Financing long-term care: the life insurance solution; As Medicaid tightens and private long-term care insurance grows slowly, many American families have another resource at their fingertips.

Although long-term care insurance has been available for many years, it has not been widely purchased, it can be expensive, and it is filled with gaps that may not cover all expenses. Moreover, if Medicaid eligibility is tightened further, many individuals will be forced to either spend down or pay exorbitant out-of-pocket costs for their long-term care.

However, most middle-class Americans do own life insurance--and that might present an answer. As many Americans retire, the primary purpose of life insurance--to ease the financial burdens on families in the event of an untimely death--is no longer present. Most children have left the home and are self-supporting. Although life insurance is available to them as part of their parents' estate, if out-of-pocket costs for long-term care are required, this presents significant financial burdens for aging individuals and their heirs.

Using and accessing life insurance benefits to pay for long-term care needs (or "life insurance for the living") is an option. This would allow the benefit normally provided upon death to be paid out during the resident's length of stay in the long-term care setting.

This is done through front-end spending of a permanent insurance policy that is called the Accelerated Death Benefit (ADB), or Life Benefit. If a policy has this provision, it will pay a percentage of the face value of the policy to the policyholder based on certain conditions. These may vary from state to state but could include diagnosis of a terminal illness or chronic disease, the need for extended long-term care in a nursing facility because of an inability to perform activities of daily living, or permanent confinement to a nursing home. This benefit offers a payout to the policyholder, not the beneficiary, for a specified amount. Policyholders can elect to use the entire ADB, which eliminates their death benefit, or they can use a portion of the ADB, leaving a partial death benefit in place.

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ADBs began in 1988 as a way of giving terminally ill AIDS patients a portion of their life insurance proceeds to meet their current needs. This was the impetus for creation of the viatical industry. Viatical settlements were devised in the 1980s for people with terminal illnesses who, needing money to cover their care, would sell their insurance policies to investors for discounted prices--usually 50 to 85% of the face value of the policy. Viatical settlements have been criticized because they have not been heavily regulated and estimates of life span are difficult.

The ADB rider can be added to whole-life insurance policies but not term-life policies because the insured term usually ends at age 65 (although it can be extended). This may be a viable option for individuals who require long-term care services but do not qualify for Medicaid. Living benefits are not subject to federal income taxes. In states such as New York and California, they also are not subject to state income tax. Most companies require that your life expectancy be 12 months or less. Premium payments vary based on the company, with some charging higher premiums for the options, some charging no premium, and others charging only if the rider is accessed. Companies often restrict the amount accessible through this benefit to 50 to 85% of the face value of the policy. New York, for example, allows payment of up to 50 to 75% of the face value. Many insurance companies give policyholders the option to add an ADB at any time, not just when purchasing the policy.

A little more than four years ago, New York State approved legislation that authorized the sale of more diverse life insurance policies that offer ADBs to pay for long-term care services. Conditions for which the ADB can be accessed in New York are terminal illness with life expectancy of 12 months or less; diagnosis of a medical condition requiring extraordinary medical care or treatment, regardless of life expectancy; or certification by a licensed healthcare practitioner of any condition that requires continuous care for the remainder of the insured's life.

Recommendations

Despite continued attempts at restriction, Medicaid spending will continue to grow exponentially as the population ages. Personal accountability and planning for long-term care can be facilitated by various means, and life insurance, an available and widely held benefit, should be accessible for this purpose. Our specific recommendations for taking advantage of this would be:

* Allow all individuals who have life insurance the option of accessing their benefit via an ADB, should they require long-term care. Because payout upon death is 100%, policy-holders requiring long-term care should be able to access their benefits at 100% of the value of the policy for the duration of their life. This would be an attractive option for individuals who decline to purchase long-term care insurance because of premium costs or for those who purchase plans but might not net a return if they don't access the benefit. As premiums continue to be paid during today's rising life expectancies, the cost factor of ADBs to insurance companies will be minimized. For individuals who would seek to acquire additional life insurance, beyond financing their long-term care needs, this could be accomplished by reinsurance of the original policy to provide an enhanced death benefit. For those who do not access long-term care services, the life insurance coverage would remain intact for their heirs.

* Amend the terminal illness requirement for all carriers to include chronic illness not limited to 12 months, but which requires long-term custodial care services. Currently, ADB eligibility for some carriers states that the policyholder be terminally ill, with an estimated life span of 12 months or less. Nursing home care, though, often can span 2 1/2 to 3 years.

* Create legislation to allow tax deductions for premiums on life insurance policies that incorporate long-term care accessibility.

* Conduct widespread educational campaigns informing individuals of long-term care's costs and their options for affordable coverage.

* Allow access to the cash value of a permanent life insurance policy while retaining a portion of the policy as a death benefit. Cash-value benefits are available on many permanent life insurance plans after a certain number of years of premium payments.

* In states with long-term care partnerships of private insurance and Medicaid, amend state laws so that individuals who use their life insurance either through ADBs or the cash value of the policy can access the partnership's LTC Medicaid eligibility and asset protection after three years of nursing home care. This would limit the individual's liability for out-of-pocket costs after his or her insurance coverage has been exhausted.

* Offer a rider for individuals who seek income protection.

* Create incentives for employers to offer employer-sponsored long-term care and related life insurance programs. A study by Prudential Financial, Inc., entitled, "2003 LTC Insurance Benefit Study," found that 62% of workers would consider long-term care insurance as a voluntary benefit if employers offered it, and 82% would consider buying it if their employers subsidized a portion of the cost.

* Support federal legislation that would include long-term care insurance in cafeteria plans and flexible spending arrangements. (Such a bill was introduced by Sen. Charles Grassley [R-Iowa] in the last session of Congress and may be reintroduced.) Current employer-sponsored cafeteria plans or flexible spending arrangements (FSAs) do not allow for a deduction of long-term care insurance as part of premiums.

* Raise the tax-free income cap on employer-sponsored group life insurance plans that incorporate long-term care insurance from $50,000 to $250,000. Currently there are no tax consequences if the total amount of individual life insurance coverage does not exceed $50,000. However, premiums paid for any amount above $50,000 are included in employee income and subject to payroll taxes.

* Because employer coverage of life insurance is usually limited to term-life insurance policies, convert these policies to whole-life insurance policies, which provide ADBs and other benefits.

The benefits of life insurance are so pervasive that 69% of American families own some type of life insurance, according to the 2001 Survey of Consumer Finances, an analysis conducted by the Federal Reserve. Individual life insurance protection in the United States has grown at an average annual rate of 5% since 1992, with the American household averaging $118,000 of life insurance coverage. Americans have invested significantly in this benefit that, with some attention and creative thinking, can be used in many ways. In an era of tightening long-term care financing resources, this is an option that merits serious consideration.

BY MORRIS TENENBAUM AND EFFIE BATIS, MA

Morris Tenenbaum is CEO of Kings Harbor Multicare Center, Bronx, New York (a two-time OPTIMA Award winner) and CNHA Fellow of the American College of Health Care Administrators. Effie Batis, MA, is Director of Operations of the Southern New York Association, a nursing home association representing more than 60 skilled nursing facilities in the New York metropolitan area. For further information, contact Tenenbaum at [phone]. To send your comments on this article to the authors and editors, e-mail [e-mail]. To order reprints in quantities of 100 or more, call [phone].