Does Your Insurance Cover Alzheimer’s Care?

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Senior man sitting on a wheelchair with caregiverOne in eight individuals 65 and older suffers from Alzheimer’s disease –quite a sobering statistic for the growing number of baby boomers rapidly crossing that age threshold. And the costs can be an “overwhelming financial burden,” says Carol Steinberg, executive vice-president of the Alzheimer’s Foundation of America.

Private and government insurance programs may cover some costs. Here’s a primer on your options.

Medicare

Many people are shocked to discover that Medicare does not cover the long-term custodial care that Alzheimer’s patients need. Custodial care is the non-medical care associated with activities of daily living, such as bathing and dressing.

Medicare does cover limited care in a nursing facility or at home. For home care, the patient must require skilled-nursing care or physical or occupational therapy to help with the recovery from an illness or injury — not to help an Alzheimer’s patient with daily-living activities. “One of the most difficult situations is when a loved one needs personal or custodial home care, but Medicare will only cover that if there is some type of skilled-care need,” says Frederic Riccardi, director of programs and outreach for the Medicare Rights Center, an advocacy group.

At-home services in most cases can be provided for fewer than seven days each week or less than eight hours each day over a period of 21 days or less. Limited custodial care could be provided during these visits — perhaps if an Alzheimer’s patient treated by a registered nurse for a broken hip needs help bathing. Medicare pays the cost of a skilled-nursing facility, but only to provide continuing treatment following a hospital stay of at least three days. Skilled care in a facility is limited to 100 days.

While Medicare offers little by way of custodial care, it does provide diagnostic and medical treatment that Alzheimer’s patients need. The new annual wellness physical exam, which is free and part of the health care law, includes testing for cognitive impairment. “This is a critical, yet hardly known, provision,” Steinberg says. Medicare also covers visits to a geriatric assessment clinic.

Alzheimer’s patients and their families need to carefully choose a Medicare Part D prescription-drug plan or private Medicare plan. Alzheimer’s medications are generally covered under Part D, but plans vary regarding co-payments. The Alzheimer’s Association offers a guide about coverage for common Alzheimer’s drugs.

If you choose a Medicare Advantage plan, make sure your neurologist and other physicians you see often are covered as in-network providers. Otherwise, you will pay higher out-of-pocket costs or ask about Medicare supplement plans.

Long-term-care insurance

These policies provide coverage for the custodial care that Alzheimer’s patients usually need. Benefits typically trigger if the patient needs help with at least two activities of daily living or if a doctor provides evidence of cognitive impairment. Because most people with Alzheimer’s receive care in their own homes, look carefully at the policy’s home-care requirements. Typically, a patient must wait 60 or 90 days before benefits begin. But policies differ on when the clock starts ticking, which could be a big headache for caregivers. 

Some long-term care insurance policies start the 60-day waiting period on the day the doctor certifies the cognitive impairment — and benefits trigger 60 days later. But other policies count only the days a patient receives care from a qualified caregiver during the waiting period. If the caregiver visits two days a week, the policy only counts those two visits toward the 60-day waiting period — and benefits will not trigger for 30 weeks. In the meantime, the family has to pick up the tab for the caregiver.

Before you hire a caregiver, check the policy’s fine print on the type of caregiver the insurance company will cover. Some policies pay for any caregiver who is not a family member, while others only pay for licensed caregivers who work for an agency. Some families who hire an unlicensed caregiver later discover that the caregiver doe not qualify under the policy.

Do not expect a policy to pick up round-the-clock home care. Daily coverage is based on the daily benefit. A policy with a $200 daily benefit, for example, will likely cover the cost of eight to ten hours of a home health aide. If a family caregiver cannot fill in the gap, a nursing home may be a better option.

You cannot use more than your daily benefit in a day, but you can stretch your daily benefit over longer periods. Say you choose a benefit period of three years, at $200 a day. If you only use $100 a day, your coverage can last for six years. Some policies cover adult day care, which can cost a lot less than daily caregivers. “Many adult day services specialize in care for those with Alzheimer’s disease and similar disorders,” says Kathy O’Brien, senior gerontologist with the MetLife Mature Market Institute.

