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Turning Life Insurance into Long Term Care Insurance (Part 1)

For 20 years now, I’ve been guiding clients and their families on the spend down of assets before applying for Medicaid.  Successful applicants must spend down just about everything before getting Medicaid approval, including any life insurance policies that have cash surrender value.

For many seniors the cash surrender value of their policies is a fraction of the death benefit value, typically 10%.  Cashing in the policy for a few thousand dollars, in some instances, causes the loss of a death benefit of $50,000 or more.  Certainly, the insurance companies don’t mind.  Pay them years of premiums and then cancel the policy before they ever have to pay a claim.  Even where Medicaid isn’t yet a consideration, many seniors on fixed incomes let their policies lapse because they simply can’t afford them any longer.  Hundreds of millions of dollars in death benefits are never claimed.

When we come across these scenarios, where the “spread” between the cash surrender value and death benefit is large, we explore ways to keep the policy in force.  Sometimes children or other family members with the financial means to do it, can purchase the policies for the cash value.  The senior gets the cash which must then be spent down but the child now owns the policy and when the parent passes away the family will receive the death benefit.  The child must continue to pay the premiums, of course, but the policy is preserved.

But not every family has the financial ability to do that.  There is, however, another option for those families.  It’s something called a life settlement and  many state Medicaid divisions are encouraging their residents to pursue it.  Next week I will explain exactly what it is and how it works.