Paying for long term-care can decimate your finances. Typically, the options for planning to cover these expenses consist of purchasing a long-term care insurance policy or setting aside a large chunk of financial assets.
Often these options are not easy to accommodate or may not be realistic. This helps to explain why less than 10 percent of individuals have a long-term care insurance policy and others do not have enough money put aside.
Recently, some new choices to help reduce the risk of not having enough to cover long-term care expenses have become available. These include hybrid long-term care and life insurance, long-term care and annuity, and pooled benefits policies. A fairly new solution is converting an existing life insurance policy into a stream of funds to pay care expenses.
What caught my attention was the possibility to use an existing asset to address an immediate need, while also avoiding the need for continuing premium payments.
Many people already own a life insurance policy. Over time, this policy has provided security to loved ones in the event of death. A conversion is a potential way to use this asset to cover another urgent life need.
In checking into how to covert an existing life insurance policy to fund care expenses, I spoke to Thomas Kenyon with Florida Long-term Care Planners.
Q: What does a life insurance to care payment conversion program do?
A: The conversion program can provide cash to pay for current care expenses. If someone needs additional funds and owns a life insurance policy, they can apply to convert the policy ownership. If approved, they can receive payments for the care they need now, although they give up the right to the existing death benefits.
Q: Does this work with any type of life insurance policy?
A: Yes, whole, universal or term life policies can all work.
Q: Can you give me more details on how the conversion works?
A: You apply and receive a payment plan offer from a company, such as Life Care Funding Group. If you accept the offer, they take responsibility for making the premium payments and guarantee the funding for care in the offer. All situations are unique and each offer will vary based on a number of factors such as policy size and type, age and health outlook.
Q: Can you give me an example of how this has worked?
A: Let's take a hypothetical example of a 75-year-old male who owns a whole life policy with a $100,000 death benefit and a built up cash value of $10,000 in the policy. He has been diagnosed with cancer and is moving to assisted living in the next month. He needs additional money to help pay for care. The conversion offer might be guaranteed payments of $4,000 per month for facility expenses for a total of 12 months. And remember, he will not need to pay any more life insurance premiums.
This program is only available to those already receiving care or who will need care within 90 days. This is a potential tool for people who need more money to pay for care and who own a life insurance policy.
Q: What happens if he passes away before all the care payments have been made?
A: In this example, if the full $48,000 has not been paid, the heirs or estate would receive the balance of payments due as a lump sum death benefit. If the full amount has been paid, a small residual death benefit goes to the heirs.
Q: If I convert a policy, how am I guaranteed the payments will be made?
A: The entire amount of the offer, in this case $48,000, is put in an irrevocable trust account. The payments are made from the trust account and the company cannot change the terms or payments.
A life insurance conversion is not a care expense plan. Planning to cover future costs should be done using insurance or other methods, which can be more effective. However, life insurance conversion could be one of the tools available should unplanned costs arise. As with most options, there are pluses and minuses and it may not be appropriate in your situation.
Tom Roberts, the owner of A New Approach Financial Planning in Lakewood Ranch and Sarasota, can be reached at 941-927-9590.