Understandably, the prospect of searching for life insurance can be somewhat intimidating. Adults now understand that high school did not adequately prepare us for the financial struggles ahead. I doubt very seriously that any high school has a life insurance 101 course to explain its importance. For most of us, we learned about financial preparation, the dos and don’ts if you will, from our parents, which they learned from their parents—so on and so forth.
This creates a funnel effect that tapers fundamental financial literacy down to a pinpoint. Unfortunately, a lack if focus on financial literacy makes us miss out on the changes in the market.
For example, 100 years ago there were far less options in the life insurance market than there are today. Therefore, life insurance was not deemed a significant tool used for financial acceleration. Today we have learned that life insurance is not only one of the best tools for accelerating finances, creating an estate, protecting loved ones, and leaving behind a legacy, it also takes the risk and guesswork out of investing.
When speaking with individuals who are interested in life insurance. I often get the question: why do I need life insurance? I respond by asking them a question: “do you have insurance on your vehicle?” They usually respond, “yes.” If asked why? They reply with something to the effect of: “if I lost my vehicle right now I would need another one quick! Losing my vehicle would impact my livelihood and the ability to provide for my loved ones.” Their response begs one more simple question: “do you think that losing your life would impact your loved ones less than losing your vehicle?”
So, what is life insurance? Life insurance is a personal contract with an insurance company that promises to pay a benefit to your beneficiaries or estate in the result of your untimely passing. This promise of payment is in exchange for smaller monthly, quarterly, or annually payments. This personal contract is a unilateral contract, which means that the insurance company is the only party that is legally obligated to pay. While there are many types of life insurance, everyone should be familiar with the two most common types of life insurance, whole life insurance and term insurance.
Term Life Insurance
Term life insurance is the simplest type of life insurance. Term life insurance policies offer a death benefit and remain in force for only a specific period or term. No death benefit is payable if the insured dies after the term expires. The term could either reference a specific number of years such as 10, 20, 30 years or a specific age such as term to age 65 or term to age 70.
Whole Life or Permanent Insurance
Whole life insurance is designed to remain in force for the whole life of an insured and the premiums will never increase. The purpose of level premiums with whole life policies is to make life coverage affordable at an older age. The insured overpays when they are young and underpay when they are elderly. Cash value is a part of whole life insurance and reflects the reserves necessary to ensure payment of guaranteed death benefit. The cash value increases steadily over time, over the life of the contract because it is regularly credited with a guaranteed level rate of interest.
Life insurance, at its simplest, is designed to protect loved ones from a financial disaster e.g., the loss of the bread earner. Life insurance when utilized to its full potential is a vital tool that can secure financial growth and accelerate financial success. Life insurance is legacy creation! One simple tool can ensure that the next generation of your family has the financial freedom to ensure success for generations to come.
Perhaps the terms that get conflated most often when speaking of inheritances is “heir” and “beneficiary.” Far from synonymous, the two terms are used to describe a person who stands to benefit from an inheritance. However, how the inheritance is received and whether it is received at all depends upon the individual’s position as heir or beneficiary.
Heir An heir is someone who is an heir at law. This means that the individual stands to inherit by virtue of the laws on the books (i.e. North Carolina Intestate Succession Statutes N.C.G.S § 29A). The position as heir means that the individual is legally entitled to inherit some or all of the Decedent’s estate because of his or her relationship with the Decedent.
Devisee A Devisee is a person who has been named in a will to receive all or a portion of someone’s probate estate. Assets that pass outside of probate will not go to a Devisee, even if directed to do so in the will. A devisee is also known a s a beneficiary under the will.
Beneficiary A beneficiary is an umbrella term for someone who stands to benefit from an inheritance. However, it most often refers to a person named as a recipient of value on a contract, whom receives such value by virtue of the death of one party to the contract. For example, life insurance is a contract and the beneficiary receives value by virtue of the insured’s death.
