"Final Expense" WL vs. Irrevocable Trust

[Guest]

I'm a green agent doing my due diligence, as is so often advised on this board by those with much experience. I am slow, studious, and plodding, I suppose, but I wish to be thorough, minimize any mistakes, and therefore operate in the best interest of the client, well within the boundaries of the law, ethics, and insurance company requirements. I greatly appreciate this board and everyone on it.

I have an issue for which I need advice. I understand the need for getting a good contract with a good insurance company. I am more concerned here about the best interest of the client.

An "acquaintance" of mine introduced me to "final expense" small face whole life policies to help "get me started" in the insurance biz. Turns out the local MGA has imposed a monthly AP quote mid-game, and the particular carrier they use is okay with it (and will yank your contract if you don't comply, as has been mentioned elsewhere on this forum). That's fine, just sounds like it's shaping up to be a "churn and burn" shop at the MGA. But that's not what I'm asking about.

It is apparent that the "final expense" market is low/fixed-income elderly folks. It is this market with which I am concerned.

On a "training" sale that I was involved with, to a low-income, elderly gentleman, he had trouble picking a beneficiary (his wife had passed) since, as he put it, "they ain't none of 'em no count - they'll just put me in a box and run off with the money". That's my first concern. It would seem that a whole life policy will pay the beneficiary with no regard to the "final expense" wishes of the now deceased insured.

My second concern regards a Medicaid spend-down, and resulting opening of estate and probate wherein Medicaid can apparently (in NC) attempt to recover "countable assets" from the estate. My understanding is that only $1500 is "not countable" in NC for this purpose. So, in this scenario it would seem to be a risk that all but $1500 of a whole life policy could be lost to this process, after the insured has died.

The angle I'm getting at is security for the insured "while they are alive". In what little information I have been able to find, an irrevocable funeral trust seems to be much more protected, from both unscrupulous heirs and/or State programs. It would seem that the insured elderly person would be much more confident that their "final expense" money would indeed go for the final expenses, especially funeral expenses.

It would seem that funeral homes offer these as pre-need arrangements, with various stipulations and drawbacks (interest earned and/or overage to be kept by the funeral home, etc.), and that there are also "stand-alone" irrevocable trusts that are not tied to a specific funeral home and may not have the drawbacks. And I understand you can do a 1035 exchange from a current CV policy into an IFT.

It would seem the ideal vehicle would be an IFT that could be funded with a life insurance policy that could be paid for monthly and which DB would grow 2-3% per year to keep up w/ inflation. Is there such an animal?

But here are my questions/requests:

What experience do the gurus and experienced agents here have with irrevocable funeral trusts? I have seen 1, 3, 5 and 10 pay, and apparently there is a 10 year policy (same as a 10 pay?). Is there an irrevocable funeral trust that is paid like a whole life policy ie. monthly to age 100 w/ CV/DB buildup at 2 or 3%? If so, then if presented properly, I think most seniors would prefer it, if it was basically the same cost as a WL "unprotected" policy. I know I would. I have heard many times on this board, "sell what you would buy yourself, or for your mother".

What carriers would you recommend for this? IMO's?

To sum up, it seems the IFT offers the senior more "control" and confidence that their expenses will be truly taken care of at their passing. "Final Expense" to me means just that, final expenses, specifically, funeral expenses. If a senior wants to leave a legacy or sum of money to heirs, to me that would entail a regular life insurance policy of whatever face amount. But to me, final expense, in the definition I just gave, does not involve heirs at all. (Although I am in agreement that whatever is left over from an IFT should go to a named contingent benificiary, of course). Am I thinking correctly, or am I way off base from the insurance industry as it stands? Please let me know. I know I still have a lot to study and learn, but I thought I would stop and take a short cut and a breather!

So, I'm simply asking, does it exist, and is there a way to market such an IFT to basically the same market in the same way as "final expense" WL is currently being marketed?

Thank you very much in advance for your comments. I will await your responses and hope for a lively exchange of ideas!

 

[senior-advisor-indiana]

Hmmmmmmmmm. Are you referring to an ILIT ? (irrevocable life insurance trust). You can put money in those that is protected from medicaid spend down. I suppose you could use a ILIT to pay for FE. I see where you are coming from but it seems a little to complicated for seniors.

 

[somarco]

Sounds like you are making this more complicated than need be, and you are adding more things to the mix than is necessary.

Final expense plans are fine in amounts up to $15,000 or so. As a general rule, life insurance proceeds are not subject to Medicaid recapture. If the death benefit is significant, and the proceeds are considered part of the estate, then Medicaid COULD seize some of the proceeds.

Basically, if you have a life policy where the beneficiary is the estate, or if the insured is the owner, then the proceeds could be seized by Medicaid.

A funeral trust is mostly a smoke & mirrors way to generate revenue for the attorney, funeral home, cemetery or all three. It is an expensive way to fund final expenses and is sometimes a gimmick used by those peddling final expense policies.

If you really want to get into estate planning, spend some time with an elder care attorney who can explain the intricacies of Medicaid planning and estate taxes. This is a complicated and changing field, especially the Medicaid issues. Now that many states are moving toward partnership arrangements before allowing Medicaid to be used to pay LTC expenses I believe you will see less Medicaid trusts, etc. than before.

The upside is you should have a market for LTCi in your future.

 

[Newby]

I am very familiar with this subject since I have sold funeral preplans exclusively for 10-years.

In MOST states, the cash value of whole-life insurance counts against you as a countable resource when qualifying for Medicaid. If you have a total of $1,500 ($2,000 in some states) of countable assets, you will not qualify for Medicaid.