An alternative and more cost-effective option for long-term care insurance in today’s expensive health care environment is a short-term custodial care policy.

Medicaid

This program, whose costs are shared by federal and state governments, is the primary payer of long-term-care services for the elderly. Unlike Medicare, it provides custodial care for Alzheimer’s patients. Custodial care typically is provided in Medicaid-eligible nursing homes, but many states’ Medicaid programs now pay for home care and sometimes adult day care or care in assisted-living facilities, says O’Brien.

 

The downside: You need to be virtually impoverished to qualify. Many people end up qualifying after spending their retirement savings on care. While state laws differ, generally you cannot have more than $2,000 in countable assets, including investments. A spouse who lives at home can generally keep about $113,000. You’re allowed to keep your home, car and assets in certain kinds of trusts. (Visit www.medicaid.gov to find eligibility requirements in your state.)

To protect more of your assets, you can buy a state-approved long-term-care policy that is “partnership” eligible. The policy would allow you to qualify for Medicaid without having to spend almost all of your money first. For example, if you buy a partnership policy that covers $200,000 of care, you would pay out of pocket until you have $200,000 left and still qualify for Medicaid. Go to the National Clearinghouse for Long Term Care Information to see if your state allows these policies.

 

 

 

 

How Long-Term Care Insurance Has Changed

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couple-in-libraryMany U.S. insurance companies have had challenges, to say the least, with their long-term care insurance product lines in the past decade and still desire how they can find some way to help consumers. 

A Washington-based insurer trade group commissioned a major consumer study by Waltham, Massachusetts-based LifePlans Inc., to look for ways to continue offering Long-Term Care Insurance.

The survey team interviewed 1,326 U.S. consumers who bought LTC insurance policies in 2015; of this number, 225 consumers, who had recently reviewed a policy, decided not to buy coverage; and 800 were randomly picked U.S. residents ages 50 and older.

The team also analyzed a sample of 8,791 LTC insurance policies purchased from seven different insurers.

Researchers compared the results from the 2015 interviews and 2015 policy analyses with the results from similar surveys and LTC insurance policy analyses conducted every five years since 1990.

One thing LifePlans found is broad consumer support for a number of policy proposals that insurers could support in Congress.

Only about one-quarter of the LTC insurance buyers, non-LTC-insurance buyers, and age 50-and-older Americans interviewed said they think the government should pay for long-term care services for all people, according to the LifePlans survey report.

But 86 percent of the LTC insurance buyers, 83 percent of the non-buyers, and 73 percent of the age 50-and-older Americans agreed that LTC insurance premiums should be “fully tax deductible.”

In Washington, one hot topic has been the idea of the government offering a universal catastrophic long-term care benefits program, aimed at people who need two or more years of care. The United Kingdom recently set up a similar public coverage care program for its residents.

LifePlans found that 55 percent preferred the idea of an extended public coverage care system and that 27 percent preferred the idea of the government offering an immediage public coverage care system, which would cover the first few years of care.

LifePlans also came up with information about trends in what LTC insurance policies are really like, what the buyers are like, and what the buyers and active non-buyers are thinking:

Price

Issuers of long-term care insurance policies incorrectly evaluated how many policyholders would keep their policies long enough to file claims, and how long the claims would last. They also miscalculated what low interest rates would do to their investment earnings.

The insurance companies have dealt with the forecasting errors by asking state insurance regulators to approve rate increases.

The LifePlans policy analyses show how the same forces have pushed up the cost of new policies.

In 1990, 59 percent of the LTC insurance policies sold cost less than $1,000 per year, and just 9 percent cost $2,000 or more per year.

In 2015, only 5 percent of the policies sold cost less than $1,000 per year, and 64 percent cost $2,000 or more per year.

The average annual premium increased from $1,071 to $2,727.

Home health care

LTC insurance prices have increased partly because, in some ways, the policy benefits have improved.

The average duration of policy benefits fell to 4 years in 2015, from 5.6 years in 1990.

But the average daily benefit increased to $161, from $72, over that period.

Insurers also added home health care benefits.

Home health care benefits were so rare in 1990 that LifePlans did not track them that year.

