New York Estate Planning & Elder Law Blog
CONVERSION OF LIFE INSURANCE DURING LIFE OF COVERED INDIVIDUAL
As this blog discussed in the past, long term planning insurance is something that many consumers are reluctant to purchase for a number of reasons One of the main reasons for this reluctance is the long term cost may not financially justify its utilization. Life insurance companies recognized this problem and started to allow for a hybrid financial product in their life insurance policies. The life insurance company allows for the conversion of a life insurance policy to pay for the long term care services.
The animating philosophy is that there will be a pay out regardless of whether or not it happens during the insured’s lifetime, so the life insurance company could just as easily pay out on the policy during the insured’s life. Every day over 10,000 baby boomers turn 65, so the population base that could potentially utilize such as a product is growing larger every day. It is estimated that at least 70 percent of the baby boomer population will need some sort of long term care during their lifetime, with 40 percent in need of nursing home treatment.
BENEFITS OF CONVERSION
These financial products take many forms. Often the life insurance policy is sold, converting a future asset into a readily exploited present day resource. There are many firms and brokers who specialize in this sale and conversion. The sale or conversion generally takes 30 to 60 days. There are no costs associated with the conversion, no requirement that the insured be terminally ill and all kinds of health insurance policies (whole, term, universal, et cetera). Most plans allow for any type of long term care, such as home care, hospice, nursing home and so on. Moreover, some of the death benefits are preserved for the family survivors to cover the cost of a funeral and burial.
Once the conversion takes place, the proceeds are placed into a pre-funded, irrevocable benefit account that is professionally administered and sent directly to the care provider facility. These products often adhere to Medicaid spend down requirements by obtaining fair market value for the life insurance policy and the proceeds placed in an irrevocable bank account, administered by third parties to pay for needed long term care services. That means that use of this financial product will not be considered an inappropriate expenditure by Medicaid and therefore not counted against you when you attempt to qualify for Medicaid.
OTHER CONSIDERATIONS
While the utilization of such a financial product is a good tool to have in your financial planning toolbox, it is important to consider some of the liabilities of such products. Any monies received on your behalf are generally considered taxable income to the beneficiary, unless he/she is terminally or chronically ill. As for terminally ill, no matter what the money is used for it is not taxable.
With respect to the chronically ill, if the money is used for qualified long term care services it will not be taxable income. There is the additional issue of inflation. Often the monthly benefits may only pay out a certain sum without the ability to increase over time, while the monthly cost of long term care invariably increases over time. In addition, the monthly benefit that you receive is usually only a percentage of your life insurance pay out benefit and therefore alternative funding sources may have to be explored.