Most often, beneficiary designations indicate that the asset to which the beneficiary is named avoids probate. You can name a beneficiary on just about any bank account, retirement account, investment account, or insurance product. All of these assets are contractual relationships where a beneficiary can be designated.
It is important to ensure that a beneficiary is named because assets that do not have beneficiary get paid to the estate upon the death of the owner. This means that the asset will have to go through the long, expensive, and dangerous process of probate. Probate is the opportunity for creditors, such as the nursing home or Medicaid, to come after the assets.
However, just because an asset avoids probate does not mean that it won’t be clawed back into the probate estate to pay claims of creditors. Joint accounts with right of survivorship and transferable on death accounts are both instances of assets that avoid probate but are still subject to the claw back.
A joint account with right of survivorship is where more than one party owns an account and, if one owner dies, the account goes to the other(s) still living. A transferrable on death account is one where the account holds some type of securities like stock.
If your goal is to avoid probate, you should name a beneficiary. But, you should not stop there. If we’re talking about a joint account with right of survivorship or a transferrable on death account, you may want to employ the use of a trust for protection
It is important to understand how assets will pass upon death. The last thing anyone needs after the death of a loved one is the unfortunate surprise need for probate.
I have spoken at length about how pre-taxed funds can complicate an estate plan. While having a fund that you can grow with pre-taxed money can increase the rate of the fund’s growth, it can be a bit of a double-edged sword.
The thing with pre-taxed money (like traditional IRAs) is that if you want to use that money, you have to pay the tax on it first. You can’t roll those funds over to cover the cost of living, nor can you pull the money out to pay for big expenses without also paying tax. Thus, that money is essentially locked up.
What I am getting at is, an estate heavily invested in pre-taxed accounts tends to not be very flexible for planning purposes. And you want flexibility. After all, 70% of individuals over the age of 65 will need some type of long-term care. If most of your money is locked up, how will you manage to protect your assets and pay for long-term care?
A great option for folks with pre-taxed accounts is an asset based long-term care insurance policy. As I’ve mentioned in other articles, long-term care insurance is a great tool to cover the cost of future care (not only long-term care but chronic care as well). Not only does it cover the cost of long-term care, it also provides you with flexibility in your future plans, all the while costing less in a year than two-weeks at a long-term care facility.
So, what’s an asset based long-term care policy? This type of policy allows for you to directly pay your long-term care insurance premiums out of your tax qualified account. This is a great option because it allows you to roll that money over without taking an immediate tax hit. Thus, the amount withdrawn from the pre-taxed account is not taxed when used to pay the long-term care premiums. Furthermore, what you pay toward long-term care insurance may be tax deductible depending on your overall medical expenses for the year.
Long-term care insurance is not only a great option to ensure that your cost of care is covered at a reasonable and affordable rate, it’s also a great estate planning tool to lend you flexibility and optimize your tax liability each year. If you have questions regarding long-term care insurance or an Estate Planning or Elder Law matter, let the experienced attorneys, and agents, at McIntyre Elder Law and McIntyre Financial help you.
Greg McIntyre, JD, MBA VA Certified & Elder Law Attorney
If you wanted to cross a bridge and someone told you that the bridge had a 70% chance of collapsing, would you cross it? No. You are a reasonable person, and you would create an alternative plan to reach your destination. Unfortunately, you face the same odds for a similarly catastrophic event and most have not prepared for it.
If you are over the age of 65, you have a 70% chance of needing some sort of long-term care—whether it’s in home, assisted living, or skilled nursing level care. If you do end up needing long-term care (LTC), which you likely will, you’ll need to figure out how you’re going to pay for it. You may receive Medicare and a Medicare supplement but that will not cover the cost of LTC. Medicare will only cover up to 80 days of care but only if you are improving. If your progress hits a plateau, you will need to find an alternative means of paying.
LTC can be extremely expensive. Depending on the level of care, you can expect to pay anywhere from $5,000 to $10,000 a month or more. Most do not have the cash on hand to pay out that kind of money for the long-term. If you do end up paying out of pocket, you will likely need to liquidate your assets (home, care, retirement accounts, and investments) to cover the bill. Paying out of pocket, for most, means that they will not be leaving anything for their loved ones when they die. Everything they own goes to cover the cost of care.
