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Turning Life Insurance into Long Term Care Insurance (Part 2)

                So your parent has an insurance policy that they can no longer afford and they are in spend down mode to qualify for Medicaid.  Cashing in the policy and spending the proceeds is necessary before Medicaid will kick in.  But last week I mentioned another option, something called a life settlement.

                Here’s how it works.  The parent, as the owner, sells the policy to a third party for cash.   To be clear, the death benefit won’t be paid to the children any longer.  The third party investor will become the owner and beneficiary.  But, the senior can very often receive more money than he/she would by surrendering it for the cash value.  Typical life settlement payments range from 30 to 60% of the face amount (death benefit).   Term insurance policies, which have no cash value, can also be sold through life settlements.

                The cash received can help pay the cost of care for the senior.  This might allow Mom or Dad to stay in an assisted living setting or at home longer before money runs out and a move to a nursing facility becomes necessary.  It could also help get a family through a Medicaid penalty period resulting from gifts that were made several years before that can’t be repaid.

                But, why would someone sell a $100,000 policy, for example, on a life settlement contract, to receive only $30,000 to $60,000 and lose $40,000 to $70,000 on a death benefit, especially when that person could pass away very soon?

                This is certainly not the best financial outcome, looking at it purely from the numbers.   But, as I said last week, although it would be best for children or other family members to purchase the policy for the cash value, not every family has the financial means to do it.  In other words, life settlements can and should be an option of last resort, when no other alternative exists other than surrendering a policy or letting it lapse.  It is a means of turning a life insurance policy into a long term care benefit.

                There are very few strategies that we as elder law attorneys and state Medicaid offices agree on.  Life settlements happens to be one of them.  In 2010 the National Conference of Insurance Legislators unanimously passed the Life Insurance Consumer Disclosure Model Law which included the conversion of a life insurance policy into a long term care benefit plan as one of its mandated options.   And just last year, numerous states – New Jersey being one of them – introduced life policy conversion consumer disclosure laws granting Medicaid departments the authority to educate citizens that they have the right to convert their life insurance policies to pay for any form of care they select.

                If you would like more information on life settlements, email us at