In 2021, I wrote an article for this journal detailing some of the guidelines for identifying and selecting the proper type of long-term care (LTC) coverage for an individual’s given circumstances and the impact of COVID-19.1 Now it’s 2023, and COVID-19 is less of a focus (while not gone from our lives) and less impactful in general, but the need for LTC solutions remains strong as our population ages.
The Backdrop
The Silver Tsunami is here! By 2060, the age 65+ population in the United States is expected to double, and the age 85+ population could triple.2 Longevity is a major risk concern for all, but particularly for women who tend to live longer than men. The number of individuals living to age 100 doubled since the 1990s, with one in 5,000 now being a centenarian.3 Of those centenarians, 85% are women.4 We know that with a longer life, demand for LTC services will increase, and it’s a reasonable assumption that care providers will prefer clients who have payment sources already in place.
LTC policies provide a source of additional money (income) to pay for services, providing payments when an individual can no longer perform routine daily activities without assistance, referred to as “activities of daily living” (ADLs), which include bathing, eating, dressing, toileting, transferring and continence. Insured individuals typically qualify for benefit payments when they can no longer independently perform two of six ADLs or are diagnosed with a severe cognitive impairment.
With less focus on COVID-19, carriers have opened up their maximum issue ages again to pre-COVID-19 limits, though applying at younger ages is recommended for greater likelihood of obtaining coverage as these plans are health underwritten.
A recent Morningstar report noted that 42% of people over age 85 need LTC services, and while 10% of people over age 65 have dementia, that number jumps to almost 40% at age 85+.5
Tax Deductibility of LTC Premiums
For stand-alone policies and certain linked-benefit plans in which the premium has a portion allocated to the LTC benefits, all or a portion of the premium may be tax deductible by an individual. For accident and health insurance, individuals who itemize deductions may deduct the lesser of: (1) the actual premium paid; or (2) the eligible LTC premium. The eligible LTC premium for 2023 is:6
Age 40 or less $ 480
Age 41 – 50 $ 890
Age 51 – 60 $1,790
Age 61 – 70 $4,770
Age 71 and older $5,960
The medical expense deduction is allowable to the extent that such expenses (including payment of eligible LTC premium) exceed 10% of adjusted gross income.7 The per diem limit for 2023 is $420 per day.
Paying for LTC Event
A number of LTC coverage options are available—the challenge is finding the best solution that meets a client’s particular needs. There’s movement in the marketplace to create new products as well. The primary options currently are:
Self-funding. While paying for all LTC costs may be feasible for those with larger net worths or higher income earners who are good savers, there can be better ways to cover the LTC event costs. High-net-worth (HNW) clients tend to make smart financial decisions, and using an insurance company’s money to pay the LTC costs versus paying full costs out of pocket can be a smart decision. As discussed below, many states have pending LTC tax legislation that would impose an income tax on those who don’t own LTC insurance coverage, making it a potential concern for those clients who feel they could self-fund care in the future.
Stand-alone LTC. The sole purpose of a stand-alone LTC plan is to provide for the payment of LTC expenses. This type of LTC insurance plan tends to be most popular with clients who have no children and thus no need for a death benefit feature, have more limited funding options (lower net worth) or simply want insurance that only covers the specific event with no extra add-ons.
Hybrid plans. These refer to either life insurance policies with an LTC or chronic illness rider or a linked-benefit plan. It’s important to note the difference in focus of these two types of plans.Life with rider options are simply an acceleration of death benefit and, therefore, have a focus on death benefit. These plans don’t offer any inflation increase option so the LTC benefit remains flat throughout the years of the policy.
Linked-benefit plans are focused on LTC benefits, with inflation riders available to keep up with the increasing costs of care over the years. These linked-benefit plans include a smaller death benefit feature to ensure premium dollars aren’t wasted if there’s no LTC need and some level of a return of premium feature in case the client wants to cancel coverage in the future and receive their money back. The focus, however, is on providing solid LTC benefits on a guaranteed and paid-up basis, whether that be a single premium payment or ongoing premiums for a specific number of years.
Some life with rider plans are fully guaranteed, but they can be based on whole life, universal life, indexed universal life or variable life insurance chassis and so may vary with the market; all linked-benefit plans have guaranteed payments, and most are fully guaranteed although a few plans are linked to the market via an indexed chassis base plan.
All types of hybrid plans can be funded via Internal Revenue Code Section 1035 tax-free exchanges from an existing cash value life insurance policy.
Care coordination benefits. These are available to help a policyholder identify home health care providers as well as nursing home and assisted living options. While not a separate type of plan, this can be a very valuable benefit for all policyholders and is sometimes a focus for HNW clients who may not have as much need for the actual financial payout but will want assistance in finding the care at claim time. Care coordination benefits are available on stand-alone LTC policies and linked-benefit policies but only on a few life insurance with rider plans.