In 1995, only 49 percent of the policies analyzed that offered home health benefits could pay for more than two years of care in the home.

The home health care benefit’s richness peaked in 2000; that year, the home health care benefits sold had an average duration of 5.4 years.

But home health care benefits were still better in 2015 than in 1995. In 2015, 79 percent of the policies that offered home health benefits could pay for more than two years of care, and the average home health care benefits duration was four years.

Personal characteristics

The average age of a buyer fell to 60 in 2015, from 68 in 1990. Over that same period, the percentage of purchasers ages 75 and older fell to 1 percent, from 17 percent.

In part because of the age shift, the percentage of buyers who are widowed fell to 7 percent, from 23 percent.

The percentage with a college degree increased to 68 percent, from 33 percent.

Financial characteristics

Between 1990 and 2015, the changes in LTC insurance buyer personal characteristics went hand in hand with changes in financial resources.

The percentage with annual income under $25,000 fell to 4 percent, from 42 percent.

The percentage with less than $75,000 in total liquid assets fell to 13 percent, from 47 percent. 

Buyer motives

LifePlans discovered that the younger, better-educated, higher-income LTC insurance buyers of 2015 had different goals than the 1990 buyers.

In 1990, 30 percent of the buyers wanted to avoid dependence on other relatives, and only 24 percent wanted to protect their assets or leave an estate to heirs.

In 2015, just 13 percent were worried about dependence, and 36 percent were worried about estate protection. 

Non-buyer motives

In spite all of the headlines about long-term care insurance price increases and market withdrawals, high prices may only be about as much of a barrier to today’s LTC insurance sales as they were in 1990.

LifePlans found that 51 percent of non-buyers cited “too costly” as a very important reason for not buying coverage in 2015, but 53-58 percent of the non-buyers also gave “too costly” as a very important reason for not buying coverage from 1990 through 2010.

The popularity of other barriers to buying LTC insurance fell much more dramatically.

In 1990, for example, 36 percent of the non-buyers were very skeptical about whether insurers would pay LTC insurance claims. In 2015, only 13 percent of the non-buyers gave skepticism about payment of claims as a reason for not buying coverage.

LifePlans added a new reason in 2015 for resisting LTC insurance with the uncertainty about whether a policy will cover the types of services a consumer might need. More than half of the consumers say uncertainty about whether a policy will cover the right services is a very important reason not to buy coverage.

Information

 

If you are thinking about purchasing LTC insurance but have uncertainties, there are better alternatives with a viable solution for reasonable cost and excellent coverage. 

New Medicare Law for a Patient Loophole

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Long-Term CareLast November, after a bad fall, 85-year old Elizabeth Cannon was taken to a hospital near Philadelphia for seven days of observation, followed by nearly five months in a nursing home for rehabilitation and skilled nursing care. The cost: more than $40,000.  

The hospital insisted that Elizabeth had never been formally admitted there as an inpatient, so under federal rules, Medicare would not pay for her nursing home stay. The money would have to come from her pocket.

The experience of Elizabeth and thousands like her inspired a new Medicare law — in force as of Saturday, August 6, 2016 — that requires hospitals to notify patients they may incur huge out-of-pocket costs if they stay more than 24 hours in the hospital without being formally admitted. Because of the Notice Act, passed by Congress last year [2015] with broad bipartisan support, patients can expect to start receiving the notice in January [2017].

“It was extremely distressful to my mother, who was frugal her whole life,” said Cynthia Morgan, Elizabeth’s daughter. Elizabeth had questioned why Medicare would not pay for her care after she paid into Medicare for so many years. Elizabeth died in April 2016.

Hospitals have been keeping patients like Elizabeth in limbo due to fear of being penalized by Medicare for inappropriate admissions. While under observation, patients can be liable for substantial hospital bills, and Medicare will not pay for subsequent nursing home care unless a person has spent three consecutive days in the hospital as an inpatient.

Time spent under observation does not count toward the three days, even though the patient may spend five or six nights in a hospital bed and receive extensive hospital services, including tests, treatment and medications ordered by a doctor.

Under the new law, the notice must be provided to “each individual who receives observation services as an outpatient” at a hospital for more than 24 hours. Medicare officials estimate that hospitals will have to issue 1.4 million notices a year.

