Chris Orestis believes he has a perfect solution for many people who lack long-term care insurance but hold life insurance policies. His company, Life Care Funding, offers life settlements - transactions that allow life insurance policyholders to sell their policies at a discount in the secondary market. In exchange, the buyer - Orestis' company - takes over premium payments and consequently collects the death benefits.
Although such settlements are offered by many companies, Orestis' company has added an unusual twist. Instead of a cash payout, his company offers prefunded irrevocable benefits accounts, then hires professional administrators to oversee these accounts and make monthly payments to long-term care providers.
For elderly clients, the Life Care Funding swap represents an alternative to other long-term care financing sources, such as a reverse mortgage or a life insurance policy with a rider that allows the policyholder to convert it to long-term care insurance.
Until recently, Orestis, who founded Life Care Funding in 2007, mainly tried to reach elderly life insurance policyholders through management teams at nursing homes and senior residential housing developments. But now Orestis is seeking to branch out and market Life Care Funding's deals more aggressively to financial planners, whose middle-class clients "are struggling with the cost of long-term care funding," he says.
The specific terms that Life Care Funding offers in exchange for the policy hinge on the state of the policyholder's health and the value of his or her death benefits. Usually, the client receives 35% to 65% of a policy's death benefit, Orestis says.
Benefits are dispersed according to a schedule devised with the policyholder, or their family. This schedule can be altered if necessary as long-term care arrangements are altered. Like standard long-term care insurance, the benefits may be paid to a wide variety of long-term care providers, including home care, assisted living, skilled nursing, memory care and hospice providers.
David Kitaen, an insurance broker in Novato, Calif., has helped one client exchange his life insurance proceeds for long-term care coverage through Life Care Funding. The client has stayed in his home and receives assistance there. "It was a wonderful result for this family," Kitaen says.
But other planners nationwide are less certain about Life Care Funding's approach. Among their concerns:
* What about inflation adjustments for long-term care expenses?
* Would it make more sense for policyholders to simply swap death benefits for cash and pay for long-term care directly without Life Care Funding's administration?
* What substantive advantages would the Life Care Funding model offer beyond simply converting a life insurance policy to one with a rider for long-term care coverage?
"I'd have to ask a lot of questions," says Donald Haisman, owner of Haisman Wealth Management in Fort Myers, Fla., which has $30 million in assets under management. He acknowledges, though, that long-term care costs "are very high" and that many clients without long-term care coverage are fearful about the future.
Topping Haisman's list: "What are the financials of the company?" His clients would be exchanging a guaranteed death benefit, so Haisman would want to know that Life Care Funding had the financials to ensure corporate longevity.
Kitaen says Life Care Funding "solved that problem by having irrevocable accounts set up." Even if Life Care Funding went out of business, he says, those irrevocable accounts would continue to exist.
There's another advantage in having the money controlled by an outside administrator, Orestis says: "The irrevocable benefit account ... is protecting the money, because it is locked up in this account and you're using it for qualified care. It is a qualified Medicare spend-down, so you are not jeopardizing your long-term eligibility."
Orestis argues that although his product is not for everyone, it is well suited for families struggling with an almost immediate need for long-term care for an elderly person. "The people who primarily are using the program we find are in the middle class, not high-net-worth individuals," Orestis says. "They are struggling with insurance premium payments; they were going to abandon their policies and here's an option for them to get its highest conversion value."
Brent Horvath, an advisor at Gries Financial in Cleveland, which manages about $500 million in assets, says he has had clients who want to cash out the value of their life insurance policy "simply because they don't have a need for it."
Horvath worries that in a Life Care Funding swap, his clients may not get as much as they would with a plain- vanilla settlement for their policy's death benefit. "You'd have to really look at it closely," Horvath says.
But the option might be worth considering for clients who cannot meet what are often strict underwriting standards for long-term care insurance, says Benjamin Birken, an advisor at Woodward Financial Advisors in Chapel Hill, N.C., which has $140 million in assets under management. He notes that other approaches for financing long-term care, such as reverse mortgages, "are expensive tools to access."
Although Orestis says that there are no federal or state laws barring the exchange of life insurance death benefits for long-term care financing, he has been lobbying state lawmakers in California, Florida, Kentucky, Louisiana, Maine, New Jersey and Texas for bills that would codify policyholders' rights to sell their death benefits in such an arrangement.
Orestis is not a stranger to the political arena. In the 1990s, he worked for the White House and Senate majority leader's office; later, he held an executive position with the Health Insurance Association of America, a trade group.
In June, Texas enacted a law that allows its state Medicaid office to notify citizens about their rights to convert life insurance death benefits into long-term care financing. That bill sets requirements that must be met in order for the funds that Life Care Funding puts in an irrevocable benefits account to qualify for the Medicaid spend-down - money that, because it's going to medical bills, doesn't count against an individual's Medicaid eligibility income limits.
Among other things, the rules require that at the original policyholder's death, the lesser of either 5% of the death benefit or $5,000 will go to the estate or named beneficiaries. The rules also specify that, at death, any unpaid long-term care payments under a Life Care Funding (or similar) contract go to the estate or named beneficiaries.
Orestis sees a market for his company's services that reaches far beyond Texas. He says he crunched numbers based on a broad look at the insurance industry and the long-term care market, and came up with an eye-popping figure. "There is easily $50 billion in this market," he says.
Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.