Napa's Health Insurance Guys: Don't have long-term care insurance? You might have to pay a tax.

Dear Kyle, Tom and Alan:

I read your column about the upcoming tax on people unless they have a long-term care plan in place.

The trouble is I got some quotes for my wife and myself and the price is so expensive! We only did $250 per day, two years, 3% inflation and a 90-day elimination period but the premiums were through the roof! Anyway, since we don't have a plan in place, what's the latest on mandatory coverage?

Bill

Kyle: From what we can find, nothing is happening until 2025, although the 15-member committee is meeting and due to report in the next few months. The existing plan in Washington state was supposed to start charging a statewide payroll tax on everybody as of July 1. The rate is .5%. California is considering a tax of between .40% and .60%.

Al: I'm not clear on if it's a tax on everybody's income or just those on a payroll.

Tom: Pretty sure it's all of us. Washington's plan has a maximum lifetime benefit of only $36,500, but according to one article I read, the average costs after age 65 are $137,800. So, our reader, Bill, is going to want to consider either an annuity or a life policy with a long-term care (LTC) rider.

Al: So if California goes the way Washington did, an individual who has an LTC plan may be exempt from the tax. Hence the flood of LTC applications in Washington prior to the "drop dead" date (so to speak). In fact, some LTC companies pulled out of Washington completely.

Unfortunately, Bill, it's still very expensive.

Kyle: What all this is leading up to, of course, is whether an annuity or life insurance policy with an LTC rider is sufficient to qualify for the exemption.

Either one may be according to the IRS. Section 7702(b) of the Internal Revenue Code (IRC) defines a qualified LTC contract and how to treat it for tax purposes. According to Marc Glickman, CEO of BuddyIns:

"A 7702(b) rider can offer several advantages over a stand-alone long-term care policy. It provides multiple benefits in one product: life insurance/annuity plus long-term care coverage. In addition, once the rider is purchased, the premium is often fixed and guaranteed not to increase unless the base policy premium increases. The rider also may preserve some value for heirs if the rider benefits are not exhausted by a long-term care event."

Tom: The problem for many people buying an annuity with an LTC rider is that typically the plan requires a large initial deposit. Our usual quote was a deposit of $100,000. Most annuities have a 7- to 9-year period where you are penalized for early withdrawal. With the LTC rider, the annuity would offer up to $300,000 in LTC benefits. However, the original deposit of $100,000 would go first. So the annuity would lose its value as an inheritance, but would definitely work as an LTC plan.

Kyle: We're out of space! More later.