Consider this …
By Louis H. Brownstone
There is a major change in long-term care planning in the works. A new, mandatory tax which would provide minimal long-term care benefits for California’s citizens has now been recommended to the legislature by the California Task Force for Long Term Care. There’s no guarantee that this tax will become law, but passage is likely. It could impact all citizens who pay either a payroll tax in California — no matter where they live — or pay California income tax.
What would this mean? It’s too early to tell with any certainty. We can only guess what the most likely outcomes will be. But if you want to protect your clients that have fairly substantial incomes, get them covered with private long-term care insurance now. They would then have the ability to opt-out of paying the tax.
This article will first discuss the background of the Task Force and estimate the amount of the tax. Then it will discuss the role of the insurance agent in advising prospects as to who should buy private long-term care insurance merely in order to opt-out of the tax.
California Task Force history
The California Task Force for Long-Term Care was established “to explore the feasibility of developing and implementing a culturally competent statewide insurance program for long-term care services and support.” The task force is comprised of a committee of some fifteen members, consisting mostly of California Department of Insurance (DOI) employees and representatives of caregiving organizations.
The California Task Force has met many times over the past year and has submitted its recommendations to the legislature. It has tried to improve on the imperfections of the recently enacted Cares Act from the State of Washington. The Cares Act will be funded beginning this July through a mandatory payroll tax of 0.58%. It will give workers a lifetime benefit of $ 36,500, adjusted annually by Washington’s Consumer Price Index. California and some thirteen other states, including the large ones of New York and Pennsylvania, are also considering adopting an improved version of the Washington Cares Act.
The concept is to provide a small long-term care benefit and to encourage citizens to buy wrap-around private long-term care insurance. This would protect citizens and save the state many millions of future Medi-Cal dollars.
In my view, this is a noble effort to provide a public program to solve the pressing long-term care conundrum. The committee meetings showed how pervasive, threatening and growing long-term costs are. But the more one examines the details of a public program, the more complex the issues are that emerge.
The Tax Amount
Let’s discuss the most critical issue: how large is the tax going to be?
The task force members formed into three distinct groups which differed on the size and cost of the benefits:
- Caregivers group: wanted the maximum benefit designs at the greatest cost. These designs could increase payroll or income taxes by as much as 20% over the huge 9.83% or more that many Californians currently pay;
- Two insurance actuaries: favored the least expensive designs. This could cost roughly the same as the 0.58 % Washington Cares Act
- Members of the Department of Insurance: said little but were concerned with cost issues and to what extent an expensive a plan could pass in the legislature and be signed by Governor Newsom.
The result was that the task force provided the legislature with five recommended designs, not just one, which are widely different from each other, both in cost and in benefit structure. It has hired the actuarial firm of Oliver Wyman to provide a cost analysis no later than December 31, 2023.
Members hope to get employers to pay up to half the cost. This would be counterproductive in my view. Corporations already pay an 8.83% income tax in California, and would strongly resist any increase. They would have an even greater incentive than they do now to switch their domiciles to more friendly states where they would pay no income tax at all. Their flight to other states would decrease tax revenues in California. I don’t think the legislature will allow this to happen.
If California’s citizens have to bear the full cost burden, what size of a tax rate would the legislature consider? Washington’s payroll tax rate is 0.58% for a program far smaller than that the California Task Force is considering. How robust can California’s program be and still be accepted by the legislature and its citizens? There would have to be many compromises in proposed benefits to keep the tax rate under 1%. I don’t believe that the legislature would enact a tax rate of 1% or higher.
Insurance agent’s role
It is almost certain that citizens won’t be able to opt-out of the program and avoid the tax once the law is enacted. In addition, it’s almost certain that they will be able to opt-out if they have an acceptable long-term care insurance plan in place before the opt-out opportunity expires. Keep in mind that if one opts-out of the program, one also opts-out of the benefits in the plan.
What plan would likely satisfy any minimum opt-out requirements?
A traditional long-term care insurance plan could well contain a benefit of $100 per day for a two-year benefit period with a zero or thirty-day elimination period with 3% compound annual inflation. Other non-traditional products with similar long-term care benefits which come under section 7702(b) of the Internal Revenue Code might also satisfy any requirements. Of course, these plans would only offer partial coverage.
Would life insurance and annuity products with chronic illness riders under section 101(g) also qualify? We don’t know at this point.
Which of your clients should you prospect?
Not those in the lower 50% in income, as the public program would be an inexpensive partial long-term care solution for them. The higher the income, the more advantageous an opt-out decision.
At what income level should you advise prospects to buy private long-term care insurance merely to opt-out of the public plan?
You have to project income of a prospect over many years and strike an average of what that income would be. The tax for the public program rises with income, but rates for private plans may remain relatively stable. For example, if a man were forty-one years old, making $80,000 per year, and his income grew by 3 % per year, by age 65, he would be making $160,000 per year. His average compensation over the twenty-four-year period would be $120,000. If the tax turned out to be 0.9 % of income, the public program average premium would be $1,080 per year.
For that person, a private long-term care insurance program could well be less expensive than the public program, especially if that person were a male and could take advantage of separate gender rates. One carrier currently has a very comparable rate for that forty-one-year-old male. For females and those who would be subject to unisex rates, the income level to merit an opt-out decision would be somewhat higher.
For a person whose current income is in the $100,000 to $150,000 range, it might be a wise decision not to opt-out of the public plan and purchase wrap-around private long-term care insurance in order to obtain robust protection. But for a person whose income is above $150,000 now, I would recommend opting out of the public plan and purchasing private coverage.
Timeframes for opting out
In Washington, only several months were allowed to opt-out of its program. An amazing 1/7th of eligible citizens opted-out of the Washington Cares Plan. There’s going to be more time to opt-out of the California plan. Legislation will probably not happen for at least another eighteen months, and for at least a year, you can take advantage of this unique opportunity to help protect California’s citizens. There’s going to be a great deal of discussion in California about long-term care in the coming months, and as an agent, you need to be well informed on the issues and ready as the situation clarifies to execute a specific marketing plan.
LOUIS H. BROWNSTONE is chairman of California Long Term Care Insurance Services, Inc., a large specialist long- term care insurance brokerage, located in San Francisco. He is currently a
member of the executive committees of the National LTC Network and the National Alliance of Insurance Agencies. He is also active in NAIFA, the National Association of Insurance and Financial
Advisors. A graduate of Andover and Stanford, Brownstone has been a long-term care insurance specialist for over thirty years.