Nursing Facilities
Consider Insurance Options
Here are a few ways to use different types of insurance that you might have to help pay for nursing care.
Life Insurance
Those who own life insurance policies can consider a number of ways to use or convert them to help pay for care. But be aware that 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 your 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 a 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. However, the amount paid in a conversion or viatical exchange will be significantly less than the face value of the policy — commonly, only between 50% and 85% of the policy, depending on the policyholder’s life expectancy. Most companies require an estimated life expectancy of 36 months or less.
Also, if the stay in the facility is likely to be lengthy or permanent, this arrangement may have additional drawbacks. The amount received from selling the insurance policy will be counted as an asset when applying for Medi-Cal, which may disqualify some people for potential Medi-Cal.
Finally, beneficiaries named in the policy will no longer get any money from it once the policyholder dies — often a huge concern when only one spouse is entering a nursing facility or a beneficiary is likely to be dependent on the future funds.
To prevent fraud against especially vulnerable consumers, California imposes tough 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 care in a nursing facility, contact the California Department of Insurance, which operates a consumer hotline at 800-927-4357.
Annuities
An annuity is a contract in which a financial company promises to make a series of payments to an insured individual who pays a premium. Basically, it acts as a savings account, with the company as the bank. Within this simple definition, the specific contracts can vary a lot, and therefore annuities can be risky if you don’t fully understand the clauses and conditions. In some arrangements, survivors can be designated to receive income after the insured’s death.
Annuities come in two types:
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Deferred annuities, by far the most common, in which premium payments are held to accumulate interest for a number of years until periodic payments are made. One possible advantage for some 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 invest among various accounts such as stocks, bonds, or money markets and receive a varying rate of return.
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Immediate annuities are paid for with a lump sum premium and the company begins paying periodic payments at once.
While annuities are just one of many 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 costs. For example, if one spouse in a married couple needs Medi-Cal-covered long term 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 added protection against confusion, 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, see Annuities: Look Before You Leap from the Healthcare and Elder Law Programs (HELP).
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.
Long Term Care Insurance
Private long term care insurance may help cover the costs of care in some nursing facilities. Policies usually require paying a monthly premium based on the individual’s age and health condition when purchased. Payments begin only after a waiting period or when the company considers that the care is needed according to the particular rules set out in each policy. Many of these policies pay only for short term care lasting a few months or less and are used to supplement Medicare coverage.
In California, long term care policies must be labeled according to the type of benefits that will be paid. When searching for nursing home coverage, make sure the policy clearly indicates it is for “Nursing Home and Residential Care Facility” or “Comprehensive” — both of which pay for some benefits in a nursing facility. Policies labeled “Partnership” allow their holders to keep more individual assets when they later qualify for Medi-Cal.
Importantly, many companies require that a person must be in relatively good health before they will issue a long term care policy. An individual who is in poor health or already contemplating entering a nursing facility will not be a good candidate for such coverage.
Because of potential complications and limitations of 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 about coverage options — or ask for referrals from friends and associates who have had satisfactory experiences in securing coverage.
For more information and help with understanding and comparing insurance policies, contact the local Health Insurance Counseling and Advocacy Program (HICAP).
To learn more about policies and benefits and the companies that sell long term care insurance in California, see “The Long-Term Care Rate and History Guide” by the California Department of Insurance.
