elder care services.
2) They receive a greater economic value for their policy than they would if they were to take the cash surrender value (the amount of money one would get if he or she terminated their policy) or engage in a life settlement.
3) They maintain the option to receive Medicaid assistance if and / or when their resources expire (a life settlement does not maintain this option).
4) The family is freed of making monthly payments to maintain the policy as well as of the administrative tasks of managing it.
1) The major drawback is that the family does not receive the death benefit from the life insurance policy. And the value they do receive is less than the death benefit amount would have been. Calculating an exact value is not possible, as one does not know how long the policyholder will live and therefore how many additional monthly premium payments would have been made. Typically, families receive the equivalent of 20% – 50% of the death benefit amount (also known as the face value of the policy).
2) As with any funding source for elder care, such as selling a home, getting a reverse mortgage, or taking a loan, there are situations when the option does not make sound economic sense. Life insurance conversions are no exception. For this program, if the life expectancy of the policyholder is relatively short, and the family can possibly afford to pay for care from some other source of funding, such as a family loan, they should do so.
Example Life Care Funding Usage Scenario
A policyholder has dementia and needs care. They have a life insurance policy with a face value of $150,000. A life insurance conversion provides the family with 35% of the face value of the policy ($52,500) in care services. The family hires a home care worker at the cost of $2,000 per month. After one year, the individual requires a higher level of care and moves into an assisted living community. The monthly cost is $3,000. After six months in assisted living, the individual passes. All the home care ($24,000) and the assisted living ($18,000) have been paid for by the agreement and $10,500 remains in the account. This money is then paid to a beneficiary designated by the policyholder, typically an adult child or spouse.
Impact on Medicaid Eligibility
Life insurance is considered a countable asset when applying for Medicaid. This means if the face value of the policy exceeds Medicaid’s limit (generally $1,500), then the cash surrender value is a countable asset. For example, if one has a policy with a face value of $2,500 and a cash surrender value of $1,200, $1,200 will be counted towards Medicaid’s asset limit. Make note, in most states, Medicaid’s countable asset limit is $2,000 for a single individual. So, in some cases, one’s life insurance policy might make an applicant ineligible for Medicaid.
Therefore, in order to qualify for Medicaid, the applicant must allow their policy to lapse, and they will not be able to collect their death benefit.
Rather than allowing a life insurance policy to lapse, engaging in a life insurance conversion will provide the policyholder with funds for long-term care. After those funds have been spent, the applicant can then qualify for Medicaid. This process is referred to as a Medicaid-qualified spend-down. Were the applicant to take the cash surrender value for the policy or engage in a life settlement, it is unlikely they would be able to qualify for Medicaid.
Medicaid eligibility is very complicated. It is recommended that those considering Medicaid as an option should consult with an eligibility expert before to making a decision.
Qualifications for Life Insurance Conversions
Life Insurance Policy Requirements – All types of in-force life insurance policies are eligible provided they have a minimum face value of $50,000. This includes Universal Life, Group Life, Straight Term, Variable Life, Convertible Term, and Whole Life policies.
Age Requirements – There are no declared age restrictions for this program. However, the age of the individual may affect the amount of care value or even cause them to be denied. Older individuals in poor health can expect to receive higher amounts for care than younger applicants in good health. In general, individuals who convert their insurance policy into life settlements are 65 years of age or older.
Disabilities / Health Requirements – To participate in this program, an individual must have a need for immediate and ongoing care. Their health status may impact the value of the settlement amount.
Marital Status – There is no marital status or other family requirements. Since a family exchanging their life insurance policy for care payments does not receive the death benefit from their policy, this option is more appropriate for single individuals or those that do not have dependent children.
Other Requirements – There are no minimum and maximum income or asset requirements for the program. One veteran’s discharge status or geographic location within the U.S. has no impact on eligibility.
Benefits of Life Insurance Conversions
A life insurance conversion can allow family members to receive payment as caregivers.
The benefits from life insurance conversions come in the form of payments made directly to care service providers. This can be for home care, assisted living, nursing homes, adult day care, hospice, memory care, or used to make home modifications to enable aging in place. There are no restrictions other than the benefits must be used for the care of the policyholder and / or their spouse.
Typically, a pre-determined amount is paid to care providers on a monthly basis. This amount is flexible, based on the amount of months that one wants to receive payments. As an example, if one’s conversion benefit is $22,000, one is able to receive payments of approximately $611 / month for three years, payments of approximately $911 / month for two years, or payments of approximately $1,833 for one year. However, lump sums are also available to pay off incurred debt to care providers. The care providers and monthly amounts can be changed at any time given 30 days notice.
Policyholders and their families usually receive between 20% and 50% of the face value of the life insurance policy. The average amount received is 35%. This percentage is nearly always higher than would be received in a life settlement or by taking the cash surrender value of the policy.
Paying Family Members as Care Providers
Using a life insurance policy to pay family members for the care services they provide a loved one is a highly attractive component of this program. Some explanation is required on how this works. The proceeds from converting one’s life insurance policy go into an irrevocable (it cannot be changed or revoked) FDIC insured bank account. From there, payments for care are made on a monthly basis to the care provider of the policyholder’s choosing. The spouse or adult child of the policyholder simply becomes a licensed home care worker. They are hired to provide care and are paid from the account.
In order to maintain future Medicaid eligibility, it is important to make sure the legal paperwork has been done correctly, caregivers are only paid for the hours they work, they are paid the market rate, and taxes are paid on the income they receive.
There are no fees associated with the Life Care Funding program. However, when determining the true cost of the program one must consider that participants typically receive 20% – 50% of the death benefit amount. Therefore, to determine the true cost of the program, participants must consider the expected lifespan of the policyholder and the monthly premium payment amounts they would be required to make for the remainder of their lives.
What to Expect
Life insurance policyholders that are interested in applying for this program should be prepared to provide the following information.
-Copy of the life insurance policy
-Current policy illustration
-Signed HIPPA authorization
-Life Insurance Information Release Form
-Last 2 years Medical Records
-Proof of Power of Attorney (if necessary)
Once all the necessary paperwork has been received, 4-8 weeks are required to process the application and arrange payment with the long term care service providers.
There are no charges or fees to apply for this program.