WA
Chapter 4
Alternatives to
Not everyone needs long-term care insurance; some people simply shouldn’t purchase long-term care insurance. For example, some consumers cannot afford the premium over a long period of time. Since many will not use their policy benefits for ten years or more, the premiums paid over that time period represents a sizable sum of money.
Some consumers will not have adequate assets to protect. These individuals will easily qualify for Medicaid, so purchase of a long-term care policy would not be effective or even prudent.
A few people will have saved adequate for long-term care needs and will be able to pay for them out of pocket. These consumers are gambling that they may not need such care, but if they do, they can afford to pay for the care personally.
Any method of investment or long-term care funding that produces a pool of money could be considered as an alternative to an insurance policy. It would not matter whether the funding came from stocks, an inheritance, viaticals, or gold; funding is funding. If it produces enough money to pay for long-term care services, then it is an alternative to an insurance policy.
When to Buy Insurance
If an individual does plan to purchase long-term care insurance
it should be bought at a younger age, if possible. The age of application
determines future rates, which will always be based on the age the policy was
issued. While premiums may still increase, they will be based on that
application age rather than current age. Waiting until health conditions
develop may also mean a higher
Few people actually set aside funds for long-term health or personal care requirements. Investing successfully is one thing and having the funds set aside purely for long-term care is another. The problem is one of timing. Generally, the need for long-term care comes as life is coming to a close. The chances of putting money aside and using it for nothing else are small. It can be done; it just isn't likely to be done. Even so, it is possible to fund long-term care in ways that do not involve an insurance policy.
Asset Transfer
The ability to legally transfer assets may vary to some extent from state to state. Some transfers are made in order to qualify for Medicaid benefits. It is legal to transfer assets from one person to another, but if an individual is applying for Medicaid, such transfers must have been done prior to what is called the “look-back period.” Trusts typically have longer transfer requirement periods than do assets outside of a trust. If the transfers are not made soon enough, Medicaid benefits may be denied.
Individuals may feel tempted to handle the preservation of their assets personally, either because they feel knowledgeable enough, or because some type of salesperson, friend or relative gave false or grossly limited information. This is seldom wise. So many details go into finances that it makes sense to use professionals to cover all aspects of financial protection. A mistake in this area can be extremely costly to all involved.
Reverse Mortgages
Until reverse mortgages were developed, using one's home to pay for a long-term care confinement meant selling it, getting the cash, and moving out for someone else to move in. Those who are at least 62 years old can now use their home values in a different way. A reverse mortgage is a type of home loan, using the equity that has built up over the years to receive additional income. Repayment will be required at some point, but not while the borrower uses the home as their principal residence.
There are costs associated with obtaining a reverse mortgage and many feel those costs are relatively high, so individuals considering this type of home loan must consider the up-front costs. Those wanting cash to use for investing should not use a reverse mortgage since the loan is likely to cost more than the borrower could safely earn.
HUD’s Federal Housing Administration (FHA) created the first reverse mortgage. The Home Equity Conversion Mortgage, called HECM, is FHA’s reverse mortgage program that enables individuals to use the equity in their home while still living there. To be eligible for this program, the borrower must be 62 years old or more and either own their home or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan. The borrower must use the home as their principal residence.
The loans are generally expensive, although some argue that the cost is small compared to the advantages of having additional income each month. The amount owed grows larger each month. The younger the borrower is when the reverse mortgage is taken, the longer compound interest will grow along with the amount the borrower owes. AARP warns that, due to the upfront costs of the reverse mortgage, if the borrower moves within a few years after taking out the loan, it will likely do more financial harm than good. If it is likely that health care costs, such as long term care, will be required later on it may be best to wait until these costs actually arise to utilize a reverse mortgage, saving the home equity for that time.
Reverse mortgages are very different from other types of loans and the borrower will be wise to understand them before signing on the dotted line.
1. The loan must be paid back at some point, but not while the borrower is living there. The loan must be repaid when the borrower dies, sells their home, or permanently moves out of their home.
2. The borrower may receive the funds in a variety of ways, including a single lump sum, monthly advances, or a line of credit that allows periodic withdrawals.
3. Reverse mortgages usually cost more than traditional loans. The interest rate is compounded, meaning interest is charged on previous interest. If the contract continues for many years, the interest charged can be substantial.
By comparing reverse mortgages to typical home loans (called “forward” mortgages) it may be easier to understand the reverse loans. Both types create debt against the home and have an effect on the equity that exists; they simply do so in opposite ways. With reverse loans debt increases, while traditional forward mortgages decrease debt since the borrower pays a house payment each month. Reverse loans remove the individual’s home ownership gradually, while forward mortgages increase ownership over time.
