Your executive benefit package includes a range of services to help attract, retain, and reward their service. Just like your financial institution’s product portfolio, it helps to meet a diverse range of needs. One of those might be Long-term care insurance.
This article will discuss what Long-term care insurance is and answer 9 top questions so you can provide the right solutions for you and your team. Plus, it will help you decide if long-term care insurance makes sense for your institution.
1. What is long-term care insurance?
Long-term care (LTC) insurance is a health insurance policy that funds a portion of expenses in the event the policyholder becomes:
- Has a chronic (not life-threatening) illness
- Unable to live on their own (as a result of being unable to do three or more activities of daily living)
- Activities of Daily Living (ADLs) include eating, dressing, bathing and bathroom needs, and general movement
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2. Who needs LTC insurance?
Short answer? Almost everyone. Why? Long-term care is expensive and, whether by sickness or advanced age, it’s possible you may need assistance with ADLs.
While health care increases in price, so too do the costs associated with long-term health care services. This includes such services as:
- Assisted living facility or nursing home
- Adult day-care
- In-home health care
LTC insurance can help relieve some of these financial burdens. It’s impossible to know today whether you or a member of your executive team will need such care. Like other insurance, offering it depends on a balance of perceived/real risk, costs, and benefits today.
Conditions can arise unexpectedly. Accidents can occur. Preparation can pay dividends later.
3. Who does LTC cover?
LTC policies cover individuals age 65 and over. There are also requirements a policyholder must meet to receive LTC benefits. We will cover some of those below.
LTC policies help pay for personal care (assistance with ADLs) that typical health insurance policies may not cover. That means paying for LTC without assistance from insurance. These costs can be significant. And that isn’t just traditional insurance. It’s Medicare, too.
Contrary to expectations, Medicare only covers LTC in limited circumstances. You may be entitled to Medicare benefits for skilled nursing care if the following requirements are met:
- Confined to an in-hospital stay for at least 3 days
- Admitted to a Medicare-approved skilled nursing facility within 3 days of discharge from the in-hospital stay
- Need skilled nursing care
In such a case, Medicare will help pay up to 100 days for skilled nursing care, with the following schedule:
- 100% of cost for first 20 days
- Co-payment for days 21-100 ($176 per day as of 2020), with Medicare paying balance
After 100 days, Medicare no longer pays for skilled nursing care. At this point, LTC insurance shows its value.
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4. What’s the difference between “regular” LTC insurance and Executive LTC insurance?
LTC insurance is popular as part of an executive compensation package. These often help attract and retain top executive talent. Executive LTC arrangements are also known as “carve-out” plans. These may be paid for in full by the employer.
Thus, your institution can “carve out” a group of employees to offer LTC coverage. This is often known as “golden handcuffs.”
Insurance underwriting requirements are more relaxed for these carve-out group policies than for regular individual policies. The latter can require an extensive health evaluation.
Underwriters simplify the process for carve-out groups, including open enrollment periods that make it easier to obtain coverage.
Employer-paid premiums are tax-deductible as a business expense, even for equity owners. The LTC benefits are tax-free to the covered person. The IRS may or may not classify the premium cost as income for the policyholder.
These apply whether it is regular or executive LTC insurance.
Since our Learning Library is for both credit unions and community banks, we don’t know your tax status. As it can be either not-for-profit or for-profit, we encourage you and your executives to seek professional tax advice. This will help you determine any tax impacts.
Regular LTC Insurance for Non-Executives
Some businesses offer regular LTC insurance to employees who aren’t on the executive team. For them, companies may pay a small portion of the monthly premium or offer a monthly stipend intended to help employees buy LTC insurance.
This approach can be part of a multi-tiered arrangement. For example, your financial institution may have three tiers of contribution:
- 100% of LTC premium for your executive team
- A portion of the premium for top managers
- Supplementary support for the rest of the staff
5. What are Group and Multi-Life LTC insurance policies?
When offering LTC insurance to staff, institutions have an option between group or multi-life policies. Let’s look at why you would choose one over the other, or, offer both!
Group LTC Policies
Group LTC policies are popular with non-employer groups, such as credit union members, unions, and other associations. Association discounts are available for group members. This is not what you’d use for your executive coverage.
There are basic requirements for offering to non-employer groups:
- Group must have at least 200 members
- Must exist for purposes other than purchasing insurance
These policies can be voluntary, where the employee or member pays the entire cost. Or, they can have an institution contribution, where your organization pays for a certain amount of coverage. Then, if the member wants more coverage, they pay an additional premium.
Think of this like your AD&D program. In our experience, credit unions provide a base level of coverage (say, $1000), then perform outreach to encourage higher insurance amounts.
For new employer coverage, LTC insurance now comes in multi-life contracts. These are individual contracts for covered employees, instead of a group contract. Today, fewer than 15 companies still write regular LTC group contracts. Why the change?
