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Alternative solutions to pay for LTC, part 1

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On Feb. 4, 2011, Federal Reserve Chairman Ben Bernanke gave a dire warning in a speech before a gathering of top financial policy reporters at the National Press Club in Washington, D.C.

“The two most important driving forces for the federal budget are the aging of the U.S. population and rapidly rising health care costs,” Bernanke said.

He warned the costs of caring for the rapidly growing population of seniors in the U.S. will be an unsustainable burden for the budget and a constant impediment to economic recovery. As 10,000 baby boomers a day started turning 65 on Jan. 1, 2011, the big three entitlement programs, Social Security, Medicare and Medicaid, are all in the red and creating havoc for government budgets at the federal and state levels. This has become the No. 1 economic concern of the Federal Reserve.

Medicaid has especially become a serious problem for the states. It funds at least two-thirds of all spending for nursing home care and is the primary payor for long-term care services in the United States. Unlike Social Security and Medicare, seniors do not automatically qualify for Medicaid at age 65 and instead must qualify based on income and assets at indigent levels.

Many seniors follow a “spend down” path to get rid of money and assets to qualify. Since the economic crisis began three years ago, Medicaid rolls have increased while the available dollars to cover services have decreased. The current situation and future projections are so serious that both the federal chairman and the secretary of Health and Human Services, the body that runs Medicaid and Medicare, issued unprecedented high-profile warnings on back-to-back days in early 2011.

Over 10 million Americans now require LTC annually, and Medicaid is the primary payor of LTC services in the United States. In 2009, Medicaid spent $240 billion on LTC services, accounting for 43 percent of total expenditures. By comparison, $45.6 billion or 19 percent of LTC services was paid out of pocket by the consumer. States spent on average 16 percent of their annual budgets on Medicaid, making it the second biggest budget item behind only education.

A report tracking Medicaid spending going back over the last seven years showed Medicaid underfunded payments for services to all patients by $14.17 every day in 2009, and this alarming underfunding trend will get worse through 2011. The economic crisis has robbed state budgets of funds available to support Medicaid funded programs. As a result, there was a national deficit of almost $5 billion.

Medicare and Medicaid are under so much stress that the cuts are coming fast and furious. The impact of all these aging baby boomers being added to the equation is now described as the “Silver Tsunami.” As this population surge starts looking to these programs to support their costs of LTC, there will be harsh push back from the government. It is simple economics that most people continue to ignore — too many people and not enough money will result in less services and higher hurdles to qualify for government programs.

Alternative solution emerges

According to the NAIC, today there is $10 trillion of in-force life insurance in the hands of 153 million Americans. That is a huge population of asset owners who, for the most, part do not understand their legal rights of ownership and the various options available to them. The insurance industry prices and makes profits from the fact that millions of these people are paying billions of dollars in premium payments for policies that in the end will be abandoned. Too few policy owners possess the knowledge of how insurance works and when their original need for a policy has run its course; the vast majority of owners simply walk away from what may be one of the most valuable assets they own — for nothing in return.

The shame of this situation for the consumer is there are numerous options for them to explore before surrendering or lapsing a policy. Life insurance is legally recognized as personal property, and the owner has the right to use this asset in a number of ways, including collateral as a loan from the carrier or third party, assignment and transfer of ownership, or converting the policy to another use while still alive.

For many policy owners, life insurance is an illiquid asset that is easily abandoned. The vast majority of life insurance policies in-force will never pay a death benefit because they either expire, lapse or are surrendered for cash value. Legislative and market activities across the country point to the growing realization that life insurance policies are an asset well suited to help pay for LTC. Too few seniors realize their policy could be used for purposes other than a death benefit — but the word is rapidly spreading among policy owners and law makers.

Consumer disclosure law spreads across country

The National Conference of Insurance Legislators understood the implications of billions of dollars of life insurance policies in the hands of seniors being discarded annually when they unanimously passed the Life Insurance Consumer Disclosure Model Act in November 2010. The law requires life insurance companies inform policy holders above the age of 60 or with a terminal or chronic condition that there are eight approved alternatives to the lapse or surrender of a life insurance policy. As of this writing, California, Connecticut, Kentucky, Maine, New Hampshire, Oregon, Washington State, Virginia and Wisconsin already have passed or are now considering life insurance consumer disclosure laws for their state.

NCOIL declared that final passage of the Life Insurance Consumer Disclosure Model Law is intended to be “a strong stand for life insurance policy owners and would empower consumers through education about their options.” NCOIL President Rob Damron, upon unanimous passage, said, “It is imperative that policy holders understand that they have alternatives to merely lapsing or surrendering their policy. The model would require a clear notice to consumers including … conversion to long-term care.”

The adoption of this law in the states is a direct response to the explosion of baby boomers reaching retirement age, anemic sales and significant disruption in the long-term care insurance market, and a realization that billions of dollars worth of life insurance is abandoned every year by people who do not know their legal rights or options. Expect more legislative action like this to escalate rapidly throughout the country.

For more on LTC, see:

The basics of LTC

Life insurance tip: Beat the high cost of waiting

LTCI tip: Selling to family