AARP recommends individuals ask themselves five questions before entering into a reverse mortgage:
1. Do you really need a reverse mortgage?
2. Can you afford a reverse mortgage?
3. Can you afford to start using up your home equity now?
4. Do you have less costly options?
5. Do you fully understand how reverse mortgage loans work?[1]
Since reverse mortgages are different from other types of loans, the risks are also different. Borrowers need to spend some time learning how they work, advantages of using income from their home to fund special needs (such as long-term care), but also the disadvantages of these loans so they can make an informed decision prior to signing on the dotted line. Using up one’s home equity is a major financial decision.
Funding
Annuities are contracts issued by insurance companies. The term “annuity” means “a payment of money.” While some investors may purchase an immediate annuity with a lump sum deposit, many people slowly deposit into an annuity over many years (accumulation annuities). Annuities are marketed by many institutions, including banks and credit unions, but they are underwritten by an insurance company.
If an individual has an annuity that is not already annuitized for current living expenses, it might be possible to use the funds to pay for long-term care needs. What many people fail to fully understand is how the payout option chosen affects income received and the insured’s beneficiaries. Prior to annuitization, annuities are considered to be beneficiary-designed money, but once they are annuitized this is no longer true.
The amount received by annuitizing depends upon several things, including the amount invested in the annuity, the amount of interest it earned over time, and the payout option selected. It could also be affected by early surrender penalties if the investor takes a lump sum withdrawal prior to product maturity (when the surrender penalties no longer apply). They could also be affected by federal penalties if the investor begins withdrawing prematurely (prior to age 59 ½). Annuities are generally considered to be for retirement needs and that would certainly include paying for nursing home care or other types of long-term medical needs.
The payout option selected will determine the amount received each month. If the amount in the annuity is not large enough, using the annuity to pay for a nursing home stay may not be realistic; the investor must have saved adequately.
Single Life Payout Option
If the goal is to receive as much income each month that is possible, then the annuitant should select the Single Life payout option. This option bases payout on only one life, as the name implies. Because the insurer is paying only on the life of a single person, more is received than would be if they were considering two lives (husband and wife, for example). What many people fail to realize is that the single life payout option also excludes beneficiaries. Once the annuitant dies, proceeds do not flow on to any other person, even if the annuitant happens to die soon after the annuity was annuitized (put into payout mode). The annuitant is, therefore, gambling that he or she will live a long time and the insurer is gambling that the annuitant will die early, leaving the remaining funds with the insurer.
Joint-and-Survivor Payout Option
This is the option most often used by life partners, since it covers the lives of two individuals. The monthly income generated from this payout option will be less than that of a single life payout option, because two lives are insured rather than one. Again, the insurer will not continue paying any listed beneficiary because like the single life option, the insurer is essentially the listed beneficiary.
Life-and-Installment Certain Payout Option
This payout option guarantees that benefits will be paid for a specified term, even if the annuitants die. While the time specified varies, it is common to see ten year terms where payments will be guaranteed to flow to someone for the time period stated; if not to the annuitants, then to their beneficiaries. If the annuitant lives beyond the stated guaranteed time period the annuity would continue paying them income until their death. Once the time period has been reached and passed, beneficiaries would receive nothing.
Lump Sum Settlement
If a long-term care need exists the annuitant may choose to simply take a lump sum settlement. Assuming the annuitant is past the age of 59 ½ and any policy early surrender periods, there will be no penalty for taking the money in a lump sum. If the annuity is annuitized into monthly payments, any existing insurer surrender penalties would not apply.
Viatical Settlements
If an individual owns a life insurance policy it may be possible to sell it, using the cash received to fund a long-term care requirement. Those who buy life insurance policies sell the face values (death benefits) to investors. The insured will not receive full face values of course; they will be paid a percentage of the face value. Viatical settlements are most likely to work if the insured is expected to live no longer than three years, but there may be exceptions to this. Viatical settlements will not pay any benefits to listed beneficiaries - only than the investors.
Paid Family Members
In some cases paying family members is a solution if long-term illness or injury arises. Usually their care needs are the result of physical, mental or emotional problems that makes living alone dangerous. Some families willingly provide the supervision and care that is necessary and are able to do so. In some cases, help from outside agencies may be able to supplement the care the family gives. Whether or not this outside help was covered by insurance policies or government aide will depend upon multiple factors. For the sake of planning, the family or individual should not depend upon payment from other sources.