One of the few things that Medicaid allows money to be spent down on to qualify for Medicaid quicker is funeral and cemetery expenses. They can buy a grave or mausoleum, headstone, cemetery fees, burial liner, casket, and funeral and/or cremation services.

Lets say someone goes in a nursing home and pays $4,000 monthly to the nursing home. They have $40,000 in the bank and a $15,000 life insurance policy with $3,000 cash value which they pay a premuim of $75 per month for.

If they do not do a funeral preplan, they will private pay the nursing home for 10-months, find a funeral home that will take an irrevocable assignment of the life insurance and continue to make a $75 payment on the policy for as long as they live (their kids will actually because the insured will only have a $30 per month income when they are on Medicaid.) Any excess life insurance proceeds that are left over after the funeral is paid must go to Medicaid.

If they go to the funeral home and do a preplan, they will prepay the funeral out of the $40,000 (usually around $8,000 to $10,000) pay the cemetery directly for the grave space and headstone (say another $3,000 for example.) So then they only have $26,000 left to private pay the nursing home so they just qualify for Medicaid sooner than 10-months. The insurance policy at this point must be cash surrendered and the cash value added to the amount they pay to the nursing home or can be changed to reduced paid up with the proceeds going to Medicaid upon death. The only other option would be for one of the family members to keep making the payment but if they do the entire death beneift must still go to Medicaid (provided that Medicaid has paid more then $15,000 in care prior to the death.)

The funeral preplans are funded with either a bank trust or a whole-life insurance policy. Either one grows the death benefit by about 4% per year. The funeral home is not paid until death but is usually paid within 24-hours when the death occurs (a BIG reason they like them so well.) The funeral home does NOT get to keep excess interest in most states. It goes to Medicaid (if they were on Medicaid) or goes to who ever the family names as a beneficiary if they are not on Medicaid.

This information is correct in MOST states. There are exceptions. Georgia is an exception. From what I understand, in Georgia when someone is heading toward Medicaid they can purchase as many $5,000 life insurance policies as they want and name who ever they want as the beneficiary. So if they had $40,000 they could purchase 8 $5,000 single-pay policies and then qualify for Medicaid the next day. They can not have any policies with a face amount over $5,000. Crazy system they have.

In all states, term-life insurance doesn't count against them at all. They can have all them term they want and leave it to whomever they want and still qualify for Medicaid.

I am not a lawyer so don't take any of this as legal advice. It would be a good idea for any life agent to take a funeral home preplanner to lunch and find out exactly how things work in your state. Keep in mind, just like with any kind of profession, 10% are real good at what they do, 20% are average and 70% don't know %&*$ from shinola. Funeral Directors USUALLY don't know much about it but in a FEW states (like OHIO) only funeral directors are allowed to do funeral preplanning.

You could probably get a referral fee for bringing clients to the funeral home who really need to do this but keep in mind there is VERY LITTLE commission paid on preplans for age 80+

 

[senior-advisor-indiana]

I always try to set the final expense plan up as thier children being the owners of the policy. That way the seniors finances don't matter.

 

[pat77]

I always try to set the final expense plan up as thier children being the owners of the policy. That way the seniors finances don't matter.

Doesn't that give the 'UNSCRUPULOUS" kids more authority over mom and dad's final expense than they need? I have heard some real horror stories lately, even with ex's that owned policies.

 

[Newby]

Doesn't that give the 'UNSCRUPULOUS" kids more authority over mom and dad's final expense than they need? I have heard some real horror stories lately, even with ex's that owned policies.

If they have great kids that they are close to and trust completely AND are real sure the kids won't go through a divorce or lawsuite in the future, putting the policy in the kids name is an option. However, every attorney that I have ever talked with advises STRONGLY against it for obvious reasons.

Many people don't have responsible kids. And many won't pay to get advice from an attorney. So there are a lot of people who have learned an expensive lesson from putting their whole-life policy in someone else's name.

 

[Newby]

Here's an old thread that explains pretty well why people who are spending down for Medicaid (usually in a nursing home) often cash out all their life insurance policies and prepay everything at the funeral home and cemetery.

I get asked to explain it several times a month. I think this puts it in plain English.

 

[rousemark]

What experience do the gurus and experienced agents here have with irrevocable funeral trusts? I have seen 1, 3, 5 and 10 pay, and apparently there is a 10 year policy (same as a 10 pay?). Is there an irrevocable funeral trust that is paid like a whole life policy ie. monthly to age 100 w/ CV/DB buildup at 2 or 3%? If so, then if presented properly, I think most seniors would prefer it, if it was basically the same cost as a WL "unprotected" policy. I know I would. I have heard many times on this board, "sell what you would buy yourself, or for your mother".

I think you are confusing the life insurance product and the Funeral Expense Trust if you are talking about using a trust such as the NGL Funeral Expense Trust. The trust really has nothing to do with what product you use to fund it. It is simply a way to protect the life insurance proceeds and to assure the insured's wishes are honored by transferring ownership of the policy from the insured to the trust. You can use a limited pay life product or a life pay whole life product for the funding. The limits on the amount of insurance that can be protected vary from state to state. You also need to keep in mind that once the trust is irrevocable so once you place the insurance policy in the trust, it cannot be undone.

 

[johndf]

Reading thru this thread from a while back.
Does anyone have any statistics on what the average age someone applies for medicaid or for that matter an average age of someone signing up for an irrevocable funeral trust.

Thanks