Long Term Care Taxes And What It Means For You
This week’s blog was co-written by the Mana team and Phil Seibel, an insurance planner with Advanced Benefits Solutions in Austin, Texas.
Long term care - a time in your life when you’ll need help with a range of services and support to perform everyday tasks due to illness, disability, or aging - is a hot topic right now. In 2019, the WA Cares Fund was launched by the State of Washington. It will be funded by a state-mandated tax in which all W2 employees are required to pay a payroll tax of 0.58% on all earnings. The mandate of this fund is to broaden access to long term care benefits. Now, many states are expected to follow suit.
A new tax is inherently political, but this won’t be the focus of our blog. Instead, we’d like to focus our discussion today on long term care, long term care insurance, and who might - or might not - benefit from a long term care tax.
Why am I hearing so much about long term care right now?
In 2021, the median annual national cost of a private room in a nursing home was $108,405, according to the most recent annual survey from Genworth. In our state of California, the median annual price was $117,530. Long term care is both costly and increasingly expensive as more and more people require it. Seven out of ten people turning 65 today will require long term care in their lifetime.
The major claim payor for long term care benefits is Medicaid, not Medicare, as many think. Each state is growing more and more concerned that the baby boomer generation is going to deplete Medicaid funds, severely impacting future generations. As result, plans were drafted for mandatory state-sponsored long-term care insurance programs, paid via payroll tax.
As we mentioned at the beginning, the State of Washington was the first to pass such a payroll tax. Starting July 1, 2023, every individual who works in Washington State will pay 0.58% of their wages into the Washington Cares 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.
Alaska, California, Colorado, Hawaii, Oregon, Illinois, Michigan, Minnesota, New York, North Carolina, Utah, and Pennsylvania are other states that are considering similar long-term care tax proposals; New York and California are the two states that experts believe will be early adopters.
The State of Washington offered a one time opt out for residents to avoid the tax. In order to opt out, individuals had to submit proof that they owned an individual long term care policy by a certain date. As you can imagine, the opt-out caused a massive influx of policy applications which created challenges for insurers and a huge backlog. What made matters worse, many long-term care insurance providers stopped providing independent policies in the State of Washington.
What is long term care insurance and do I need it?
There are various types of insurance policies that provide long term care benefits. The options and plans can seem endless; a good first step is to understand the insurance-specific lingo:
Benefit Amount: When you qualify for care, this is the dollar amount that is the maximum amount the insurance company will pay out on a monthly basis, up to your total benefit amount.
Inflation: Many policies allow the addition of an inflation rider, causing the monthly benefit amount to increase on a yearly basis starting the day the policy goes in force. Such a rider increases benefit coverage each year.
Coverage length: Most policies offer coverage for 2-6 years. This means that when you qualify for care, you will receive your monthly benefit amount for the coverage length. You have the option to stop and start these benefits at any time, enabling you to have coverage for longer.
Example A: Your policy pays a monthly benefit of $4,000 a month with a 6 year benefit period. Upon filing a claim, you would receive that $4,000 a month for 6 years.
Example B: Let's say you filed your first claim and you only needed assistance for a short period of time. Your policy would pay out $4,000 a month for every month you need care. Once care stopped, the remaining benefit amount would be there for the future and could continue to increase based on your inflation option.
Reimbursement vs Indemnity:
Reimbursement policies are designed for a policyholder to be reimbursed for qualified long-term care expenses.
Indemnity style plans pay the monthly benefit available on the policy, in full and tax-free, to the client when they qualify for a claim.
After understanding these key terms, the next step is to evaluate whether a long term care insurance policy is right for you.
One thing to consider is how long you might need long term care in the future. The average length of stay in assisted living is 28 months; the average length of stay in a nursing home is 485 days. As pure anecdotal evidence, about two years ago my own father started needing a home health care aid three days a week, five hours a day. As his needs increase, so do the hours we hire the home health care aid to attend to him. On average, a female that is 65 today will require 3.7 years of long term care services while men 2.2 years.
