Wednesday, September 16, 2015

Funding Long Term Care: Voila, #5!

Traditionally, there have been 4 basic ways that folks pay for long term care:

► Family/friends
► Savings/investments (self-funding)
► Medicaid
► Long Term Care insurance

Now, it seems, there's a fifth option: life insurance.

One of HIPAA's lesser-known sections deals with viaticals. This is where one sells a life insurance policy for immediate cash. Most folks think of these as a cash cow for folks with (for example) AIDS, but there's another "twist" available: long term care funding.

During my most recent Long Term Care insurance "refresher" course, the instructor mentioned that a company called Life Care Funding has developed a program to use existing life insurance plans to pay for long term care, by essentially viaticating one to pay for the other. I was intrigued, and filed it away for future investigation.

And then, several days ago I received an email about this very company. So I immediately reached out to see about an interview, and head honcho Chris Orestis kindly obliged:

InsureBlog: I'm a bit unclear on the tax issues. This is viaticating a policy; it appears that cash goes into trust for LTC disbursement. How is the disbursement not taxable?

Chris Orestis: In many cases, the proceeds received from converting a life insurance policy insuring the life of a chronically or terminally ill individual into a Long Term Care Benefit Plan will not be subject to U.S. federal income tax.  As a general rule, proceeds from the sale of a life insurance policy are subject to U.S. federal income tax; however, the Internal Revenue Code provides special exemptions for sales of life insurance policies insuring the lives of individuals who are terminally ill or chronically ill.  In the case of a terminally ill insured, the proceeds from the sale of the policy will not be subject to U.S. federal income tax regardless of how the proceeds are used.  And, if the insured is chronically ill, the proceeds will not be subject to U.S. federal income tax so long as they are used solely to pay for qualified long-term care services.

[ed: Mr O didn't specify, and the LCF website doesn't note it, but one presumes that he's referring to Code Section 101(g)(2)(A), which basically exempts these types of sales from taxation if they're for the benefit of terminally or chronically ill individuals.]

In addition, the current estate and gift tax exclusion is more than $5 million. Therefore, unless the insured has an estate in excess of the exemption, any residual amount of the Long Term Care Benefit which remains in the account when the insured dies may pass to the account beneficiary(-ies) tax free.  If the policy owner and insured are not the same person then, in the case of a chronically ill insured who passes while funds remain in the Long Term Care Benefit Account, the policy owner will be required to pay U.S. federal income tax on any residual amounts remaining in the account.

■ I presume that the funds in trust are invested in some way? How is the growth not taxable?

The funds are not invested.

■ Okay, then why not?

The reason is that the duration of the Long Term Care Benefit Accounts is typically too short to warrant the costs of investing funds. The accounts typically last 2-3 years and the funds are used to pay for long term care related expenses.

■ What is the mechanism for triggering/paying claims? Is there a waiting period?

The Long Term Care Benefit Plans are used to fund immediate need for senior care services. Typically funds are being sent to care providers the same day the account is funded. To qualify for enrollment, care must be funded by the account within 90 days or less of being opened.

■ It seems like PHI would be involved in that process: how is this protected?

There is a simplified underwriting process that primarily involves reviewing medical records and phone interviews. HIPAA releases must be signed before underwriting begins and HIPAA compliant protocols are followed throughout the underwriting process.

■ Would it be correct to say that this is something like a reverse mortgage but for long term care, not housing?

It is an understandable analogy, but this is the sale of the policy and there are no costs for the policy owner and nothing is paid back, whereas a reverse mortgage is a loan that involves fees and the money is secured against the house and must be paid back with interest.

■ If the insured pays no fees, who does? Someone gets paid for this: who and how?

Life Care Funding covers all fees and expenses and makes money because we own the policies and collect the death benefit when the insured dies. Our target is a 10% profit range.

■ What role is there for the agent (if any)?

Licensed life insurance agents that hold a life settlement broker’s license (in states that require one) can offer this program and receive commissions as compensation.


Thanks, Chris, for your time and your thoughtful answers.

I'll conclude with a few thoughts of my own:

First, I really like this kind of outside-the-box thinking, and applaud the LCF folks for discovering a creative addition to the more commonly known funding sources. That being said, I see this program having limited application. In no particular order:

1 - It's not partnership-compliant.

2 - It uses up life insurance proceeds that will no longer be available for estate preservation or legacy purposes (although, as noted, it does allow for final expense reimbursement)

3 - It's the opposite of insurance (more dollars in than out)

On the other hand, it seems like a viable alternative (or supplement) for folks with insurability issues, and/or who have excess life insurance coverage.

[Special IB thanks to Brittany Thomas for arranging the interview]
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