“The financial consequences of observation stays can be devastating for seniors,” said Senator Susan Collins, Republican of Maine and the chairwoman of the Senate Special Committee on Aging.

Senator Benjamin Cardin, Democrat of Maryland, the chief sponsor of the Senate version of the legislation, said it would “save seniors from the sticker shock that comes after they are discharged from the hospital and realize that Medicare will not cover the cost of care in a skilled nursing facility.”

The median cost for a private room in a nursing home is roughly $92,000 a year, according to a survey by Genworth Financial. Medicare covers up to 100 days of skilled nursing home care at a time.

The text of the standard “Medicare outpatient observation notice” is subject to approval by the White House Office of Management and Budget. In its current form, the notice to beneficiaries says: “You are a hospital outpatient receiving observation services. You are not an inpatient.” And it explains that Medicare will cover care in a skilled nursing home only if the beneficiary has had an inpatient hospital stay of at least three days.

Patients can then consult their doctors and may ask to be reclassified as inpatients.

Hospitals have found themselves in a dilemma. They increased their use of “observation status” in response to close scrutiny of their billing practices by Medicare auditors — private companies hired by the government to review claims. In many cases, these companies challenged decisions by doctors to admit patients to a hospital, saying the services should have been provided on an outpatient basis. The auditors then tried to recover what they described as improper payments.

Doctors and hospitals said the auditors were like bounty hunters because they were allowed to keep a percentage of the funds they recovered.

But patients will now, at least, be better informed. The Senate Finance Committee explained the reason for the law this way:

“The number of Medicare beneficiaries receiving outpatient observation care over the last several years has been steadily increasing. Some beneficiaries are surprised to learn that although having received treatment overnight in a hospital bed, the beneficiary was never formally admitted as an inpatient but was instead a hospital outpatient.”

Federal officials acknowledged that Medicare beneficiaries sometimes had to pay more as outpatients under observation than they would have paid if they had been formally admitted to the hospital and received the same services as inpatients.

The administration issued rules to carry out the new law. The purpose, it said, is “to inform beneficiaries of costs they might not otherwise be aware.”

“Even if staying in a hospital overnight, the status might still be considered outpatient,” the administration said in a publication for beneficiaries.

Consumer advocates and nursing homes support the new requirement.

“Medicare beneficiaries are spending more and more time in the hospital without being formally admitted,” said Joyce Rogers, a senior vice president of AARP, the lobby for older Americans, adding that this “can expose beneficiaries to unexpectedly high out-of-pocket costs amounting to thousands of dollars.”

Mark Parkinson, the president and chief executive of the American Health Care Association, a trade group for nursing homes, said, “Patients often have no idea what their status is in a hospital and observation stays impose a significant financial burden on seniors increasing the likelihood of turning to Medicaid.”  

“The new law is an important first step, but Congress and the administration need to do more to protect beneficiaries,” said Judith Stein, the executive director of the nonprofit Center for Medicare Advocacy.

Under the law, hospitals can still keep Medicare patients in observation status, and some of the patients will be responsible for nursing home costs. Twenty-four senators and more than 120 House members are supporting bipartisan legislation to address that concern. Under that bill, time in a hospital under observation would count toward the three-day inpatient stay required for Medicare coverage of nursing home care.

A Head to Head Match – 401k vs Whole Life Insurance

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Couple sitting on the beach sandIn talking about the best ways to save for retirement, an interesting idea is to compare investing in retirement plans to saving money via a whole life insurance policy. One misconception with life insurance is the myth that someone has to pass away for life insurance to be of any benefit.  

Nothing is further from the truth.

Life insurance inherently has benefits that can be used while you are alive but these never get mentioned in mainstream media. A few television personalities emphatically say that term life insurance is the only way to go because it is inexpensive and the extra money can be used to invest in mutual funds rather than purchasing whole life insurance. This does not work for the majority of people.

The mantra of “buy term and invest the difference” usually turns out to be “buy term and spend the difference.” It simply illustrates that people do not know what they do not know.

Term life insurance is straight forward. It is inexpensive life insurance at younger ages that covers you for a certain number of years (typically 10-30) after which it terminates.