Luckily, there are alternatives out there. Medicaid is one alternative which I have written about at length in other articles. Medicaid may be a viable and beneficial option for you. Check out my other articles to learn more.
Another alternative is long-term care insurance. LTC insurance is much like life insurance, car insurance, or any other type of insurance in that you pay monthly premiums, and, upon the occurrence of a triggering event, the policy pays out. For car insurance, the triggering event is a wreck. For life insurance, it is the death of the insured. For LTC insurance, it’s the need for long-term care.
LTC insurance premiums do present a monthly obligation. They can cost anywhere between $1700 to $2300 per year. However, that amount pales in comparison to the cost of LTC out of pocket. With LTC insurance, you will pay, in a year, less than half of what you’d pay in a month without the policy.
Another benefit is the variety of policies available. This allows you to pick the plan that will ensure a return on your investment. For example, some LTC insurance policies have a chronic care rider. This means that the policy will pay out if you have the need for care beyond what Medicare will pay for but not to the level where you need assisted living or nursing home care. Thus, even if you are a part of the lucky minority who never needs LTC, LTC insurance can still benefit you.
Eliminating the Look back Period with Long-Term Care Insurance
Considering that 70% of individuals over the age of 65 will need some type of long-term care in the future, it is important to plan for how you might pay for your care. The simplest way is to pay out of pocket. However, with long term care costs ranging anywhere from $50,000 to $100,000 per year, paying out of pocket is not an option for most—at least not long term.
Planning to Preserve
An alternative solution that will allow you to cover your cost of care is Medicaid. Long-term care Medicaid can be a life saver; but you have to meet its strict asset threshold. For example, the person who is in need of care (“the applicant”) can only have $2,000 worth of assets in their name for Medicaid Purposes (note: Medicaid does not count the applicant’s primary residence or the applicant’s vehicle). If the applicant is married, their spouse can have up to $126,400 worth of assets in the spouse’s name (minus the home and cars for the couple).
Those individuals who are over resourced (have more than the asset threshold) are put at a disadvantage. Many have more than the threshold but are by no means wealthy or able to pay out of pocket for care. Furthermore, the notion of spending all of your hard-earned assets for costly long-term care is a rather dim prospect for most. So, what are those who are over-resourced to do? Spending down the money is one option. This is a regular planning tool to preserve the value of the assets while simultaneously qualifying the individual. However, depending on the nature and amount of the assets, this may not be the best approach. For example, some individuals are so over-resourced that a spend-down includes spending some of the assets on the cost of care instead of preserving it (because it would otherwise count as an asset).
Another option is getting your assets out of your name. This is a great option if done correctly and strategically, because it can allow you to preserve all of your assets while allowing you to also receive Medicaid. You’d ideally want to gift away the amount of asset that are putting you over the threshold. (e.g., if you have $200,000 worth of assets, you’d give away $73,600 to reach the limit of $126,400). This will no doubt get you under the asset threshold. However, gifting the property—to an individual or irrevocable trust—will trigger the look back period. The look back period is where Medicaid looks back 3 to 5 years from the date of application (3 years for assisted living—5 years for nursing home care) to see if you gave any assets away. If they see that you have, they assume that the purpose of the gift was to artificially lower your asset level to qualify for Medicaid, which results in a penalty. The penalty is a period where—although you qualify for Medicaid—they force you to pay out of pocket for a period of time before Medicaid kicks in (currently, every $6,300 given is a month of penalty e.g. if you gave away $12,600, your penalty would be 2-months).
Getting the assets out of your name is an option for many who plan far ahead. If you do not contemplate needing care for the next 3 to 5 years, then triggering the look back period can be a strategic move that puts you at a great advantage if you were to need care after the look back period has run. The issue with this strategy is that it’s a bit of a gamble. Many individuals cannot effectively guess when their health will decline. Further, many individuals wait to plan for the need for long-term care until they start to see their health decline. Thus, many don’t have the luxury of waiting for the look back period to run.
