At Advanced Benefit Solutions we believe it’s important for us to be a part of the conversation when it comes to any insurance product that impacts the well-being of our clients. We work with financial advisors all over the country to provide solutions designed just for your clients. Long-Term Care insurance is an important part of planning for a secure financial future, especially as many states are starting to roll out a mandatory tax.
You may have seen information on the news about long-term care taxes, so this article covers what long-term care insurance is and why the tax ramifications are becoming increasingly important. Many financial advisors discuss long-term care as a part of comprehensive financial planning and preparing for retirement.
What is Long-Term Care Insurance?
Long-term care planning is all about making sure you will have your needs met later on in life should you need extensive care for a long period of time. It is a possibility that at some point, you or your loved ones may not be able to offer the level of care you need if it becomes difficult for you to complete necessary daily tasks (such as eating, getting dressed, using the restroom, etc.)
If you need a specialized nursing facility or home care, cost can be a big factor in the care you receive. Buying a long-term care insurance policy could supplement your plan and widen the range of service options that regular health insurance or Medicare typically does not include. This is especially important if you have a chronic medical condition, a disability, or are in need of memory-specific care.
Who Needs Long-Term Care Insurance?
Many people put off getting a long-term care insurance policy because talking about long-term care is uncomfortable. But the data shows that the majority of people will, at some point, need assistance to complete daily tasks. In fact, someone turning 65 today has a nearly 70% chance of needing some type of long-term care in the future.
Many of the clients you serve could be able to self-insure this risk completely, or are close to that point. However, we have found, a majority of those same clients are interested in looking at how a long-term care policy can protect their hard-earned assets and mitigate portfolio deterioration to cover an uninsured long-term care event. It does not mean everyone buys a policy; it does mean they have factored in how a policy impacts their plan.
Why are We Talking about Long-Term Care Taxes?
Now that we have discussed the purpose of long-term care insurance, let’s talk about the taxes.
First of all, having a long-term care plan in place offers some attractive tax benefits. As an example, if you itemize your deductions, you can count the premiums as medical expenses. These are tax deductible if you meet a certain threshold.
Many states have started to propose a Long-Term Care Tax (LTC). Washington State was the first state to pass a tax , with states like New York and California looking to implement in the near future.
In 2019, Washington passed the LTC tax tied to the WA Cares Fund. What does this mean? Starting July 1, 2023, every individual who works in Washington State will pay 0.58% of their wages into the fund. The tax then pays out a $36,000 lifetime long-term care benefit – this amount will be available for everyone who pays into it.
Is it mandatory? Yes. There was a one-time opt-out for people who had purchased a long-term care policy. As you can imagine, the opt-out caused a massive influx of policy applications which created challenges for insurers and a huge backlog.
States like New York took notes on Washington’s opt-out policy, which ended up costing the state millions of dollars. If New York’s law is passed in 2024, to opt out of the tax, people must have already owned a long-term care insurance policy by January 1, 2024. Basically, if people wait until the law is passed it will be too late to opt out.
For higher earners, taxes like these aren’t going to be much of a benefit. It will impact take-home pay, and they will only get the value of exactly what they pay into the program and nothing more in terms of benefits.
What to Do about Long-Term Care Insurance
1. Don’t PanicWhile these laws are in progress, it’s good to stay informed. Keep track of what is happening specifically in your state. Alaska, California, Colorado, Hawaii, Oregon, Illinois, Michigan, Minnesota, North Carolina, and Utah are other states who are considering similar long-term care tax proposals as New York. If you live in one of those states, you should have a healthy sense of urgency in getting your long-term care plan together. We are encouraging everyone to take a look this year, in case state-sponsored long-term care programs become the norm.
2. Make Getting a Long-Term Care Policy a PriorityWhat happened in Washington was tragic. Long-term care insurance providers even exited the market because they became so overwhelmed as the volume of applications was simply too much to manage. By the time the long-term care tax law is passed in New York, people won’t even have an option to purchase a plan. If an additional tax would be a dramatic hit to your client’s net earnings, now is the time to analyze all of their options. Waiting it out will not work in their favor.
3. Create a List of Clients that could be Impacted the Most (Prioritize CA and NY)These taxes will only impact clients that are still working. Obviously, if they are not earning a wage, they will not be taxed.
4. Connect with Phil at ABS to Analyze ImpactWe have built calculators that help showcase the impact of a tax and the benefit that a client will receive. We can also look at insurance policy options, their cost, and discover the difference between the state tax and benefit vs. an insurance policy cost and benefit.
The Downside of State-Sponsored Long-Term Care
You might think okay, what’s the big deal? I don’t have to go through an application process or worry about purchasing my own plan – so what’s so bad about paying long-term care taxes into a state-sponsored plan?
Most of us aren’t thrilled at the idea of losing even more of our take-home pay to yet another tax. However, this trend of states offering plans like these is driving a conversation that we all need to have. The data shows that the vast majority of us will need long-term care at some point. With a nursing home average costs at over $6,800 a month for a semi-private room, chances are many Americans wouldn’t have enough to get the necessary care.
Downside #1: Lack of Control
We’ve all heard stories about assisted living and nursing facilities. Some facilities are better than others. With a state-sponsored plan, you don’t have as many choices. Private pay or private long-term care insurance gives you the control to find an option that fits the needs of your family.
Downside #2: Lack of Protection
Private long-term care policies have certain elements of protection against things like inflation or death if the funds go unused, among others.
Advisors, We are Here to Help
There is so much uncertainty around the landscape for long-term care insurance right now. While New York and California are likely to approve their taxes soon, we don’t know when other states will follow suit.