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Life settlements, LTC planning and advisor liability

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Unexpected and dangerous threats in the form of professional and personal liability have emerged in the wake of the growing LTC funding crisis. Lawsuits and mandated claw-back actions have been brought against families in attempts to recover monies spent on long term care. Insurance and legal advisors have also been sued by clients in response to fiduciary responsibility issues about options to fund long term care, or how to derive the highest value from a life insurance policy.

Laws to recover LTC expenditures

These aggressive legal actions take root from state filial responsibility laws and federal estate recovery mandates that have existed for decades. 

In 1993, the federal government passed a mandate in the Omnibus Budget Reconciliation Act of 1993 (OBRA ‘93) that requires states to implement a Medicaid estate recovery program. Later, the Deficit Reduction Act of 2005 (P.L. 109-171, DRA) contained a number of provisions designed to strengthen these rules. OBRA gives states the authority, and the obligation, to sue families via probate court to claw-back Medicaid dollars spent on a loved one’s long term care. In this law, states are required to sue the estates of Medicaid recipients, “to recover, at a minimum, all property and assetsthat pass from a deceased person to his or her heirs under state probate law, which governs both property conveyed by will and property of persons who die intestate.Such property includes assets that pass directly to a survivor, heir or assignee through joint tenancy, rights of survivorship, life estates, living trusts, annuity remainder payments, or life insurance payouts.”

The government has had the authority to take legal action against families to recover Medicaid dollars for over two decades. In fact, Medicaid recovers hundreds of millions from families every year, but as budget pressures increase, estate recovery actions are becoming even more aggressive. Ironically, a high profile legal action recently taken against a family to recover costs spent on long term care was not initiated by the government, but was instead successfully undertaken by a nursing home company. In 2012, John Pittas, a 47-year-old restaurant owner, was sued by a nursing home company for $93,000 in expenses incurred by his mother over a six month period after she was denied Medicaid eligibility. The Superior Court of Pennsylvania (Health Care & Retirement Corporation of America v. Pittas Pa. Super. Ct., No. 536 EDA 2011, May 7, 2012) found in favor of the nursing home based on “filial responsibility law” (which is on the books in 28 states), and the son was forced to re-pay the entire costs for his mother’s care. The court finding even granted discretion to the nursing home company to seek payment from any family members it wished to pursue.  

See also: 5 Medicaid trends to watch in 2014

Legal risks and exposure

The legal exposure families face is only the beginning of the danger as the threat assessment level continues to rise.  Insurance agents and elder law attorneys are also at great risk for not providing adequate advice (and at a minimum not documenting their recommendations) about long term care planning to clients.  “Professional advisors need to realize that the world we are working in has changed and become more dangerous for them,” said Don Quante, President of America’s First Financial Corp in St. Louis, MO.  “I was in Florida recently where I saw attorney billboards advertising for people with long term care needs to call them. I placed a call only to discover that they were not providing planning services; what they were really doing is recruiting seniors in financial distress to sue their past advisors for insufficiently preparing them to pay for long term care.”

There are a number of new funding options that are commonly used to help people pay for long term care, and it would be expected that any licensed agent or attorney would be current on these options and include these as part of any long term care planning discussion.  For example, if an individual (or their spouse) is a wartime veteran, they could be entitled to Veteran’s Aid and Attendance Benefits. There are also state specific voucher and waiver programs, as well as senior care specific and/or home equity based loan programs available to consider. And, if a person owns a life insurance policy, they may be able to sell the policy into a tax-exempt long term care benefit plan.

Millions of seniors own life insurance policies and have no idea that they can be “converted” or sold through a life settlement into a long term care benefit plan. This has been a common practice for a number of years, and every senior care provider in the country accepts this form of payment. Once enrolled, the owner of a long term care benefit account can use the funds tax-free to pay for their choice of home care, assisted living, memory care, nursing home care, or hospice. 

According to elder law attorney William G. Hammond of Overland Park, Kansas, “A perfect storm has arrived that is changing the way long term care will be delivered and financed in our country. Baby boomers are entering their retirement years at a time when the economy is struggling to regain its footing after the Great Recession of 2008. The conversion or sale of life insurance policies to help pay for the cost of long term care is one of the strategies which can be utilized to help pay for the cost of care. Smart attorneys and advisors will be well-served to recognize this innovation and to use it to help their clients remain at home or in the community longer.”

For families with the need to pay for long term care, who are unable or unwilling to keep their life insurance policy in-force by maintaining premium payments, converting it into a long term care benefit plan is a much better choice than abandoning a policy. At this point, advisors not discussing this option with clients that own life insurance are exposing themselves to the potential of serious legal liability issues.