Eliminating the Look Back Period
How do you manage to preserve all your assets and not suffer the effects of the look back period? The answer is long-term care insurance (“LTC insurance”). Long-term care insurance is like health insurance that will cover the cost of your long-term care based on the policy you purchase. Like health insurance, long-term care insurance has premiums that you pay monthly. However, the price of the premiums is not cumbersome and is cheap in comparison with cost of long-term care (one month of long-term care commonly costs more than a year of LTC insurance premiums).
Many LTC insurance policies are term policies that range 3 to 5 years. This is perfect for planning purposes. Let me illustrate. Let’s say you purchase a 3-year LTC insurance policy today. You also simultaneously get your excess assets out of your name by putting it in an irrevocable trust (and triggering the look back period). A couple days later, you suffer a stroke and immediately need to go to an assisted living facility. You can’t get Medicaid to cover the cost of care because you triggered the look back period with the transfer to the irrevocable trust. However, you have a policy that will cover your cost of care for 3 years (the same time as the look back period). Your LTC insurance will pay for your care for three years, thereafter you will qualify for Medicaid to cover the remainder of your costs because you’ve gotten the assets out of your name and the look back period has run its course. We call that having your cake and eating it too.
Protect your Life Insurance
As you’ve learned by now, there are certain assets you’re allowed to have and still qualify for LTC benefits through Medicaid. Life insurance is one of the assets that Medicaid specifically looks for when assessing someone’s asset level.
Life insurance can be broken into two broad categories: term and whole. Whole life insurance retains a value, which builds over time as premiums are paid. Term, on the other hand, typically does not have an intrinsic value that builds as premiums are paid. The value that builds when premiums are paid is called a “cash value,” the value that the policy would have if cashed out. “Face value” is the value of the policy’s death benefit.
Term life insurance does not count as an asset for Medicaid. Whole life insurance does count. Medicaid allows individuals going into assisted living to have a policy with a value up to five thousand dollars. For those folks going into a nursing home, they can have up to ten thousand dollars face value. Medicaid cares about the face value instead of the cash value because the cash value increases with each premium paid. Ostensibly, the cash out value could conceivably equal the face value if the policy is kept long enough.
Obviously, a whole life insurance policy can easily have a face value that exceeds ten thousand dollars. In fact, many individuals rely on their life insurance policy to provide a comfortable inheritance for their loved ones. If you’re one of those individuals, you don’t want to cash the policy out. Even if you can save the cash value, you’d be surrendering the death benefit—which would likely greatly exceed the cash value.
Some individuals come to a point where they are forced to cash out their policy to qualify for long-term care benefits. Because the cost of care can greatly exceed the death benefit, and because the client may need to cash in the policy to pay for care, life insurance can fall victim to the long-term care crisis just like any other asset. Thus, you want to plan to protect the life insurance from the outset.
Life Insurance Trust
A trust can be a great tool to protect life insurance. The idea behind the life insurance trust is to preserve the life insurance but take it out of the client’s name. Therefore, the life insurance is no longer counted as an asset for Medicaid purposes.
The life insurance trust is an irrevocable trust. As such, the policy would be owned by the trust and not the client. This arrangement is especially attractive for life insurance since it is not something that a client would typically need to access. Accordingly, it is different from putting, for example, a bank account in an irrevocable trust. Such bank account is used by the client on a daily basis, whereas life insurance just sits there until the insured dies.
Because this is such a useful arrangement, any life whole insurance policy worth more than ten thousand dollars should be placed into a life insurance trust. This is especially true considering that the transfer of the life insurance to the trust implicates the look back period. Therefore, the sooner it is done, the better.
 Disclaimer: as long as it has no cash value.  Special Assistance Medicaid.  Unless the life insurance was purchased to fund a large future purchase e.g., your child’s college tuition.