Solving today’s enigma of the state long-term care tax mandates of tomorrow

This summer, most Washington state residents will face a mandatory employee payroll deduction (0.58% tax on gross wages) put into place by The Washington Cares Act. The new law has created a state-run fund to help state residents pay for the cost of long-term care if they need it someday.

Throughout 2021, while the WA Cares Act was still under proposal, Washington state announced that its workers who have private long-term care insurance were able to apply for an exemption from the WA Cares Fund, but only if a policy was issued prior to Nov. 1, 2021. This opt-out provision was for a limited time only and is currently no longer available.

Do you want to venture a guess as to what happened next?

As it (unsurprisingly) turns out, many clients will jump at an opportunity to avoid a reduction to their gross pay.  Thus, applications for LTCi began pouring in. What other states will learn from Washington is that publishing the deadline before the deadline ended up causing major unintended consequences to an LTCi industry with 49 other states to help.

LTCi carriers met the demand for as long as they could. Still, most would end up suspending sales in Washington (some far in advance to the deadline) to prevent major service disruptions of policy placement. Today, these same carriers are on Capitol Hill advocating that anything similarly legislated in another state takes a new, more thoughtful approach to impacting LTCi distribution—a fair request considering California, the next state most likely to pass their version of a program, has more than five times the population of Washington.

What is the most probable outcome going forward? Unlike Washington, residents of other states probably won’t have the same luxury of understanding how opt-out eligibility (if any) is defined until the legislation is written and ultimately passed. If California’s program gets passed as legislation in mid to late 2024, for example, a most likely scenario is that an exemption would require clients to have had an eligible LTCi contract in place in 2023 or prior. Further, clients likely won’t know what type of LTCi coverage is eligible or what amount is required as a potential minimum to opt out of a program.

Financial professionals in many states are left wondering how to solve this enigma this uncertainty has created within client conversations.

Financial professionals in many states are left wondering how to solve this enigma this uncertainty has created within client conversations. Their bewilderment is somewhat justified as it’s not easy to provide advice without confidently understanding its implications, but is it possible they may be overthinking how challenging the uncertain deadlines within these proposals really are?

Potentially avoiding a tax, after all, should not headline a conversation with a client about the advantages of long-term care protection.

So what do we know about LTCi?

Here’s what we do know about LTCi. It is one of the most important and tax-efficient ways clients can insulate retirement savings from a risk most do not consider seriously enough. Perhaps equally important to its economic value, an LTCi policy can help prop up a care plan for a parent or grandparent that an entire family can feel good about.

Product availability has evolved significantly this century, especially in the past decade, and there are more ways to uniquely fund LTC solutions than ever before. Beyond traditional LTCi are hybrid linked-benefit contracts (both asset-based and annuity-based) that get clients into extraordinary positions every day – often by advisors simply asking them, “If there is a long-term care event, which asset(s) are you spending down to pay for the cost of that care?”

As the baby boomer generation ages into retirement, a looming national crisis exists within the answer to that question. It is the very reason states are beginning to implement tax mandates in the first place. These state-run programs should help mitigate (albeit slightly) an undeniable cost-of-care problem many of their residents will be confronted with over the next several decades. The proposed tax mandates will (likely) also help awaken state residents to this reality. Still, it will be up to their experienced, trusted financial professionals to help prevent a false sense of security around how meaningfully protected they are by their state.

What are states doing to fund LTC?

To help illustrate this point, as Washington residents visit the WA Care Funds website for clarity and click WA Cares Benefits, one of the first educational nuggets they’ll learn is “Peace of mind: We no longer have to worry about how we will afford long-term care as we age.” Clients in Washington are reading this! They’re being misguided, at best.

Is your state next? Your clients need to hear from you on this topic and understand how sufficiently protected you believe they are from an LTC event. Regarding their planning goals, clients need to discuss with you whether alternative or supplementary solutions could make sense.

These proposed state mandates have captured clients’ attention because of what mandates will cost them. Pricing will only increase with age, health generally does not improve with time, and today’s interest rate environment favors our LTCi industry’s ability to manufacture some of the most competitive products we’ve seen in many years. What better time than now to seize the moment and schedule that phone call or appointment to discuss your client’s goals?

If today’s solutions end up allowing clients to opt out of tomorrow’s potential tax mandates, great—we can celebrate that as an added benefit of planning. But rather than brighten a spotlight around what we don’t know in the short term, your client relationships will become much deeper if you explain what clients should know about LTCi, its lasting impact, and why acting today (and not waiting!) will put them in the best position for tomorrow.

Ken Diltz is sales director, national accounts, Crump Life Insurance Services. He may be contacted at [email protected].

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