Whole life insurance however is the opposite…it covers you for your whole entire life, is more expensive than term insurance because it accumulates cash value (term life insurance does not). 

The reason whole life insurance premiums are higher than term insurance is because the coverage costs are averaged over your entire life time. Therefore whole life insurance premiums are higher if purchased when you are younger and less costly as you age.

To use a simple analogy, whole life is like buying a house (builds equity) and term is like renting (no equity).

If this were the only difference between the two types of insurance than the television pundits might have a case however the devil remains in the details. A whole life insurance policy should be the foundation of any financial plan, even ahead of a qualified retirement plan (for example, 401k). Lets compare the features.

Qualified Retirement Plans:

Tax deferred/tax deductible; IRS approved; limits on contributions; employer match..sometimes; can invest in the stock market; loan provision (typically limited to 50k and loans must be repaid or become taxable); limited to the plan’s investment options; creditor protection; must have income to contribute; subject to taxation at ordinary income tax rates; no guaranteed retirement income.

Whole Life Insurance:

Tax deferred (not tax deductible); no limits on contributions; tax-free income and withdrawals; no mandatory withholdings; tax free to heirs; penalty free access to money under age 59 1/2; no required minimum distributions at age 70 1/2; has guaranteed costs, expenses and contribution amounts; can take a loan over 50k (no limits) and no loan repayments required; unlimited investment options (i.e. rental real estate); can be used as collateral (i.e. small business loan); estate tax free; liquid (access to funds at anytime without penalty;no hardship required); disability protection (automatic funding of retirement if you become disabled); use as your own bank (a source of financing); self completing (provides income for spouse if you die and college education for children); judgement proof (protection against creditors and lawsuits in many states); potential for dividends (more beneficial than employer match as it can potentially guarantee future tax free retirement income); protection from future income tax rate increases; guaranteed to grow every year (you know what the account will be worth in the future); guaranteed retirement income (if structured correctly); not stock market based (protection against market risk); long-term care benefits (protects against the costs of health care in retirement); retirement income flexibility (allows you to spend down your other assets in retirement); provides money for terminal and chronic illnesses; and last but not least..death benefit money when you need it most.

So why aren’t these benefits ever mentioned by the media? Because it takes too much time to obtain them or is the “status quo” an easier way to inform people? Max out your 401k and buy term insurance. Realizing how difficult it is for people to look outside the box for alternatives from what a person is accustomed to however when looking at the benefits provided by whole life insurance, the extra “perceived” cost (versus term insurance and qualified retirement plan) certainly makes it worth consideration.

Qualified retirement plans, like the 401k, were never meant to be a primary source of retirement savings but were deemed a supplement to social security. 

Whole life insurance should be in almost everyone’s financial plan and definitely deserves a serious look.

Medical Technology Advances and Long-Term Care

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Couple on cruiseMedical advances have most definitely increased the number of years we live and have decreased the number of early sudden deaths. For example, identifying asymptomatic diseases through screening has helped to reduce their incidence and severity.

The overall results of medical advances are that:

 People are living longer and requiring additional years of care. 

 Hospital stays are shorter because more services are available at home.

 People are surviving more accidents, not always with full recovery, creating a

new group of LTC patients.

Some researchers argue that medical advances have increased life expectancy but have not delayed the onset of illness, predicting that declining death rates may actually increase LTC needs. That is, more people are living long enough to develop age-related conditions such as dementia, or they are living longer with existing disabilities and chronic conditions.

Advances in pharmacology and pharmaceuticals also impact the need for long-term care. These advances have not only reduced the symptoms of diseases but also have slowed their progression, thereby increasing longevity. However, increased longevity may necessitate periods of longer care.

The irony is that as medical advances help people live longer, the likelihood increases that long-term care will be necessary.

What is noninstitutional care? 

The U.S. Department of Health and Human Services reports that 31 percent of all caregivers are employed outside the home. This type of care is referred to as noninstitutional care.

Note that employed caregivers spend no less time on elder care than those who are not employed outside the home. Workers who provide elder care spend approximately four hours a day on caregiving in addition to their other responsibilities.