Any individual who plans to rely upon their family for their care must understand that they are taking a chance. No matter how willing the family may be today, it will be difficult to access their availability in the years to come. Family situations change; emotions change; financial circumstances change (the potential caretaker may have to take a job, for example); and the family's willingness to take on the chore may change. In addition, taking in a family member affects everyone in the household, not just the actual caregiver. There must be ample room in the house and financial resources must be available. Everyone in the family is likely to give up something when an elderly person moves in.
For some, promising a financial reward in return for care is the avenue chosen. A financial reward may be an annuity, stocks, or any vehicle that will pay the caregiver at some specified point in time. The care may be tied into a will or trust or a legal agreement may be drawn up. Whatever the case, there is still no guarantee that it will work. In addition, if the potential caregiver is providing care against their will, what kind of care will they actually be delivering? Most people try to avoid a nursing home because they think their care will be less than they desire. Their care would not be good even if a family member delivered it under some circumstances. In fact, even well intentioned family members have been known to deliver poor care. Nursing homes report a substantial number of patients coming from private homes come with bedsores and other physical problems that developed due to inferior care.
Accelerated Life Insurance Benefits
Some insurance companies offer accelerated benefits in their life insurance policies. These may be a part of the policy itself, or an attached rider. These benefits or riders may not take effect immediately upon the onset of illness, and sometimes put a limit on how much can be collected. Exactly how the life insurance benefits pay for long-term care will be affected by many elements, including state laws. Since a life insurance product does intend for long-term care to be a primary goal, it is unlikely that the benefits will work as well as a long-term care policy would.
Premium rates tend to be higher for products with accelerated benefits, usually about two to ten percent higher. For this amount, the insurer will pay part of the death benefit to the policyholder each month until the benefit is exhausted or a preset maximum is reached. If the policyowner dies before the maximum benefit is exhausted, the remainder of the benefits will go to the beneficiaries named in the life insurance policy.
For those life insurance policies set up to allow accelerated benefits, there are typically some codes which must be followed as dictated by the state where issued. The words "accelerated benefit" must often be included in the title of the policy or rider. Even though these benefits are accessible on an accelerated basis, the benefit is not typically described, advertised, marketed, or sold as either long-term care insurance or as providing long-term care benefits. Long-term care insurance and benefits must comply with a strict code of requirements, which these accelerated benefits generally do not meet.
The consumer must also be aware that there are possible tax consequences and possible consequences on eligibility for receipt of Medicare, Medicaid, Social Security, Supplemental Security Income (SSI), and other sources of public funding.
Some states have specifically addressed accelerated
benefits.
"If you receive payment of accelerated benefits from a life insurance policy, you may lose your right to receive certain public funds, such as Medicare, Medicaid, Social Security, Supplemental Security, Supplemental Security Income (SSI), and possibly others. Also, receiving accelerated benefits from a life insurance policy may have tax consequences for you. We cannot give you advice about this. You may wish to obtain advice from a tax professional or an attorney before you decide to receive accelerated benefits from a life insurance policy."
The disclosure statement must give a brief and clear description of the accelerated benefits. It must define all qualifying events that can trigger payment of the accelerated benefits. It must also describe any effect the payment will have on the policy's cash value, accumulation account, death benefit, premium, policy loans, and policy liens.
In the case of group life insurance policies, the disclosure statement is usually contained in the certificate of coverage, or certificate of insurability, or in any other related document furnished by the insurer to the members of the group.
Asset Transfers for Medicaid Eligibility
Because a nursing home confinement brings such fear, an industry of "asset-hiding" has developed. Especially in states where there is an unusually high amount of retired people, the legal profession is busy helping people give away what they have in order to qualify for Medicaid. This might involve an irrevocable trust (a revocable trust cannot hide assets), transferring assets to children or grandchildren, and other techniques designed to make one appear penniless. If this seems a viable solution, an elder care attorney should be consulted. Time limits may make asset transfers unworkable if there is not sufficient time to do so prior to needing long-term care services. In addition, assets that are transferred to children or grandchildren can be totally lost if their personal circumstances put the assets in jeopardy (such as divorce).
Very often the spouse and children of an ill or frail person desires to save the assets while transferring the cost of a nursing home stay to the government. Of course, the term "government" actually means each tax-paying citizen. There is a window of time that allows the individual to move assets entirely into the name of another. For this time period to be utilized, the illness must be handled at home for a long enough period of time to allow completion of the transfers and wait out the prohibited transfer time period. This period of time is called the "look-back period." The amount of allowed transfer changes periodically, always lengthening. It states that an individual who enters a nursing home within that stated period of time will be ineligible for Medicaid benefits if asset transfer was made. The length of ineligibility will depend upon the size of the transfer. Under some conditions, the time period may be unlimited.
