Three Surprises to Watch Out for When Paying for Long Term Care

Chris Orestis, executive vice president of GWG Life, has penned an excellent article for The Independent: 

"More than 70 percent of Americans over the age of 65 will need long-term health care services, according to the U.S. Department of Health and Human Services. Yet, according to the Employee Benefit Research Institute, only 13 percent of those who received professional home health care had long-term insurance policies, which can protect seniors from high out-of-pocket costs.

There is a wide gap of people without long-term care insurance, or LTCI, and some of the alternatives carry little-known laws and legal liabilities that can pose  problem to the care recipient and their families.

The growing long-term care funding crisis has brought lawsuits and mandated claw-back actions against families in attempts to recover monies spent on long-term care. There is a growing need for consumers to consider all their available financial options to fund long-term care, and that can include selling a life insurance policy.

Often the weight for long-term care falls on the family, and they need to avoid a financial surprise that can come late in life for their loved ones.

There are three surprises to watch out for when paying for long-term care and key things people should know about alternative ways of paying for it as well as the possible problems those can present down the road.

States can sue for Medicaid recovery of LTC

Many families assume that once a senior is approved for Medicaid coverage of long-term care, the only thing left to worry about is maintaining financial and functional eligibility. You’ve proven that a loved one cannot afford the level of care he or she requires, but that doesn’t mean there isn’t anything left to worry about in terms of covering and repaying costs. The Omnibus Budget Reconciliation Act of 1993 requires states to implement a Medicaid estate-recovery program, which allows states to sue families via probate court to recover Medicaid dollars spent on a family member’s long-term care. A report by the Office of the Inspector General showed that Medicaid, the primary source of long-term coverage, recovers hundreds of millions of dollars from families every year. But as budget pressures on states increase, estate-recovery actions are likely to become even more aggressive.

Watch out for withheld information on life insurance

Selling or borrowing against a life insurance policy in the secondary market, a process called a life settlement, is a way to help people find alternative funding sources for long-term care. A number of states have passed legislation mandating consumer disclosure about the secondary market before their policies ill be allowed to lapse.

Be aware of filial responsibility laws

These impose a duty upon adult children for the support of their impoverished parents and can be extended to other relatives. These laws can include criminal penalties for adult children or close relatives who fail to provide for family members when challenged to do so. Attorneys for nursing homes are testing the laws by filing lawsuits on behalf of indigent parents to recover funds. Currently, 28 states [including Ohio]  and Puerto Rico have filial responsibility laws in place."

Proper estate and financial planning, and Aging in Place Planning in particular, demands consideration of  long term care financing opportunities, and avoidance of adverse consequences like those discussed in the article.   

Universal Life Insurance Policy Holders Face Premium Hikes

Over just the last two years, tens of thousands of universal life policyholders have been hit with double-digit premium increases from companies such as Axa Equitable, Voya Financial, and Transamerica.  

Universal life is a permanent and somewhat flexible hybrid life insurance policy that is intended to combine the reasonably affordable aspects of term insurance with a savings element similar to whole life. Universal life insurance typically offers policyholders a “cash value” savings account that earns tax-exempt interest along with the flexibility to adjust premiums and to increase or decrease death benefits. The policy’s investment account accumulates cash when interest rates are high, but can plummet when rates are low. In the 1980s and ’90s, the most common guaranteed rate in universal life contracts was 4%; some insurers guaranteed more.  Many new policies are tied to the stock market and don’t guarantee returns at all.  

Life insurers blame the economy for the premium increases. Interest rates began to slowly decline in the 1980s, but then plummeted during the 2008 recession as the Federal Reserve tried to improve economic conditions by making money cheap to borrow. But low interest rates are bad for the investment.  Low interest rates mean  lower profits.  In response, life insurers have begun to raise premiums on older universal life policies.

Understandably, universal life policyholders, many of whom were assured by agents that their premiums would never increase, are angry.   There are now a dozen lawsuits against insurers who sold those policies

Of course, regulatory reforms are suggested to help minimize the impact of these premium increases.  The New York Department of Financial Services, for example, proposed a rule that would require insurers to notify the agency at least 120 days before an “adverse change” in “non-guaranteed elements of an in-force life insurance or annuity policy.” This rule would also force insurers to notify consumers at least 60 days before the change. The regulation could be used as a precedent for other state insurance departments.  The Consumer Federation of America last year sent a letter to all state insurance commissioners asking them to study and prohibit any unfair price increases being imposed on consumers owning universal life policies.  Regardless, these reforms don't offer insureds a financial solution- only time to react.

