Hospice
Consider Insurance Options
There are a number of options under the broad umbrella of insurance that may be available to help consumers pay for hospice care — some involving creative uses of existing policies, some outright coverage.
Life Insurance
Those who own life insurance policies can consider a number of ways to use or convert them to help pay for hospice care. These arrangements may be the most fitting for those who have been diagnosed as terminally ill — which is also a requirement for receiving hospice care — since most insurance companies will require that a policyholder must be diagnosed with a life expectancy of a few years or less to exercise these options.
Accelerated death benefits. Check the existing policy or consult the insurance agent or company to see whether it includes a life benefit or accelerated death benefit (ADB) provision. Such provisions, often found in the fine print of a rider or endorsement, may allow the policyholder to collect from 25% to 100% of the death benefit in an early payment, either in a lump sum or monthly allotments. They usually pay 50% to 80% of the policy’s face value and require a life expectancy of 24 months or less.
Secured loans. Even if a life insurance policy does not have an ADB option, it may be possible to negotiate a loan secured by the future benefits.
Cashing out. In some cases, it may be possible and prudent to instruct the insurance company to simply cash out the policy, and take the amount of its current surrender value.
Viatical settlements. These allow the insured to sell a policy to a company that will pay a percentage of its face value in a lump sum in exchange for the right to collect the balance at death. But beware that the amount paid in a conversion or viatical exchange will be significantly less than the face value of the policy — commonly, between 50% and 85%, depending on the policyholder’s life expectancy. Again, this may be a fitting option for those who have been diagnosed with a terminal disease and are contemplating hospice care, since most companies will require an estimated life expectancy of 36 months or less.
But for policyholders who are likely to require care for an extended period, this action may have drawbacks. The amount received from selling the insurance policy will be counted as an asset when applying for Medi-Cal, preventing some people from qualifying for benefits.
In addition, the beneficiary who was named in the policy will no longer get the proceeds — often a concern when a spouse or children are likely to be dependent on those funds in the future.
To prevent fraud against especially vulnerable consumers, California imposes some of the toughest legal controls on viatical settlements, requiring all those dealing in them to be specially licensed. Check the California Department of Insurance's list of licensed companies and brokers.
For more information on using insurance proceeds to pay for home health care, contact the California Department of Insurance. They operate a consumer hotline at 800-927-4357.
Annuities
An annuity, a type of a hybrid between insurance and an investment, is a contract in which an insurance company promises to make a series of payments to an insured who pays a premium. Basically, it functions as a savings account, with the insurance company as the bank. Within that simple definition, there are a dizzying number of variations — and because of that, annuities can be risky for those who don’t fully understand their clauses and conditions. In some arrangements, survivors can be designated to receive income after the insured’s death.
While individuals who are planning for hospice care might consider tapping existing annuities as a source of funds, they are rarely a good option for them to take on as a new investment.
Annuities come in two types:
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Deferred annuities, by far the most common type, hold the premium payments to accumulate interest for a number of years until periodic payments are made. A potential advantage for some people is that income tax on the money is not due until distributions are received. Some deferred annuities are fixed, guaranteeing a minimum interest rate. Others are variable, allowing the insured to direct the investments among various accounts such as stocks, bonds, or money markets.
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Immediate annuities are paid for in a lump sum premium — and the insurance company begins paying periodic payments at once.
While annuities are just one of the myriad types of investment options, they come with some type of insurance attached — and some contain long-term care riders meant to appeal to those who need to finance nursing home costs. For example, if one spouse in a married couple needs Medi-Cal-covered care, an immediate annuity may allow the couple to turn their excess assets into income for the Medi-Cal recipient’s spouse.
Possible drawbacks. Many annuities contain surrender charges — payments tacked on for withdrawing money within a period after purchase, usually six or eight years, but sometimes as long as ten years. This often makes them a poor choice for seriously ill or older people who wish to use them as a source of paying for care, since immediate care costs can quickly mount and their longer-term needs are likely to be uncertain. As protection, California law requires that annuity contracts sold to seniors must contain a disclosure about the surrender charge period.
For more information about possible pitfalls of annuities, along with a synopsis of California laws controlling them, see Annuity Truth — The Truth About Purchasing Annuities for Older Americans.
Also see “What Seniors Need to Know About Annuities” by the California Department of Insurance and
“Variable Annuities — What You Should Know” by the U.S. Securities and Exchange Commission.
Health Insurance
Some health insurance plans, either group policies offered by employers or individual policies, specifically offer coverage for hospice care. Many insurers will also help negotiate hospice benefits for people with commercial or private health insurance. Information about the types of medical costs covered by a particular policy is available from an employee’s personnel office, a hospital or hospice social worker, or an insurance company
Long-Term Care Insurance
Private long-term care insurance can help cover the costs of hospice care. Policies usually require paying a monthly premium based on the individual’s age and health condition when purchased — and payments begin only after a waiting period or when the company considers that the care is needed according to the rules set out in each policy.
Most policies will cover only hospice care and services provided by designated agencies. And beware that hefty premiums may be required for such coverage.
Warnings about coverage. In California, long-term care policies must be labeled according to the type of benefits that will be paid. When searching for hospice care coverage, make sure the policy clearly indicates it is either “Home Care Only” or “Comprehensive”—which means it will help cover at least some of the costs of hospice care. Those identified as “Nursing Facility and Residential Care Facility Only” generally will not cover hospice care.
Importantly, many companies require that a person must be in relatively good health before they will issue a long-term care policy to him or her. Individuals who are in poor health or already contemplating the need for hospice care will not be good candidates for such coverage.
Because of potential complications and limitations in this coverage, it is especially important to proceed carefully when purchasing it. If you have been dealing with an insurance agent you trust, consult him or her — or ask for referrals from friends and associates who have had satisfactory experiences in finding coverage.
For more information and help with understanding and comparing insurance policies, contact the local Health Insurance Counseling and Advocacy Program (HICAP).
To learn about policies and benefits and a premium history of each company that sells long term care insurance in California, see “The Long-Term Care Rate and History Guide” by the California Department of Insurance.
