What does state-mandated LTCi mean for your clients?

By Rick Stewart

Long-term care expenses are the No. 1 use of state Medicaid funds and stretch state budgets thin. According to Shawn Britt, director of LTC initiatives at Nationwide, less than 8% of Americans over age 55 have LTC coverage, and the percentage is much lower among those of younger ages. LTC costs are expected to grow at a rate much more significant than average inflation for the near future due to the aftermath of COVID-19.

The hope is that state-mandated long-term care benefits will help ease Medicaid budgets. States are looking to provide more affordable long-term care protection for the middle class, including home health care, and help individuals try to delay or avoid using Medicaid for their long-term care benefits.

Washington state is the first state to implement a state-mandated long-term care fund or tax, and it won’t be the last. The Long-term Care Services and Supports Trust Act was signed into law in 2019; however, it did not go into effect until July 1, 2023. That is when self-employed individuals who opted in and all W2 employees in Washington state started paying a 0.58% income tax on all earned income to fund the Washington Cares Fund. After paying into the program and meeting the care need and contribution requirements, individuals will be able to receive benefits from this program starting in July 2026.

The Washington Cares Fund pays a benefit of up to $36,500 per individual, and that fund will be available to help individuals pay for long-term care services and expenses. The benefit will also provide for family caregivers to provide care to the individual. The $36,500 benefit amount will adjust for inflation every year. To receive benefits, individuals must need assistance with three out of the 10 activities of daily living listed on the state website to qualify for benefits. There is a waiting period to receive benefits, and individuals will not be eligible to receive benefits until at least July 2026 because of the requirement to pay into the Cares Fund for at least three years.

What about opting out?

In the state of Washington, when the act was passed, there was a provision stating that if people owned a private long term-care insurance policy before Nov. 1, 2021, they could apply for an exemption from the Washington tax. The policy must be a true long-term care product, not a chronic illness rider connected to a life insurance policy or annuity.

The news got out to the public well before November 2021 that an individual could buy a policy and opt out of the tax. This created a fire sale situation that resulted in tens of thousands of policies being sold in a very short period and carriers having to pull out of Washington state simply because they could not process the amount of business that was coming in. More than 400,000 people were able to obtain qualifying coverage and applied for that exemption from Washington state. The concern is that while those individuals bought private insurance, many purchased very small policies. They're not paying into the fund, so the state is not getting the revenue it expected from the program, and the individuals are still at high risk for needing assistance from Medicaid.

Is private long-term care insurance better?

Individual long-term care insurance, filed under 7702B of the U.S. Tax Code, requires someone to be unable to perform two out of the six ADLs or to have severe cognitive impairment to be eligible for benefits. That’s better than three out of 10 ADLs required by the Cares Act.

In addition, private long-term care insurance doesn’t have a 10-year or three-year waiting period. Once a policy is in place, policy owners are eligible immediately for benefits (if qualified). Private insurance may also be tax-deductible if individuals qualify, or they can use health savings account dollars to fund the private long-term care insurance policy. Remember that private insurance involves underwriting and could affect an individual’s eligibility to qualify for a private long-term care insurance policy. Finally, depending on age, private insurance might be more expensive. It's worth talking to a financial professional to see if private long-term care insurance is the correct way to go.

What are other states doing about long-term care?

As states look at these programs, they will try to avoid a fire sale situation such as what occurred in Washington. Other states currently looking at these types of mandated funds are considering an opt-out if an individual owns private insurance; however, they are starting to use language such as an individual must own insurance as of a specific date on or before the program’s effective date. They won’t make it public or give a window to go out and obtain coverage. Additionally, states like California are considering that once they pass the bill, if an individual gets private long-term care insurance, they might be able to opt out of part of the tax. So, there may be an opportunity to consider a private LTCi solution and avoid taxes even after the bill is passed. Washington did not do that, but other states may also consider those types of programs.

Roughly 30% of states are now showing some level of interest in pursuing a long-term care program such as Washington’s. California is the furthest along. California created a task force recommending five different long-term care options. Other states looking at doing a program include New York and Pennsylvania, both of which proposed bills. They both looked at programs very similar to what Washington state created with a 0.58% income tax.

Other states are doing something different. Illinois is looking at Healthcare for All Illinois Act, and New Hampshire is looking to establish an interstate compact for universal health care. These are interesting because both programs would include long-term care coverage but are still determining what the coverage will be. What's concerning is that these programs would prohibit the sale of private long-term care insurance if passed, so residents would be relying on the states to provide and fund their long-term care. Connecticut has introduced a bill that would require its Department of Insurance to study how residents may need care and determine whether a state-mandated program is appropriate. Other states are also in the early stages of doing research, but we expect states to continue looking at creating a program such as the one in Washington state.

Guidance for financial professionals

The million-dollar question is, how do you guide clients when your state is still determining what they will do? First, I recommend learning about what is going on in your state, following how these bills are progressing.

Second, I would educate clients on the importance of long-term care planning and the costs associated with long-term care services in their area. Keep clients informed of what's going on and what other states are doing because this is a financial crisis in the U.S. and something that must be addressed.

Third, help determine whether private insurance is right for your client. Your clients should make these decisions before the states decide for them. Help your clients understand the different types of long-term care insurance (traditional, hybrid, annuity, etc.) and help to recommend a long-term care insurance plan when it makes sense in their overall financial plan. Every client has individual situations; review their financial position and retirement plan. If private insurance makes sense, look at that and make that recommendation. Remember, if you don’t talk to your clients about the importance of long-term care planning, someone else will.

Rick Stewart, CLTC, is director of sales, LTC Solutions Center, Crump Life Insurance Services. Contact him at [email protected].