Best Fit
What’s the best LTC product? The answer remains the same—it depends on the facts, circumstances and needs of each individual client. While we all have our own biases and preferences, good advisors will carefully review product features and limitations to ensure that they’re purchasing a product that reflects the client’s needs for future care and offer a few options for various types of product solutions. This may, and should, always include a preliminary assessment of the client’s health history.
Here are a few rules of thumb:
- For a client with limited funds, a stand-alone LTC policy frequently provides the best LTC coverage for the cost.
- If a client has available funds and wants strong guaranteed LTC coverage, a linked-benefit policy is a good choice. Linked-benefit plans can be a great option for clients who are older or clients with health issues (that is, the other types of coverage would be cost prohibitive or unavailable) because there’s less underwriting required.
- For clients who no longer need in-force insurance coverage or who aren’t relying on an existing annuity for income, an IRC Section 1035 exchange from a permanent life insurance policy or a traditional annuity to a tax-favored linked-benefit annuity plan can be a great option that efficiently redirects those funds to provide LTC coverage.
- If a client has a life insurance need and some concern about the potential for a care need in the future or wants to make an existing life insurance policy “dual purpose,” then a hybrid life and LTC product makes sense. Again, a Section 1035 exchange of an existing life policy into a hybrid plan can be attractive.
- Note that a life insurance with rider plan may leave no death benefit for other purposes if used fully for an LTC need; thus, make sure the client doesn’t have a need for life insurance proceeds with this type of “hybrid” plan being their only coverage.
Solo Agers
We’ve recently seen a greater focus on clients who fall into the “solo agers” category, that is, those who are single, divorced or widowed or who may become solo as they age. The reason for greater focus on making sure these clients plan for longevity and their potential LTC needs is that they tend to have fewer individuals to help them as there’s no spouse or partner to provide care or help in setting up care and/or taking care of household needs (groceries, meals, paying bills). This can obviously be a major additional challenge when care is needed due to physical or cognitive decline when living solo.
LTC Tax Legislation
One of the newer incentives for purchasing LTC insurance is the various LTC legislation pending in a number of states. Each state may pass different rules; however, most are currently mimicking what Washington state enacted already (WA Cares Act).8 A very important note here is to consider the type of LTC insurance plan that could meet the requirements to obtain an exemption from income tax. While this may vary by state, most states currently accept stand-alone LTC insurance, linked-benefit plans and life insurance with LTC riders—aside from New York, where the language currently would only include stand-alone LTC plans. Those “hybrid” plans, which include chronic illness riders on a life insurance plan, aren’t acceptable for an exemption in any states’ proposed legislation to date as they’re not considered LTC insurance (IRC Section 101(g) plans versus IRC Section 7702(B) plans).
Currently, California, Massachusetts, New York and Pennsylvania have legislation proposed and/or task forces reviewing and proposing potential plan designs. Illinois, Michigan and Minnesota are in the process as well. Numerous other states are in the wings, waiting and watching to propose their own legislation (for example, Arkansas, Colorado, Hawaii, Missouri, North Carolina, Oregon and Utah).
Washington state LTC legislation was passed in 2019 with a payroll tax for all W2 employees who didn’t have existing LTC insurance, but timing was revised with an open window to purchase coverage. Washington state “paused” the plan in 2022 and revised options for those close to retirement, out-of-state residents and veterans with 70% or higher disability income. Employee contributions will start July 1, 2023 at a rate of .58 cents per every $100 of income.
When the next state rolls out its LTC plan, carriers may set higher limits and/or decide not to offer LTC plans in that state at all. States may also decide not to offer a “purchase window” period, making it too late to get an exemption for any W2 employee who doesn’t purchase LTC coverage prior to plan rollout.
Act Now
Now’s the time for your client to consider purchasing LTC insurance coverage of some type. Purchasing while as young and healthy as possible provides more available options. The financial security for the client and their family, as well as the peace of mind from knowing the family won’t be required to provide all the care or contribute all their hard-earned savings to cover care costs, can be of paramount importance.
Endnotes
1. Nancy Simm, “Selecting the Best Fit in Long-Term Care Coverage,” Trusts & Estates (April 2021).
2. Census.gov, “The Next 4 Decades: Older Population in the United States,” www.census.gov/library/publications/2010/demo/p25-1138.html.
3. www.bumc.bu.edu/centenarian/statistics.
4. Ibid.
5. www.morningstar.com/articles/957487/must-know-statistics-about-long-term-care-2019-edition.
6. Internal Revenue Code Sections 7702B(a)(1), 213(d)(1)(D) and 213(d)(10).
7. IRC Sections 213(a) and 213(f).