Policy owners attack

A very recent example of what can happen if alternative options to lapse, surrender, or benefit reduction for owners of life insurance can be found in California where a couple filed a lawsuit in January, 2014 against Lincoln National Life (Larry Grill et al v. Lincoln National Life Insurance Company California Central District Court). This marks the first time that a lawsuit has been filed against an insurance company for “actively concealing” the policy owner’s right to seek a life settlement as an alternative to lapse, surrender of reduction of death benefit. It could establish a groundbreaking precedent when it comes to informing owners of life insurance policies about all of their rights and options to get the maximum value from their asset. 

The ramifications for the world of insurance, financial services and long term care planning cannot be overstated or underestimated. Today, many insurance agents are outright prohibited from discussing the life settlement option for fear of reprisals from insurance carriers. Yet, it is clearly the fiduciary responsibility of an advisor to inform a policy owner of this alternative option to consider. This puts advisors in a very precarious position. For policy owners in search of options to fund long term care, selling a life insurance policy into a long term care benefit plan is ignored at great peril by those relied upon to know the market and give sage advice.

No sooner said than done…

By 2014, twelve states had introduced policy conversion consumer disclosure legislation to educate policy owners about the option to sell a life insurance policy to fund a long term care benefit plan and remain private pay. It also codifies the long term care benefit plan structure that protects the funds and ensures they will only be used to pay for long term care services in: California, Florida, Kentucky, Louisiana, Maine, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Texas, and Washington. Texas was the first to enact this consumer protection legislation into law in 2013, followed by Kentucky in 2014.

The point of the new disclosure law is to make sure people know they have the legal right in every state to use their life insurance to pay for long term care and remain private pay for as long as possible. The bill requires that policy owners be informed of this private pay option, and that they specifically use a long term care benefit plan to protect the funds and make sure that they are only used to pay for the long term care services of their choice.

This new law does two things:

  1. Grants authority to the Medicaid department to inform and educate citizens that they can convert life insurance policies into a Medicaid qualified long term care benefit plan to remain private pay as long as possible and choose any form of long term care they want instead of abandoning a policy to go straight onto Medicaid.
  1. To qualify, the long term care benefit account must be an irrevocable, FDIC insured account that makes payments directly to the care provider; the person must be able to choose the form of care they want; a funeral benefit must be preserved; and if there is any unpaid account balance when the person dies it must go to the designated account beneficiary. 

States are quickly realizing the savings that can be found for their beleaguered budgets by delaying entry onto Medicaid through the use of life insurance policy conversions into long term care benefit plans. State legislative leaders across the country are taking action with these consumer protection disclosure laws to encourage consumers to convert their life insurance to pay for long term care as an alternative to abandoning their policies. Policy owners exercise their legal right to convert an in-force life insurance policy into a long term care benefit plan and direct tax-free payments to cover their senior housing and long term care costs. 

Insurance, financial and legal advisors need to be aware of this option and how to incorporate it into a long term care financial plan. Families who have abandoned a life insurance policy, only to later discover it could have been used to pay for long term care, now have the legal precedence behind them to hold their advisor responsible.

Where do we go from here?

The world of long term care planning is starting to resemble the Wild West, where vigilant justice is being extracted by all sides impacted by the long term care funding crisis. Governments have the right to recover funds from families; courts are ruling in favor of corporate interests going after extended family members to claw-back long term care costs; and, in turn, families are going after insurers and advisors years after receiving what they perceive to be “actively concealed,” bad, or incomplete advice.

Advisors are dedicated to helping clients by finding solutions to their needs and problems. The best way to accomplish this is to provide as much information and access to options as possible. Simply not knowing about or ignoring an existing market option will not protect an advisor against the growing trend of angry clients facing financial ruin because of long term care costs that they were unprepared to meet. Clients assume advisors are aware of all options in the market that can help them, and expect to be informed so they can make decisions about how to plan and fund their long term care.

People want to remain financially independent and in control of their care decisions for as long as possible. People do not want to go onto Medicaid, yet consumers lack awareness and are unprepared for how they are going to cover the costs of home care, assisted living, skilled nursing care, or hospice. It is a subject typically ignored until a loved one is in immediate need of care.

The writing has been on the wall for a long time. The baby boomer crush coupled with the LTC funding crisis is starting to escalate this issue quickly. Consumers want to be private pay and choose the form and place of care that they want.  They want to be in control and spare their families financial ruin. Political leaders want to see people remain private pay as long as possible and delay — or, better yet, avoid — Medicaid. Providers of long term care services and supports prefer private pay. People with life policies need to be informed that they can turn their policies into a long term care benefit plan instead of lapsing or surrendering their policy. If they aren’t, unprepared families are facing possible legal action by the government, and advisors are facing possible legal action from unhappy families.

To download a FREE copy of the complete white paper: “Dangerous Liabilities Lurk for Families and Advisors in Long Term Care Planning,” Click Here