Scott Hanson, a senior partner and founding principal of Hanson McClain,  a financial advisory firm in Sacramento, California,  offers the following advice to insureds holding universal life policies:

• Get ahead of the curve by contacting your insurer to find out just how much your policy’s cash reserves are worth.  Depending on the amount you have accrued over the years, you might be able to afford future premium hikes.

• Alternatively, consider working with your insurer to lower the policy’s death benefit, and by extension, your costs.

• You could also inquire about changing policies. What else does your insurer have to offer you? Fair warning: It can be hard to get approved for a life insurance policy when you’re in your 60s or older.

• If all else fails, you could look for a life insurance agent or company who would buy the policy from you now in exchange for receiving the death benefit later.

For more information regarding life insurance in estate and financial planning, go here.

There are Many Life Insurance Options in Estate and Financial Planning

Estate planning will always involve consideration of life insurance.  Life insurance can, among other objectives, create liquidity to pay estate taxes and settlement expenses, replace lost income for spouses and dependents, and protect an estate against loss. There are two main types of insurance: term and permanent. These two main alternatives differ on how long there is coverage and whether or not the policy includes a cash value.

Term Life Insurance

Term life insurance is the simplest, and probably the most common type of insurance. The purchase of insurance is for a set number of years, and the policy owner has coverage only for those years. In general, premiums remain level for the term. If the insured dies during the term, the beneficiaries receive a death benefit. Once the term ends, however, coverage ends. Some policies are "guaranteed renewable,"  meaning the owner can renew the policy for another term without having another medical exam, but premiums typically  increase. Some term policies also allow you to convert a term policy into permanent insurance.

Term insurance is usually purchased to cover a short- to medium-term need, such as a mortgage or a dependent's education costs.  Level term insurance keeps the premiums and death benefit the same over the policy term,  but there are other options. If the need for insurance will decrease over time, deceasing term insurance offers a reducing death benefit  over the term. Most consumers encounter these when buying a home or car, to ensure payment of the debt at death.  Conversely, if your need for insurance will increase over time, you can purchase increasing term insurance in which your premiums and death benefit rise over the term.

Permanent Life Insurance 

There are many different types of permanent life insurance (also called cash value insurance), but the four main types are whole life, universal life, variable life, and universal variable life. All permanent life insurance policies provide coverage for life (or for as long as you pay premiums). The other feature of permanent insurance is that in addition to paying a death benefit, the policy builds a cash value, which can be used as collateral for a loan or withdrawn from the account. A portion of the premium payments goes into a separate cash account that grows over time. Loans or withdrawals reduce the death benefit, but offer liquidity option in estate and financial planning. Many of these policies offer the option to add the cash value to the death benefit upon the death of the insuredfor an additional cost.  Each types of permanent life insurance has its own specific features and variations:

• Whole life insurance. With whole life insurance, the owner pays a set premium and receive a set death benefit. In addition, the cash value is guaranteed. Whole life insurance is a good option if an owner  is seeking stable premium payments, cash value, and a death benefit.

• Universal life insurance. Universal life insurance offers flexible premiums, cash value, and death benefit. The main feature of universal life insurance is the ability to use accumulated cash value to pay premiums. A policy may lapse, however, if the cash value does not grow sufficiently to support premium payments. Universal life also offers the option to change the death benefit, although, depending upon the policy, the insured may have to go through the underwriting process again. Universal life insurance is a good option if an owner is worried about the ability to pay premiums in the future and wants the ability to change premiums and  death benefit amounts as circumstances change.

• Variable life insurance. Variable life insurance offers the ability to invest cash value. The premium payments are usually  level, but an owner can direct the cash value payments into subaccounts that are similar to mutual funds. The cash value and  death benefit will vary depending on the performance of the accounts, although some policies may contain a guaranteed minimum for each. Variable life insurance is appropriate if an owner is using the policy as an investment and wants to control investment options. Variable life is better for younger buyers who can afford to take more risks.

