Incubating Long-Term Care Sales:
A Small Business Perspective
by Dean Horger CLU ChFC CSA CLTC

What if a business owner could offer an employee benefit that was selective, available to spouses, let the employee receive future benefits tax-free, let the owner deduct most if not all of the contributions, and did not increase the employee's taxable income? It's not a dream, it's long-term care insurance.

Let's go through the parameters:

Selectivity: A business owner can choose a class of employees to include in a plan (including the owner-employee) as long as there is a rational basis for including some and excluding others.

Spouse Coverage: The owner can include employees' spouses or their own spouse within a plan. This is very different from the way other executive benefit plans generally work, such as 162 bonus plans with life insurance or non-qualified deferred compensation plans.

Deductibility: Depending on the business entity form, the business owner may deduct premiums paid for a non-owner employee and spouse. They may be able to deduct all or some of what was paid for the employee-owner's and spouse's premium.

Let's take a closer look at deductibility. Individuals who itemize deductions may add their eligible premium to any un-reimbursed medical expenses. (The lesser of actual premiums paid or age-based limits referred to in the chart)

If the combined total exceeds 7.5% of their adjusted gross income, the amount over that threshold can be considered for a deduction. Very few individuals qualify for this deduction.

A sole proprietor may purchase long-term care insurance on themselves and their spouse. They can deduct the premium or the eligible age based limit, whichever is less. Keep in mind the sole proprietor doesn't have to consider the 7.5% of adjusted gross income requirement.

Here is an example: Mary and her husband, John are both 55. Mary is the sole proprietor of a gift shop. The premium is $2,800 for both policies. If Mary itemizes, she can deduct $2,220 in an above-the-line deduction. ($1,110 for herself and her husband). The business could pay for those premiums as a business expense in any of the pass-through business entity forms, such as the partnership, S-corporation (assuming the business is more than a 2% owner), LLC, and PC (assuming that the business is not being taxed as a C-corporation). The premium expense passes to the owner as income. The owner can deduct up to the age based limits on the individual tax return.

The business can pay and deduct the long-term care insurance premiums for a non-owner employee for a policy owned by the employee and for a policy owned by their spouse. The premium is not considered taxable income to the employee or spouse. Also, it is not considered taxable income when it is paid to the insured at time of claim reimbursement.

If a stockholder employee is actively at work in the business, a C-corporation could pay the premiums for the stockholder employee and spouse, and deduct the premiums.

However, premium that the C-corporation pays is not considered income to the stockholder employee. The benefit paid in the form of reimbursement is not taxable as with all tax qualified long-term care insurance policies.

It is one of the few executive benefits that has advantages for selectivity win, spousal win, and deductibility win scenarios. Also, since the employee owns the individual policy, it goes with them if they leave the company.

One area that many executives and planners have overlooked in their retirement strategy is the potential cost of long-term care, which burden the retirement portfolio and the family. So, why wouldnÕt a business owner transfer some of that risk to an insurance carrier, particularly if it can be done using tax-advantaged dollars?

To start the discussion with your clients, you can say, "We've done some planning for your retirement. There is one thing we haven't talked about and I feel I need to ask. If you had a chronic disability today, which required long-term care, how would you pay for it?"

The answer is usually, "I don't know." or "I"d pay for it from my retirement portfolio." Your response should be, "I was afraid you might say that. Let's look at some strategies that can help you protect your retirement portfolio. As a business owner, you can generally do this with tax-advantaged dollars."

Many carriers offer a multi-life discount. Think of the market in two segments: an employer pay-all executive only program or a voluntary plan for all employees. The executive only plans are very attractive since they enhance their benefit program. In addition, you deal with one decision maker and walk away with significant premiums and multiple applications at one time.

Concentrate on the executive employer pay-all first. You can present the voluntary program as a viable option if the business chooses to offer coverage to other employees.

In evaluating carriers, look for a company with strong financials, a history of claims-paying ability, and a track record in the long-term care insurance arena. Also, consider a program that gives the employer plan flexibility and the biggest bang for their buck. They should receive all applicable discounts including preferred health.

People recognize that long-term care is a critical challenge. Small businesses that offer to pay long-term care insurance premiums for their employees may have an easier time attracting and retaining the most qualified people. It gives business owners the opportunity to cover themselves as well, particularly in a closely held company. It may also help them focus on their jobs without anxiety, which can help maintain the prosperity of the company.

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For more information call 888 GENWORTH or contact your Genworth sales team.