Consumer Attitudes and Understanding

Another social factor associated with the growing long-term care need is current consumer awareness and attitude. Generally, the public at large does not have a good understanding of the long-term care need, including why and how to plan for long-term care. Many simply deny that they will need long-term care; others believe, incorrectly, that Social Security, Medicare, or their existing health insurance will cover the costs.

They do not see long-term care as something one needs to plan for in advance, such as they would retirement. This attitudinal “disconnect” also explains one of the reasons why people may not consider the purchase of long-term care insurance.

According to a report issued by the U.S. Department of Health and Human Services, coverage purchased to cover acute medical care far surpasses the coverage purchased to cover long-term custodial care. Whereas almost all older individuals are protected from high acute medical care costs through Medicare and private Medigap insurance, a very small percentage have purchased long-term custodial care insurance.

This report cited the following, among others, as key factors limiting demand for long-term care insurance:

lack of information – Many underestimate the likelihood of requiring LTC services and the potential costs of those services.

 misperception of public and private programs – Many people believe that Medicare, retiree health plans, or Medicare supplement insurance covers LTC services. This is not the case.

 delayed preparation for/denial of long-term care needs – Many do not think about preparing for long-term care needs until the need arises. At that point, they may be too old or disabled to purchase insurance.

 long lag time between purchase and benefit payment – Long-term care insurance must be purchased before it is needed; often, this means a period of many years between purchase and when benefits are likely to be paid. Consumers prefer to spend their current dollars on coverage that provides a more near-term benefit, such as Medigap policies.

affordability – Many of today’s older consumers have low incomes and cannot afford long-term care premiums.

perception of need – Some consumers decide they do not need long-term care insurance because they have too few assets to protect or have family and friends available to provide care.

Consumer attitudes and perceptions notwithstanding, long-term care is a growing reality. It is also a very expensive reality.

The Cost of Long-Term Care

The medical, personal, and social services necessary because of an accident, a chronic illness, a disability, or simply the phenomenon of aging—services associated with long-term care—are among the most expensive of health care costs, especially considering the great numbers of people affected.

The actual cost of long-term care depends on where the care is received, what type of provider administers the care, and how long the care is required.

Some people require minimal assistance with only a few activities of daily living (ADLs) for a limited time.

Others require skilled nursing facility care for an extended period.

Unfortunately, no one can predict who will be stricken with the need for long-term care, what type of care will be needed, or how long the care will be necessary.

Planning for Long-Term Care

Given the likelihood of needing long-term care and the tremendous cost that this care entails, it is important that individuals plan for it—and the sooner the better. Certainly, there are barriers. For example, people tend not to think about becoming older and needing care, or they don’t anticipate that they will ever need care themselves; they resist the idea of becoming dependent.

They may believe [erroneously] that Medicare or their current health insurance will cover the cost of this type of sustained, ongoing care. They may find it difficult to raise this issue with their loved ones. Or they may underestimate the time and toll that future caregiving will demand of their family or friends.

Some are not aware of the tremendous costs of this care or how it is paid. Some may think of long-term care simply as nursing home care and assume that the “government” will cover the cost. Some are confronted with conflicting financial priorities. And some people may simply not know where or how to begin the planning.

But for every reason why people do not plan in advance for long-term care, there is a reason why they should:

Advanced planning for future care needs will allow for greater independence and choice as to where and how the care is delivered.

 Advanced planning can mean greater financial security, not only for those who may need care but also for their family and loved ones.

 Advanced planning can ease the financial and emotional toll on one’s family and release them from the burden of providing the care, if and when it is needed.

 Advanced planning will avoid the uncertainty, confusion, and mistakes that could arise in the event of a health care need.

 Advanced planning will promote a continued quality of life, as the person defines it, when care is needed.

Alternatives To Lapsing A Life Insurance Policy

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Nest Eggs       More than 100 years ago, in its landmark, Grigsby v. Russell decision, the U.S. Supreme Court ruled that life insurance is personal property. It can be bought and sold like any other property owned.

This means your life insurance policy has value to you or your family right now, not just when you pass away. Unfortunately, the vast majority of people are unaware of this simple fact.

