Definition and Overview
A life insurance conversion is the sale, by the policyholder, of their life insurance to a 3rd party in exchange for a defined amount of long term care services such as an assisted living, home or Alzheimer's care or home modifications to allow aging in place. The program is specifically structured to allow participants to gain Medicaid eligibility. Should the policyholder pass before the defined amount of elder care services has been exhausted, any remaining monies go to a beneficiary designated by the original policyholder.
This is a relatively new option and the nomenclature surrounding it is still fluid. One might also hear it referred to as Life Care Assurance, a Long Term Care Benefit Plan, a Medicaid Life Settlement or simply Life Care Funding, which is the name of the primary organization responsible for this program's development.
Life Insurance Conversions (Life Care Funding)
In this program, the owner of a life insurance policy sells the policy to a 3rd party for an agreed upon dollar value of elder care services. The buyer of the policy takes over the monthly premium payments, pays the care providers' monthly fees for the policyholder and collects the death benefits when the policyholder passes.
The major benefits to the policyholder are:
1) They immediately receive funding for elder care services.
2) They receive a greater economic value for their policy than they would if they were to take the cash surrender value or engage in a life settlement.
3) They maintain the option of to receive Medicaid assistance if and / or when their resources expire (a life settlement does not maintain this option).
4) The family is freed of making monthly payments to maintain the policy as well as of the administrative tasks of managing it.
The major drawback is that the family does not receive the death benefit from the life insurance and the value they do receive is less than death benefit amount would have been. Calculating an exact value is not possible as one does not know how long the policyholder would live and therefore how many additional monthly premium payments would have been made. Typically, families receive the equivalent of 20% - 50% of the death benefit amount.
As with any funding source for elder care such as selling a home, getting a reverse mortgage or taking a loan, there are situations when the option does not make sound economic sense. Life insurance conversions are no exception. For this program, if the life expectancy of the policyholder is relatively short and the family can possibly afford to pay for care from some of other source of funding such as a family loan, they should do so.
The benefits from life insurance conversions come in the form of payments made directly to the care service providers. These can be home care, assisted living, nursing homes, adult day care, hospice or used to make home modifications to enable aging in place. There are no restrictions other than the benefits must be used for the care of the policyholder and / or their spouse.
Typically, a pre-determined amount is set to be paid to care providers on a monthly basis. However, lump sums are also available to pay off incurred debt to care providers. The care providers and monthly amounts can be changed at any time given 30 days notice.