Flexibility marks today’s long-term care insurance

Second of two parts.

Long-term care insurance is like no other company benefit, for many reasons. Employers today have great flexibility in how they might ultimately provide such coverage. For instance:

• The insurance can be entirely employer-funded, entirely employee-funded, or a combination of the two. Benefits are nearly without exception tax-free, and premiums are rarely considered imputed income to the employee.

• Benefits grow automatically every year tax-free, due to 5 percent inflation features built-in, either on a simple or compounded basis.

• Premiums are tax-deductible to just about anyone who is paying a premium on both the corporate side and personal side of a tax return. C corporations write off all of the premiums because long-term care insurance is considered health insurance, while S corporations, LLCs, sole proprietorships and others still enjoy substantial tax deductions.

• Long-term care insurance can be purchased using a discount through the group, regardless of who is paying for it.

• Corporate discounts are standard, while additional discounts are realized for enrolling one’s spouse and/or being in good health.

• Long-term care policies follow the employee after they leave the employer with no change in rate or coverage — portability without strings is standard.

• Long-term care insurance as a matter of routine is available to a broad spectrum of people outside of an employer group who are simply related to the employee — including parents, brothers, sisters, aunts, uncles and grandparents. These individuals are able to purchase at the corporate rate as well; most often the employee is not required to purchase coverage simply to make it accessible to family relations — any such requirement is known as linkage.

• Group or individual products are available — the primary difference being that of medical underwriting. Although there are never physicals involved in qualifying for coverage, there are indeed substantial differences between the two. True group products are typically offered on a “guaranteed issue” basis. Most insurers offer both types of plans. However, individual policies, although requiring anywhere from a little to a lot of underwriting, are as a rule more flexible with regard to design.

• Unlike all mainstream employer-funded or employer-sponsored benefits, there are no anticipated annual rate increases. Long-term care insurance is weighted on the front end for future claims, not in the middle or back end, as is typical for group health, life and other coverage. Rates can increase, but traditionally have not done so.

One of the most dynamic applications of the product is the ability to be selective in who participates in the coverage — ERISA typically does not apply. LTCI plans installed in this fashion are often referred to as “carve-outs.”

For example, we have done carve-out plan installations for a commercial printing company, a box manufacturer, an accounting firm and a jewelry manufacturer, among others, just for owners, key employees and spouses — the purpose was to recruit, reward and retain highly valued personnel. In these instances, the employer opted to pay for the coverage in its entirety, but again, a blend of premium contributions is feasible.

The key to a successful carve-out is to establish a class, or classes, of employees, to define who can participate in the long-term care insurance plan and at what cost, if any, to the participant. Any good broker should provide an employer with two important documents to this end — a corporate resolution and a plan document, not to be confused with a summary plan document.

Long-term care insurers can provide “short-pay” schedules, in which the premium would be due for a limited time period, most often 10 years, after which the policy would be paid up for life, and is portable into retirement. This is often useful for businesses with retained earnings they need to do something with.

For those companies that have long-term care insurance in place but are not happy with their situation, two additional options exist — change brokers using a broker-of-record letter or change insurers by doing a transfer-of-reserve.

The former is easy enough, while the latter is far more complex. Any LTCI benefit plan installed should address transfer-of-reserve long before it is purchased. Simply addressing the issue in a request-for-proposal is not legally binding. It needs to be in the physical policy itself.

Hans Hug Jr. is owner of the LTC Insurance Group, a brokerage based in Exeter. He can be reached at 888-758-8949 or via e-mail at hhug@verizon.net.