You might also think about what kind of care you want to pay for with the proceeds of your policy. Some of our clients want a policy with all the bells and whistles: a high benefit amount, a cost of living inflation rider, coverage for as long as possible, and an indemnity style plan. This kind of policy will be the most flexible and most costly. Others prefer a policy that is more cost-effective today but will still allow them to avoid paying a future payroll tax.
Another consideration worth weighing is how a future payroll tax might affect your finances.
To pay or not to pay
California, New York, Pennsylvania, and Minnesota are just some of the states that are in process of building and implementing their own program, and Connecticut, Illinois, and Massachusetts will quickly follow suit. Each state's rules, exceptions, and benefits can differ.
In 2023, California initiated a task force to get an actuarial assessment of a potential tax and the benefits that tax would provide. The assessment’s submission date is set for January of 2024. At the time of writing, the task force has developed 5 projected long term care benefit plan designs, all with varying levels of taxes assessed to income earning residents of California. If you do not currently own or purchase a personal-owned policy in 2023, the percentage of tax to each dollar earned is projected to range from 0.58% to 1.5%. Unlike Washington state, self-employed individuals will not be exempt from the tax.
Here is an example:
Let's say you are 45 years old, living in Los Angeles and earning $250,000 per year. The State of California elects to tax at the maximum rate of 1.5% of earnings or $3,750 per year. This means you pay over $75,000 in taxes over the course of the rest of your working life (assuming you retire at age 65) for a total long term care benefit amount between $36,000 and $144,000. To receive that benefit, you will need to utilize state approved facilities and resources, meaning you will not have the choice of whether to stay at home or at a facility of your choice. If you retire outside of California, the most stringent plan design prohibits you from taking the policy with you to receive benefits in another state.
The total long term care benefit amount is the same for anyone who contributes and qualifies for the benefit. If you earn $1 million a year, you’ll be paying $15,000 a year for a total long term care benefit amount between $36,000 and $144,000. The more you earn, the more it makes sense to evaluate a long term care policy.
When should I look into a long term care insurance policy?
Based on the potential tax we see on the horizon in New York and California, we think it makes sense to evaluate the option of an individual long term care policy if you have any of the following:
A higher income - $200k or more in income
A family history of long term care needs (eg. a parent or grandparent was in a long term care facility for greater than three years)
If you have many years to pay into the system. Remember, this is an annual tax with a finite benefit.
If you value choice in how and where your care will be administered.
Although the tax has not been finalized, experts suggest discussing and vetting your options with your financial advisor and/or insurance professional as soon as possible. If you do not have a personal policy by the time the tax becomes law, you may not be able to opt out (CA is analyzing a reduction for residents that purchase a policy after the enactment, but that has not been confirmed yet.)
The passing of the Washington state long term care payroll tax was unprecedented, but now it appears that many states plan to follow suit. Unlike the residents of Washington, everyone else has a bit more time to plan. Though thinking so far ahead might not be the most pleasant task, we encourage everyone to take the time to work with a fiduciary financial advisor to help navigate the choice that’s best for you.
Phil Seibel’s professional life has been one wild ride. He attended the University of Texas on a pitching scholarship and was drafted by the Montreal Expos, where he was fortunate enough to play for 7 years. The highlight of his baseball career came when he was able to be a member of the 2004 World Series Champion Red Sox. After a constant string of injuries Phil retired, switching over to the front office of the Arizona Diamondbacks where he helped manage the Scouting and Player Development offices. After a year and a half, Phil realized that he needed to make a change to be able to balance work and raising a family. Following in his father’s footsteps, he joined the insurance world. Since 2009 he has been fortunate enough to work with some of the best mentors in the industry, allowing him to build a practice and skill set that serves financial advisors and clients alike. Phil works for Advanced Benefits Solutions. His goal is to bring the ultimate level of excellence to the insurance world, a challenge he gladly welcomes. He currently hangs his hat in Austin, Texas with his wife and two daughters who keep him on his toes.