Long-Term Care Insurance has come a long way. After seeing clients hit with rate increases on traditional coverage, you can see why many advisors are considering alternative solutions rather than traditional LTC policies. But did you know that new traditional policies in 41 states are protected by the new Rate Stability Regulations.
In my mind, consumers have many more choices today for funding the potential LTC problem… as ignoring the issue isn’t going to make it go away.
In this post, I’ll be writing about one of the hybrid asset-based policies that, in these cases, are built on a life insurance chassis.
I’m updating and adding to my Long-Term Care book (which should be available in about 6 weeks) and thought you might find this interesting (or know someone who might)! This post is from a new section that I’m adding.
Essentially, this post and the new section of my come down to having the I.R.S. pay for one’s LTC insurance! Let’s stick it to the IRS!
Many folks know that there are tax benefits for business owners who buy many types of LTC insurance; what about LTC benefits tax for non-owner employees?
And I’m not even writing about employer group plans in this post, as I haven’t added that chapter to my book yet (stay tuned).
So, let’s learn a bit about LTC and non-owner employees.
Non-owner employees can exclude the traditional or the total LTC premium portion of a hybrid policy premium from their taxable income. These benefits are not subject to age-based LTC limitations.
The employer might consider a myriad of designs. They could be traditional LTC policies (partial or full premiums) or, in this case, a life insurance-based hybrid plan. There are so many choices, so many possibilities. Here are just two examples.
This hybrid LTC policy combines life insurance with cash indemnity LTC benefits and has a unique policy structure that may create an opportunity for owners/employees of sole proprietorships, S corporations, and partnerships to attract and/or retain key employees. This type of “bonus” is something competitors don’t typically offer, so it’s a big differentiator.
These businesses can use pre-tax business dollars to bonus and fund LTC policies for the employee(s) in a tax-efficient manner.
Sandra is a 61-year-old employee of an S corporation who worries about not having LTC coverage. She has resisted purchasing a traditional LTC policy, fearing the ongoing cost (especially during retirement) and that she may never use the benefits. Like most LTC policies, there is health underwriting.
Her employer regards Sandra as a vital employee and wants to provide this benefit as a retention bonus to ensure she stays with the business for at least another five years.
We proposed a guaranteed premium of $22,335, payable for only five years, which provides both parties with the following benefits. (Or perhaps she could negotiate this plan as part of her salary (reducing her base pay by $22,335 – not a bonus).
• Meaningful LTC benefits for Sandra should she ever need care
• Initial monthly cash indemnity benefit of $5,000 (with inflation
protection)
• Death benefit to heirs of $120,000 if LTC care is never needed
If she uses more LTC benefits than the $120,000 amount, there
is a guaranteed residual DB of $12,000.
• At age 82, a monthly cash indemnity benefit that has grown to $9,300
• At age 82, a total LTC benefit pool of $721,989 (over six years)
Tax benefits for Sandra:
• Only the life insurance portion of the $22,335 premium ($9,069) would
be included in her income. If her total marginal tax bracket was
30%, it would cost her only $2,721 a year in taxes for five years!
She CANNOT get this LTC coverage at this after-tax cost. She
could not get this permanent death benefit at this cost either!
• She excluded $13,266 from her annual income (tax-free benefit)
Benefits for the employer:
The company can deduct the employee’s FULL premium ($22,335) and keep this valued employee working for the company for at least the next five years rather than getting a 100% taxable bonus of $22,335 cash. Either way, the employer gets the same tax deduction.
That was an awesome example. But did you know that the spouse of the non-owner employee can also get preferential tax treatment of the employer-paid premiums or “bonus?”
Tim and Georgia are a 50-year-old couple in great health. Let’s see what another design from the same insurer looks like for them.
In this case, since the employee is younger, the employer wants to keep Tim around for at least another ten years and is willing to fund the plan premiums of $13,263 per year for that long. Let’s see what that bonus buys this couple.
• Meaningful LTC benefits for BOTH should they ever need care
• Initial monthly cash indemnity benefit of $6,000 (with inflation
protection)
• Death benefit to heirs of $216,000 if LTC care is never needed
after the last spouse dies. If they use more LTC benefits than the
$216,000 amount, there is a guaranteed residual DB of $21,600.
• At age 80, a monthly cash indemnity benefit has grown to $10,830
• At age 80, a total LTC benefit pool of $1,040,000 (over 8 years)
Tax benefits for Tim and Georgia:
• Only the life insurance portion of the premium ($4,120) would
be included in their income. If their total marginal tax bracket
was 30%, it would cost Tim only $1,236 a year in taxes for ten years!
They CANNOT get this LTC coverage at this after-tax cost.
They could not get this permanent death benefit at this cost
either! These are huge benefits that can’t be underestimated.
• They excluded $9,143 from their annual income (tax-free benefit)
Benefits for the employer:
The company can deduct the employee’s FULL premium ($13,263) and keep this valued employee working for the company for at least the next ten years.
This benefit may prove much more valuable to the employee than getting a 100% taxable bonus of $13,263 cash. Both the employer and employee win for big and small companies alike! This is a great benefit for attracting and retaining the people you need to grow and prosper your business.
Again, the IRS essentially bought the LTC coverage for Sandra, Tim, and Georgia. And they can buy it for you too, by using this little-known strategy.
Do you know a forward-thinking employer who might want to keep a few of their most valued employees? Or lure rock stars away from competitors?
If so, have them contact me.
Note: Some employees who work for a company that doesn’t want to offer this employee benefit or retention bonus may be able to negotiate a win-win deal for both parties, as mentioned above in Sandra’s example. The employee gets favorable tax treatment, and the employer still has the same tax deduction – whether it is salary, bonus, or an LTC premium.
Anyway, should you want to learn more about planning ahead for long-term care (with or without insurance), you can get my book on amazon.com by clicking here.
all the best… Mark