The problem arises when the policy owner concludes they just can’t afford those premiums anymore, perhaps because they’re now in their retirement years and living on a fixed income. Or maybe they decide they just don’t need the death benefit anymore now that their children are grown, have steady jobs and built families of their own.

So, in the absence of knowledge about any other alternatives, most policy owners in this situation just lapse or surrender the policy back to the insurance company, accepting whatever small amount of cash surrender value is available.

Research available to the Life Insurance Settlement Association indicates that more than 710,000 policies are lapsed or surrendered each year — with a combined face value of more than $57 billion — by American seniors over the age of 70.

It’s important to contact your trusted insurance advisor [since it is their fiduciary responsibility] who can inform you of your options and instill awareness of alternatives to lapsing or surrendering a policy. 

But aside from the fiduciary issue, there is a common-sense test: if a person could lapse a policy for its nominal cash surrender value of $20,000 or able to sell that same policy to an investor for $150,000, they should be entitled to this information.

So, if a person has decided they no longer need or can afford a life insurance policy, what are the alternatives to lapsing the policy and surrendering it back to the insurance company?

Here are the primary options that you should know:

  • Maintain the policy through loans, using the policy or its cash surrender value as collateral;
  • Seek an accelerated death benefit, if possible;
  • Convert the policy to a long-term care health insurance policy, if possible;
  • Assign the policy to someone else as a gift or to a non-profit organization as a charitable contribution;
  • If it is a “term” policy, attempt to convert it to permanent insurance;
  • Reduce the death benefit (a lower “face value”) and the premiums; and
  • Sell the policy to a third-party investor through a life settlement.

As with any financial planning decision, there is no “one size fits all” answer to which of these options is best. The one that makes the most sense for you will depend on the your unique needs and desires as the policy owner — and that is where your trusted advisor, can play an invaluable role to guide you to the wisest decision.

90 percent of seniors who lapse policies without knowing about a life settlement indicated they would have considered that option had they known about it; and that 79 percent feel their advisors should inform them about a life settlement option.

Consider this story: A car dealership owner originally purchased a $488,000 life insurance policy to fund a buy/sell agreement with his business partner. After the business dissolved, his family continued to pay the premiums, but eventually decided the coverage was no longer needed.

He was planning to surrender the policy back to the insurance company for $6,800, then learned he had another option: to sell his policy to a life settlement company for $80,000. That’s more than 10 times what he would have received from the insurance company. The proceeds were divided among his three children, which they used to supplement their income.

If your main motive is to obtain cash in your hands — for retirement needs, health care expenses or simply to invest into other assets — then a life settlement is likely the best alternative. As a life insurance policy owner, when you enter into a life settlement, you can realize an average of seven times the amount of the policy’s cash surrender value, based on an analysis of a 2010 survey by the U.S. Government Accountability Office.

Perhaps that’s why 90 percent of seniors who have lapsed a policy would have considered selling it if they had known a life settlement was an option, according to a survey prepared for the Insurance Studies Institute.

Regardless of what you choose to do, just make sure that you are informed of all options before you lapse that life insurance policy.

 

HSAs/HDHPs – Working Together

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Smiling Pleasant LadyIt’s no secret that health care costs have been skyrocketing for many years and that the rapid rate of increase is affecting everyone. It’s estimated that a couple retiring today at age 65 will need $200,000 to cover health care expenses in retirement. 

That means saving for health care should be an important part of retirement planning.

There is an approach that can help you better plan for and meet these rising costs— enrollment in an HSA-eligible health plan (also known as a High-Deductible Health Plan [HDHP]) and an HSA. This combination can potentially save you money on health care while giving you more control over how your medical dollars are spent.

To help you better understand HSA-eligible health plans, HSAs, and how the two work together, here are answers to some commonly asked questions to help you get started.

What is an HSA-eligible health plan?

An HSA-eligible health plan is an HDHP that satisfies certain IRS requirements with respect to deductibles and out-of-pocket expenses. You generally pay more up front for medical expenses before the plan begins to pay for covered services. In return, you will generally pay less in premiums than in other medical plan options. Otherwise, an HSA-eligible health plan is much like a traditional health care plan. Enrollment in an HSA-eligible health plan is one of the requirements to be eligible to establish an HSA.