Each state sets an average cost for nursing home care. The ineligible period is based on the costs set down by the state. If the financial transfer would have covered 5 months of care, then that is the time period of ineligibility. Whatever amount of time could have been covered by the financial value of the gift, that is then the amount of time lost for Medicaid benefits.
EXAMPLE:
Care in a local nursing home costs $3,500 monthly. The community spouse transfers $25,000 to her daughter in an effort to protect the assets and soon thereafter applies for Medicaid benefits for her ill spouse. The state would divide the $25,000 by the cost of the nursing home ($3,500) to determine the length of time she is ineligible to receive benefits for the institutionalized spouse: $25,000 divided by $3,500 = 7.14 months. Therefore, the ill spouse could not receive Medicaid benefits for 8 months due to the inappropriate transfer of assets.
There is no maximum period for disqualification of benefits. Only transfers made during the prohibited time period prior to application for Medicaid benefits actually applies. Therefore, if institutionalization occurs during the prohibited time period following an asset transfer, it would be wise to delay application until that period of time has passed.
EXAMPLE:
A married couple gives their children $300,000 as a gift. In the year following this transfer, one of the two enters a nursing home. Because the gift would disallow benefits for 86 months, the community spouse does not apply for Medicaid or COPES benefits until sufficient time has passed. By doing so, she has eliminated a penalty because DSHS will not look beyond the asset transfer eligibility period.
Not all transfers are illegal causing periods of ineligibility. Certainly, gifts made outside of the "look-back" period are not illegal. Trusts have different time tables than do non-trust assets so again, consultation with an elder care attorney is advised.
It is also legal to transfer a home to a child of the applicant, if the child has lived in the home and provided care to the beneficiary for the two years immediately prior to needing care in a nursing home or receiving COPES benefits. It is also legal to transfer the home to the applicant’s sibling if the sibling has an equity interest in the home and has lived in the home for a one-year period immediately prior to institutionalization or COPES eligibility.
Transfers may be made to a spouse or to a trust for the sole benefit of the spouse. This is also true for transfers made to an annuity for the sole benefit of the community spouse.
Transfers may be made to a minor or disabled child or to a trust for the child. In fact, transfers may be made to a trust for the sole benefit of any disabled person under the age of 65.
Any transfer may legally be made in situations where the gifts will be returned to the Medicaid applicant.
Transfers of assets are generally exempt when a Partnership policy has been purchased since Partnership nursing home policies are designed to protect assets (but not income).
Many states have instituted penalties for those who refuse to return illegally made gifts. The amount of penalty will depend upon the state in which it occurred. In addition, illegal transfers that are not returned are deemed to be fraudulent conveyance, which gives DSHS the right to petition the court to set aside the transfer and require the return of the assets given away.
What if the recipient of the gift no longer has the assets they were given? DSHS can waive the application of the transfer penalty if they feel undue hardship would result. This might happen if the money had been spent and there was no way to recover it. Probably DSHS would only waive the application of the transfer penalty if it were felt that no intent to defraud Medicaid existed and if recovery of the gift might cause the recipient or their family to face loss of shelter, food, clothing, or health care.
Trust Shelters
Some types of trusts may be used to shelter funds and allow Medicaid qualification. To use a trust as a means of protection, a specialized attorney should be sought out. While any attorney may legally draw up a trust, only attorneys with specialized training will do the type of job desired. Only attorneys should draw up trusts intended to shelter assets. Companies who sell trusts should not be relied upon. They simply are not geared for such complex situations.
Determining How to
Cover
Financial planners have used various investments with the intention of funding any type of medical expense that might arise, including long-term care needs. Often they promote the theory that the money is there for long-term care needs, but if not needed, it is there for something else. The problem with this becomes obvious. It is too easy to use the money for that “something else.” Long-term care medical needs tend to be the last medical requirement prior to death. Therefore, the only other use for the money should be gifts to beneficiaries. Investments solely intended for funding long-term care could work, as long as the money is not used for living costs. Money that is intended for long-term care needs cannot be used elsewhere for any reason. If it is, then the money is no longer available for long-term medical needs coming during the last years of life.
There was a time when long-term care insurance was not viewed favorably by many elder care attorneys and financial planners, but that attitude has been changing. It is no longer an issue of whether or not an individual needs to cover the costs of long-term care, but rather how the costs will be covered. If an insurance policy is not the best answer, then the individual must determine an alternate method of coverage.
End of Chapter Four
United Insurance Educators, Inc.