• Variable universal life insurance. As the name suggests, variable universal life insurance combines the flexible premiums of universal life insurance with the investment choices of variable life insurance. There is no guaranteed minimum cash value, but most policies have a minimum guaranteed death benefit provided the premiums are paid for a set number of years. Like universal life insurance, the owner may be able to change the death benefit, but again the insured might have to go through the underwriting process again. Variable universal life insurance is a good option for young purchasers who want an investment option and flexibility with premium payments.

ODI Assists Families Locate Lost Life Insurance Policies

If you suspect a deceased loved one has a life insurance policy that you cannot locate, there is a service through the Ohio Department of Insurance (ODI) that can assist in identifying and locating the policy. ODI’s missing life policy search service is a comprehensive search service that assists Ohio residents, and the families of deceased Ohio residents, in locating lost insurance policies purchased in the state. The search identifies the existence of any life insurance policies or annuity contracts purchased in Ohio and issued on the life of, or owned by, a deceased person.

Since its implementation in September of 2009, the missing life policy search service has had 682 valid search requests, and have matched 442 polices with their rightful owners. Executors, legal representatives, or members of the deceased person’s immediate family may file a search request with the Department. To submit a request, visit the Missing Life Policy Search Service, page of ODI's website.  Go here to print out a request form.  Have the form notarized, attach a copy of the certified death certificate, and mail it to the Department.

The Department forwards the search requests and supporting documentation to all Ohio-licensed life insurance companies within 25 business days of submission. If an insurance company has information about an in-force individual insurance policy on the life of the deceased person or an individual annuity contract where the deceased person is an annuitant, the insurer is required to take action to administer the policy and/or contract according to its terms. If any money is to be paid to a beneficiary, the insurance company will contact the beneficiary directly. In this case, the company has 21 days to notify the consumer after contacting the Department.

Ohioans with questions about life insurance can call the Department's toll-free consumer hotline at 1-800-686-1526. A life insurance informational toolkit is also available on the Department's website. The toolkit provides tip sheets, publications, and links to other helpful web sites.

Crummey Powers Targeted by 2015 Budget Proposal

President Obama's proposed budget for fiscal year 2015 includes several important tax changes, some  of which would, if adopted, impact many estate, financial, and business succession plans.  Most of the proposals that appear in each year’s budget proposal never make it into law, or even into the following year’s budget proposal.  It is worth noting the proposals, however, because they represent what the President would sign into law if unbridled by the legislative process,  and what might end up as potential bargaining chips in the legislative process.  

The latest budget proposal includes the elimination of Crummey powers in estate planning   under the misleading title, “Simplify Gift Tax Exclusion for Annual Gifts.” Crummey powers are currently drafted in a trust in order to allow a gift to the trust to qualify for the annual gift tax exclusion. By granting the beneficiary of the trust the right for a limited period of time to withdraw the gift, the Crummey powers give the beneficiary a “present interest” in the gifted property, allowing the gift to qualify for the annual exclusion.  Without the Crummey powers, the gifts would be considered incomplete or future gifts, meaning that the gifts would be taxable. Crummey powers are named for the Ninth Circuit decision in Crummey v. Comm’r, 397 F.2d 82 (9th Cir. 1968), which approved and explained the use of this tool to satisfy the present interest requirement for gifts.

Currently individuals can gift up to $14,000 a year per donee without reporting the gift for gift  tax purposes.  Under current law, everyone can each transfer up to $5.34 million tax-free during life or at death without incurring a tax of up to 40% on the gifts. That figure is called the basic exclusion amount and is adjusted for inflation. In addition, widows and widowers may be able to add any unused exclusion of the spouse who died most recently to their own, thus permitting them together to transfer up to $10.68 million tax-free.

The annual gift tax exclusion, however, does not apply to gifts to a trust unless the donor gives the beneficiaries Crummey powers.  Crummey powers are central to many estate planning trusts.  Crummey powers are used by wealthy donors, for example, to create trusts for multiple beneficiaries and gift large amounts of money to the trust tax-free.  By drafting a trust with a large number of beneficiaries, some of which will never exercise their withdrawal power or ultimately receive a distribution from the trust, each additional donee means  more property can be transferred using the annual exclusion.

