Too often our company encounters seniors and their family who have owned a life insurance policy for many years that are about to lapse or surrender it for minimal value. They have contacted their life insurance company to ask them what they can do. The life insurance company will inform them that they really only have two options if they don’t pay their premium: Surrender the policy for its cash value if it has any or let it lapse.

Most people receiving a lapse notice have no cash value because it has already been drained by the carrier to make premium payments. That typically leaves the final option of pay or go away. The number of seniors who allow this to happen to a policy after paying premiums, sometimes for decades, is scandalously high. State lawmakers around the country have taken notice of this situation and are now taking action to make sure policy owners are informed of their options before abandoning their life insurance.

The life insurance companies are not happy about this disclosure law and have been gearing up their considerable lobbying machine to fight it in the states. They have objected on the grounds that too much information will confuse policy owners and may create unrealistic expectations for them. They also object to the idea that they “are advertising” other options that do not directly benefit them. Lastly, they object to the costs of sending notices to policy holders, but that argument is somewhat fungible because they will be sending notices through existing mailings such as lapse notices or premium statements.

It has been difficult for the carriers to argue against the simple concept that consumers are better off with more information, not less. The law’s intent is to make sure insurance carriers disclose to their policy owners that they have multiple options to consider beyond lapse or surrender. It also emphasizes that “policy owners should contact their financial advisor, insurance agent, broker or attorney to obtain further advice and assistance.” Violation of the law is considered an unfair trade practice and subject to penalties established by state law.

It is common sense that the best interest of policy holders is to make decisions with full disclosure of rights and options — and not in a vacuum. In today’s stressed economic environment, policy owners need to understand a life insurance policy is more than just a death benefit. It is an asset that can help them in a number of ways, and simply walking away from their policy is their worst possible option.

During testimony before the National Conference of Insurance Legislators as they considered final adoption of the Model Law on Nov. 19, 2010, Life Care Funding Group offered the following:

“Just two weeks ago we heard from a family with a $95,000 life insurance policy entering its grace period. Their mother is in the process of making the move into long-term care, and they could not afford the monthly expenses. They called their insurance company to ask what they could do with their policy and they were told their only option was to pay the premiums or let it lapse. Then they contacted us. And now instead of allowing the policy to lapse, we are converting it into a long-term care benefit plan that will help cover her costs of care and keep her off of Medicaid for at least the next two years.”

Life insurance policy conversion

This conversion option, known as an Assurance Benefit Plan, is not a LTC insurance policy. It is an actual benefit plan that a allows the owner of any form of life insurance to use their policy to pay for LTC life insurance by converting their death benefit into a living benefit to help pay for the costs of senior housing and LTC, such as assisted living, home health care and nursing home care. Any type of life insurance will qualify, and once their policy is converted, the family is no longer responsible for premium payments, there is no wait period, and the entire process can be completed in less than 30 days. Once enrolled, the benefit plan is administered on behalf of the family and the benefit payments are made directly to the facility on a monthly basis.

This conversion option differs from hybrid policies sold by carriers that can be converted into LTCI. This option allows for the actual exchange of a life insurance policy for a LTC benefit plan at the time that care needs to be paid for. Not to be confused with an insurance policy, the benefit plan is not issued by a carrier, restricted to polices that contain a conversion rider and restricted to the issuing carrier. Unlike LTCI, there are no wait periods to receive benefit payments. Once a policy is converted by the owner, benefits are immediate, they are relieved of any responsibility to pay premiums, and there are no fees.

The policy conversion can be done for any form of individual or group life insurance and is not subject to the same limitations and wait periods as LTCI. The entire conversion process can be done in under 30 days, and then a third-party benefit administrator makes benefit payments on a monthly basis to the LTC provider for the duration of the benefit period. If the insured should pass away before the benefit period is exhausted, then any remaining benefit amount is paid to the family or named beneficiary as a final expense payment. The conversion option is a much better choice than abandoning the policy for families with the need to pay for LTC that are unable or unwilling to keep their life insurance policy in-force by maintaining premium payments.

Providers of LTC services, such as nursing homes, assisted-living communities and home health agencies, have been quick to embrace this alternative form of payment. State governments, too, are realizing there is tremendous value to be found by converting life insurance policies to help pay for the costs of LTC. Life insurance is an unqualified asset for Medicaid applicants, and it has been standard practice to abandon a life insurance policy if it is within the legally required five year look back spend-down period. But now, by converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered by the LTC benefit plan and the life insurance asset can be spent-down in a Medicaid compliant fashion — while preserving a portion of the death benefit during the extended time period.

Qualified spend down of unqualified asset

The Assurance Benefit conversion option is considered a “qualified spend down” of a life insurance policy asset for Medicaid eligibility. A life insurance policy is legally recognized as an asset of the policy owner and it counts against them when qualifying for Medicaid. If a policy has anything more than a minimal amount of cash value, usually in the range of $2,000), it must be liquidated and that money spent towards cost of care before the owner will qualify for Medicaid. All Medicaid applications specifically ask if the applicant owns life insurance and full policy details. Failure to disclose and comply is fraud.

But, instead of abandoning a life insurance policy as part of a Medicaid eligibility process, the policy owner can convert a life insurance policy while still alive to help pay for LTC, and they are able to preserve a portion of the death benefit in the process. In turn, the care facility is able to quickly help someone in need of financial assistance for LTC and receive the private pay funds directly from the benefit plan.

There are also advantages for one other party paying attention to these kinds of programs– state governments and their maxed out Medicaid budgets. Policy owners that convert their life policies instead of allowing them to lapse or be surrendered represent an opportunity to extend the spend down period of this asset. In so doing, a person enrolled in an Assurance Benefit plan would stay off of Medicaid while they were enrolled.

Informed consumer in an empowered consumer

As is the case with any product or service, the more options and benefits the consumer understands is available to them, the more empowered they are to make a well-informed buying decision. In the case of life insurance, the vast majority of consumers do not understand their legal rights of owning this asset. Many policy owners mistakenly believe the insurance company owns the policy, and they “rent” the death benefit through premium payments. In fact, life insurance is legally recognized as personal property with the same ownership rights as any other asset, such as a home, stock or a vehicle.

The fact that they are in control of their policy and have multiple options available to them beyond just a death benefit opens up many new possibilities for how a policy is valued by the consumer. Its death benefit is just one level of value because the policy also has “present day value,” and the owner is in control of how and when that is accessed.

For more on LTC, see:

The basics of LTC

Life insurance tip: Beat the high cost of waiting

LTCI tip: Selling to family