Willy Wonka and the Long Term Care Insurance Factory - Part 2

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This article first appeared in the Broker World Magazine July 2016 edition. It has been revised as of March 2020 to reflect updates in the long term care insurance marketplace.

Read Part 1 here: https://www.linkedin.com/pulse/willy-wonka-long-term-care-insurance-factory-part-1-marc

Ask The Actuary - By Marc Glickman, FSA, CLTC

Dear Actuary,

What types of long term care insurance products are you finding to be most popular amongst LTC specialist agents today? – Inquisitive in Iowa

“Come with me, and you’ll be in a, World of pure imagination…” - Willy Wonka

Dear Inquisitive, 

I have worked closely over the last several years with agents whose primary business is long term care insurance. Many of them are very successful at offering traditional long term care. Often these LTCi specialists have expanded their offerings to solve a wider range of client needs using a suite of different insurance tools.

I attended an LTCi conference last year featuring the latest product designs from a variety of insurance companies. A walk through the aisles was much like a walk-through Willy Wonka’s Chocolate Factory. It turns out there is more to a chocolate bar than just sugar and chocolate: likewise, there is more to LTCi policy designs than just a limited, cookie-cutter approach. Clients have options. Multitudes of them.

In Part 2, I discuss planning strategies and tax-advantaged funding sources. It is best to plan early to keep all of the options on the table, but even for someone already needing services, it is never too late to put an LTC plan together. 

Part 2: LTCi Planning Strategy Toppings

“If you want to view paradise, simply look around and view it…”

With all of the different insurance product options, the age of imaginative product designs has commenced. There are high-end products aimed at affluent buyers and also affordable products with LTC Partnership protection for the middle market. There are tax deductible LTCi strategies for business owners and executives, and LTCi worksite programs that can be funded with health savings account (HSA) dollars. There are strategies that can be funded from qualified IRA accounts or as a tax-free 1035 exchange of existing non-qualified life insurance or annuity products. You can even mix and match funding strategies and combine multiple products together!

With all of these additional planning ideas, many LTC specialists are beginning to feel like a kid in a candy store. Those agents that are not LTCi experts can be left, well, in a bit of a sugar coma. Never fear, this article will help you identify a planning solution to fit your client.

Lifetime Benefits and Shared Care. Innovation in LTCi product design has brought about the availability of lifetime benefits and shared care. Lifetime benefits provide an unlimited duration of coverage. Shared care can allow couples to also extend their own benefits at an affordable cost by sharing benefit pools or creating an additional pool of benefits.

LTC Partnership Program. Traditional LTCi can often be designed as LTC Partnership qualified in most states, which means that an LTCi product can protect the family in Medicaid spend-down situations. Traditional LTC insurance can pay the initial benefits for care when it is needed. In an extended long term care scenario, the insured may still qualify for Medicaid services while still keeping assets equal to the amount that the insurance policy paid. The decision to use this benefit will likely depend on the types of services that each states' Medicaid program offers in the future. Nonetheless, this feature provides more financial flexibility, and in most states does not cost extra, besides selecting a policy with a minimum level of inflation protection. The four original LTC Partnership states of CA, NY, CT, and IN have unique programs and all have proposed redesigns to make them more accessible to the masses.

“What we’ll see will defy explanation…”

Tax Deductions for Business Owners and Executives. Traditional LTCi and certain hybrids allow most business owners and their spouses to deduct LTCi premiums from business income as a business expense. The amount of the deduction may vary based on the tax structure of the business, the LTC portion of the premium in the case of hybrids, and the age of the insureds. The LTC benefits received from the policy are generally tax-free, so there is little downside to funding the premium with the business checkbook. Plans can be carved out for the business owners exclusively or for any group of employees based on criteria that the owner chooses. This allows for tax-deductible executive benefit programs and incentivizes employer funding of LTC plans in the worksite.

LTCi Worksite Marketplace. Rising like the Phoenix from the ashes is a sudden proliferation of LTCi solutions in the worksite. There are both traditional LTCi and hybrid solutions that are now available. There are fully underwritten unisex-priced plans with robust benefits or quasi-simplified issue plans for larger groups. Voluntary plans are often enrolled by LTC specialist firms or agents using one or several different products. However, tax deductible employer funding, even in small amounts, can encourage high participation rates. You may be able to use a 401(k)-like approach where you define an LTCi contribution amount, and have the employer offer a matching contribution. You are limited only by your imagination.

Funding LTCi from Health Savings Accounts (HSAs). With the Affordable Care Act and increased popularity of high deductible health plans, there is suddenly more money accumulating in HSAs. In 2008, there was approximately $5 Billion in HSAs. In 2019, this is expected to top $60 Billion. HSAs can be used pre-tax to pay LTCi premiums or the LTCi portion of certain hybrid product premiums, up to the annual age-based IRS limit. Either spouse's HSA may be used to fund both spouses’ LTCi plans.

1035 Exchanges. The Pension Protection Act allowed another significantly tax-advantaged sales opportunity for both traditional LTCi and hybrid policies. For individuals who own a non-qualified annuity, they can take both the principal and tax-deferred gains and move the money over through a 1035 tax-free exchange to pay the premiums for traditional LTCI or an annuity with an LTC rider. Non-qualified life insurance can also be exchanged tax-free into traditional LTCi or Life with an LTC rider. LTC benefits can still be received tax-free.

The Bottom Line

“Wanna change the world? There’s nothing to it…”

There are many different LTCi planning solutions available to serve the over 100 million individuals in the U.S. who are planning for or have reached retirement. Additionally, many of those in the sandwich generation are currently dealing with the burden of paying for long term health care costs for one of their relatives. The majority of them do not realize that looming long term care costs can be solved with an array of insurance solutions already available in the market.

Going forward, I expect to see continued innovation addressing many of these market segments with insurance companies gravitating toward the most popular solutions. The government has also been receptive over the past few years to supporting private alternatives and increasing existing tax incentives since the majority of the long term care burden eventually falls on state and federal budgets through Medicaid. Luckily, this looming crisis can still be prevented from becoming a catastrophe. The cost of insuring against this future risk is accessible to many Americans, especially if they plan in advance, while they are still healthy enough to qualify for all of their options.

Best Regards,

Marc Glickman

Do you have any LTCi questions for the Actuary?

Please email Marc Glickman, FSA, CLTC at [email protected]

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