But, the technique is also used by not-so-wealthy individuals to protect life insurance benefits from taxation.  The planning technique is particularly effective and commonly used in irrevocable life insurance trusts that utilize annual exclusion gifts to fund large insurance premiums on the life of the grantor.  These trusts, while also common in wealthy estates, are also popular in more modest estates where the risk of estate taxes is particularly unacceptable, such as for family farmers, or family business owners.  These insurance trusts often provide taxpayers the best opportunity to leverage their annual exclusion, and can be a key part of ensuring necessary liquidity for an estate.

The new proposal would eliminate the present interest requirement and Crummey powers altogether. Instead, there would be a new category of transfers that would allow a donor to give an additional annual maximum of $50,000 within this category and qualify for the gift tax exclusion. The new category would include transfers in trust and transfers to other entities that normally do not qualify as a transfer of a present interest. This means, however, that if the donor gave more than $50,000, the gift would be taxable, even if the total gifts to individual donees did not exceed $14,000.  It also means that existing wealth transfer trusts, such as irrevocable life insurance trusts, that currently require or intend a total annual contribution or gift in excess of $50,000, would begin to eat into the current  lifetime exclusion. 

The proposal explains the administration’s justification for the change:

"The IRS’s concern has been that Crummey powers could be given to multiple discretionary beneficiaries, most of whom would never receive a distribution from the trust, and thereby inappropriately exclude from gift tax a large total amount of contributions to the trust. (For example, a power could be given to each beneficiary of a discretionary trust for the grantor’s descendants and friendly accommodation parties in the hope that the accommodation parties will not exercise their Crummey powers.)  The IRS has sought (unsuccessfully) to limit the number of available Crummey powers by requiring each powerholder to have some meaningful vested economic interest in the trust over which the power extends. See Estate of Cristofani v. Comm’r, 97 T.C. 74 (1991); Kohlsaat v. Comm’r, 73 TCM 2732 (1997).”

The IRS has attempted for some time to challenge the broad use of Crummey powers by arguing that each beneficiary must have a reasonable chance or expectation of receiving the property held in the Crummey trust.  The Tax Court has repeatedly rejected this argument, holding that the legal right to withdraw funds creates the present interest, thus upholding the right of taxpayers to employ such trusts. 

The Proposal also notes  the administrative costs to the taxpayers who utilize this planning technique and the costs to the IRS in enforcing the rule. Of course, by administrative costs to the taxpayer the  proposal means the legal and accounting fees taxpayers willingly pay in order to avoid what they consider to be an onerous additional tax on wealth transfer, wealth acquired only after paying taxes for an entire lifetime on income and realized gain, and the taxpayer expense in fighting the IRS as it has attempted to challenge otherwise court-approved Crummey powers.  By IRS costs in enforcing the rule, the proposal ostensibly includes the cost of the IRS’s protracted battle against taxpayers to limit Crummey powers, which would undoubtedly be saved.  

To read the Proposal, click here.

Long Term Care Insurance Will Soon Cost Women More




The cartoon is a link to "The Growing Need for Long-Term
 Care Insurance- Part 1" authored by Desiree Baughman,
 writer for InsuranceQuotes.org (link removed upon request)

The long-term care insurance (LTCI) market will soon change dramatically as companies start charging higher premiums for women.  Life insurance has long employed gender-based pricing, by gemder, but LTCI insurance companies have avoided the practice. For the first time this year, starting with policies from Genworth Financial Inc, the nation's largest seller, the industry will move to gender-based pricing.

The industry's goal is to reflect actuarial realities.  Women live longer and plan more for their futures by buying LTCI policies. Genworth says two-thirds of its LTCI claim payouts go to female customers, and overall, women account for 57 percent of all policy sales in 2011, according to data from LIMRA, the insurance research and consulting group.

Genworth will introduce gender-specific policy pricing by this spring, if the plan passes regulatory hurdles. That will boost the cost of new policies for women by 20 to 40 percent, depending on the applicant's age and benefit package, according to the American Association for Long-Term Care Insurance (AALTCI).

According to Reuters, Genworth spokesman stresses that the pricing will be applied only for women applying on their own - 10 percent of its policy applicants. The company will continue to offer lower rates to married couples who purchase joint coverage, and the changes won't affect current policyholders.  Gender-based pricing will likely be adopted by other carriers - both for individuals and married couples.

Gender-based pricing is seen as a necessary step for companies struggling in the current low interest rate economy to earn enough on their fixed income portfolios to fund benefits. 