What is an HSA? – A Health Savings Account (HSA) is an individual account used in conjunction with an HSA-eligible health plan to cover out-of-pocket qualified medical expenses on a tax-advantaged basis. Your HSA belongs entirely to you and can be used to pay for both current and future qualified medical expenses for you and your eligible dependents. You can contribute to your account, withdraw contributions to pay for current qualified medical expenses, and potentially grow your account on a tax-free basis by investing your savings in a wide array of investment options.

Why should you consider an HSA? – If you have the opportunity to enroll in an HSA-eligible health plan with an HSA, you may want to take a closer look. This combination may offer some significant tax and savings advantages over traditional health care plan options—no matter if you’re a low, medium, or high user of health care services.

Control. You determine how much to contribute (up to your maximum annual contribution limit per IRS rules), when and how to invest your contributions, and whether to take an HSA distribution to pay for current qualified medical expenses, or let your contributions stay invested for future growth potential.

Tax savings. When used for qualified medical expenses, HSAs offer a triple tax savings—contributions, any investment earnings, and distributions are federal tax free.

Growth potential. You have the opportunity to invest your contributions in a wide array of investment options—including stocks, bonds, and mutual funds—for potential growth of your account over time.

Flexibility. Any unused balance in your account will automatically carry over from year to year so you can begin to build your savings for future qualified medical expenses.

Portability. Your HSA always belongs to you, even if you change jobs or become unemployed, change your medical coverage, move to another state, or change your marital status.

Who is eligible to open an HSA? – You must meet several IRS eligibility requirements in order to establish and contribute to an HSA. It is your responsibility to determine if you are eligible:

  • You must be enrolled in an HSA-eligible health plan on the first day of the month. For example, if your coverage is effective on May 15, you are not eligible to contribute to or take a distribution from your HSA until June 1.
  • You cannot be covered by any other health plan that is not an HSA-eligible health plan.
  • You cannot currently be enrolled in Medicare.
  • You cannot be claimed as a dependent on another person’s tax return.

If you open an HSA and do not meet the above criteria, your contributions, any investment earnings, and distributions may be subject to income taxes, penalties, and/or excise taxes. Additionally, in order to open and contribute to an HSA, you must have a valid U.S. address.

How does a person know if an HSA is right for them? – While many may benefit from an HSA, your personal situation will determine if an HSA-eligible health plan and HSA are the right approach to meet your health care needs. As you explore your options, consider your anticipated health care expenses, your current financial situation, and how much control you want over your medical spending. Keep in mind that HSAs come with the additional responsibility to track, manage, and monitor your health care and related expenses. The record-keeping of your HSA is up to you, and it’s important to hold on to all receipts, records, or other documentation as proof that the expenses you pay from your HSA are for qualified medical expenses.

What type of expenses does an HSA cover? – Distributions from an HSA used to pay for qualified medical expenses for you, your spouse, and dependents are tax free provided they meet the IRS definition of a qualified medical expense. The good news is that a lot of expenses qualify for payment or reimbursement, such as:

  • Health plan deductibles and coinsurance
  • Most medical care and services
  • Dental and vision care
  • Prescription drugs and insulin
  • Long-Term Care Insurance premiums

Note that these expenses must not already be covered by insurance and that health insurance premiums generally do not qualify. For more information about HSAs and qualified medical expenses, refer to IRS Publications 969 and 502 at http://www.irs.gov or consult a tax professional.

Should an HSA be used to pay current qualified medical expenses or be saved for the future? – An HSA is your personal account and only you can choose how to use it. You can use the funds in your account as you incur qualified medical expenses, or leave your contributions in your HSA and pay for current medical expenses out of pocket.

Why would you want to do this? The combination of HSA tax advantages and the variety of investment options available through many HSAs provide an opportunity for potential growth. Consider this hypothetical example:

If you contributed $3,000 annually to an HSA and earned a 7% return over a 20-year period, you could potentially grow your balance to $127,291— that’s $60,000 from your own contributions plus $67,291 in earnings that you can use to pay for qualified medical expenses, free from federal taxes.

 

 

 

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