During the 90s, more than 100 companies offered group long term care insurance. After a “market failure” of losses for the insurers, coupled with unpredictable premiums, this type of policy became less common. With decades of history, premiums are more consistent today.
If you’re offering for your employees, this is the type most likely to be available. It allows underwriting specific to individuals, protecting the program as a whole. Plus, both new and existing employees can access the most modern rates and benefits.
6. What are typical LTC terms of coverage?
According to the AARP, typical LTC individual policies provide a specific dollar amount per day ($160) for nursing home coverage. The typical period you (the insured) have to wait for coverage to begin is three months (90 days).
There is also a maximum coverage period of three years.
7. What does LTC cost?
Looking at the pricing for an insurance policy can be daunting. Especially if you’re not aware of the costs it can cover. Long term care is expensive, and it continues to rise. Providing this as an executive offering can be a major benefit for the covered employees.
Take a look at the 2019 national median monthly costs for a selection of long-term health care options. We encourage you to visit our source to project costs into the future.
As an aside, in the time between we drafted this article and edited it for publishing, in-home care increased while nursing home facilities decreased.
See latest (4/2020) values:
- Homemaker Services – $4,290
- Home Health Aide – $4,385
- Adult Day-Care – $1,625
- Assisted Living Facility – $4,051
- Semi-Private Room – $7,513
- Private Room – $8,517
The 2016 national average cost for a semi-private room in a nursing home was $225 per day or $6,844 per month. That represents a 9.8% increase by 2019.
Additionally, the national average cost for a private room in a nursing home was $253 per day or $7,698 per month. That’s a 10.6% increase into 2019. That’s a national average, and most states are seeing cost increases. Long term care insurance may be a solution.
Of course, there’s a caveat. According to the AARP, the typical LTC policy only pays $160 a day. That’s $4,800 a month put towards nursing home care. That may not cover all costs, meaning, the policy holder (or their family) would be responsible for the difference.
LTC Insurance Costs
This section provides only estimates, as individual costs depend greatly on age, term, coverage amounts, underwriting, whether it’s multi-life or group, and more. We share some for your reference, making no guarantees of coverage or costs.
The estimated yearly cost for an individual LTC policy for a single female, 55 years of age, is $2,700. At age 65, the same female will pay an estimated yearly cost of $4,270.
In comparison, a single male, age 55, will pay an estimated yearly cost of $2,050. At 65, he will pay an estimated yearly cost of $2,460.
8. How does LTC insurance work with Social Security?
Social Security recipients may use their retirement benefits to pay for LTC. Payments for retirees provide cash with no restrictions on how it’s used. If desired, policyholders may assign their Social Security payments to LTC facilities to pay for their care.
Individuals with both Social Security retirement and an LTC insurance policy can combine those payments to cover their long-term care expenses.
There is a caveat you should know: Social Security Disability coverage has strict eligibility rules. It requires total disability due to mental or physical decline, which prevents the person from performing any work for which they are qualified.
Long-term disability policies are usually less strict than Social Security Disability so you may not be able to combine them to cover LTC.
9. What are, if any, the tax benefits of LTC insurance?
No, you don’t get to avoid paying taxes if you get this insurance. However, there may be some advantages you can claim.
Internal Revenue Code Section 7702(b) gives preferential treatment to LTC premium payments for tax-qualified, health-based insurance if:
- Individual has sufficient medical care expenses to itemize deductions under Schedule A on the Form 1040, or
- Institution is a C-Corporation
C-Corporations may deduct 100% of the premiums they pay for qualified LTC insurance.
For LTC insurance premiums paid by an individual, the IRS determines the premium amounts that may be allowable as a deduction on an individual tax return. It is based on the taxpayer’s age. The IRS releases a chart each year (2020 version) showing the allowable amounts.
For 2020, the amounts range from a low of $430 (if you reached age 40 or less before the end of the tax year) to a high of $5,430 if you are age 70 or older.
For limits on other ages in-between, browse IRS Internal Revenue Code Section 7702(b).
Hybrid plans are life insurance plans or annuities that also provide LTC coverage. A portion of the premium for hybrid plans may be deductible.
Benefits paid out under both traditional LTC and hybrid plans are tax-free. Life insurance plans that require a terminal condition for LTC coverage do not have any tax-free benefit.
Premiums paid for LTC insurance policies that are short-term (one or two-year benefits) are also not tax-deductible but the benefits paid out are tax-free.
More About Executive Benefits
We aim to help you make educated decisions on a range of your programs and services. Executive benefit packages can have major cost and recruitment & retention impacts.
Bottom line: LTC insurance can be expensive. LTC itself costs more. Like your other insurance products, it’s a matter of building a benefits package (for executive offerings) or deciding risk.
This series will provide you with information to make the best decisions for your institution.
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Disclosure: This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
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