Premiums have generally beeen on the rise regardless,  For new customers, policies in 2012 cost anywhere from 6 to 17 percent more than in 2011, according to AALTCI, and they are 30 to 50 percent higher than five years ago. Competition also reduced as a long list of major insurance companies have stopped writing new individual policies, including Prudential Financial Inc, Metlife Inc., and Allianz Finance Corp.

Gender pricing is just the latest sign that our approach to long-term care isn't working. The private market is limping along as a small niche business - overall penetration remains less than 5 percent of the total possible market, according to LIMRA.

If you have been thinking about LTCI,  buy it now.  Better, consider a life insurance policy or annuity that will provide a leveraged death benefit during your life specifically for long term care.  These "linked-benefit" policies are an attractive alternative to traditional long term care insurance.

Private Nurses for Home Care

Patricia B. Gray, contributing writer for Money Magazine has written an excellent article regarding private nursing for home care.  She introduces this increasingly common alternative to institutional care for seniors:

You may think of private nurses as a luxury for the ultra-rich, like a butler or personal chauffeur. But hiring in-house medical care has become an increasingly viable option for regular folks too.

You can use a nurse to ease the transition from hospital to home after surgery or a major illness, or even to administer chemotherapy if you want to stay out of a clinic or hospital. Visits from a private nurse can help your elderly parent remain in his or her own house safely.

Care at home can be a less expensive option than an extended stay in a nursing facility, says Kathleen Kelly, executive director of the Family Caregiver Alliance, a San Francisco nonprofit. Still, the cost can add up quickly, and you may have to cover most of it yourself. So it pays to know whether you need a nurse and how to pick one.

Insurance Department Helps Locate Missing Life Insurance Policies

If you suspect a deceased loved one has a life insurance policy that you cannot locate, there is a service through the Ohio Department of Insurance that can assist in identifying and locating the policy.  The Ohio Department of Insurance’s missing life policy search service is a comprehensive search service that assists Ohio residents, and the families of deceased Ohio residents, in locating lost insurance policies purchased in the state. The search identifies the existence of any life insurance policies or annuity contracts purchased in Ohio and issued on the life of, or owned by, a deceased person.

Since its implementation in September of 2009, the missing life policy search service has had 682 valid search requests, and have matched 442 polices with their rightful owners.  “This is a great program that works for the consumers of Ohio to help them locate life insurance dollars to which they are entitled,” Ohio Lieutenant Governor and Department of Insurance Director Mary Taylor said in a release. “It’s great that Ohio’s life insurance companies are able to work together, along with the Ohio Department of Insurance, to perform this service. These numbers are amazing and we encourage Ohioans to continue to submit their search requests to the Department.”  

Executors, legal representatives, or members of the deceased person’s immediate family may file a search request with the Department.  To submit a request, visit www.insurance.ohio.gov   to print out the request form.  Have the form notarized, attach a copy of the certified death certificate, and mail it to the Department.

The Department forwards the search requests and supporting documentation to all Ohio-licensed life insurance companies within 25 business days of submission. If an insurance company has information about an in-force individual insurance policy on the life of the deceased person or an individual annuity contract where the deceased person is an annuitant, the insurer is required to take action to administer the policy and/or contract according to its terms.  If any money is to be paid to a beneficiary, the insurance company will contact the beneficiary directly. In this case, the company has 21 days to notify the consumer after contacting the Department.

Ohioans with questions about life insurance can call the Department's toll-free consumer hotline at 1-800-686-1526. A life insurance informational toolkit is also available on the Department's website at www.insurance.ohio.gov. The toolkit provides tip sheets, publications, and links to other helpful web sites.

Ohio Protects Seniors from Stranger-Originated Life Insurance

The Ohio legislature has given final approval to a landmark bill that will help assure the integrity of the life insurance market and protect seniors from a growing abuse called stranger-originated life insurance (STOLI).

In a STOLI transaction, investors such as hedge funds finance a program that induces senior citizens to obtain insurance for the sole purpose of transferring the death benefits to the investors. The investors hope to profit when the seniors die, and the sooner they die, the higher the profit. Seniors caught up in these schemes can face unexpected taxes, loss of insurance capacity, loss of privacy, potential legal liability and may even render themselves ineligible to participate in government entitlement programs.

The legislation, H.B. 404, targets STOLI by reducing the economic incentive for abusive transactions and giving life insurance companies better tools to detect and deter STOLI deals before they occur.