Selling Around the Unknowns of State Mandated LTC Programs

What a whirlwind we have experienced in the last two years in the long-term care (LTC) industry! Whether you had clients in WA or not, the WA Cares Fund and its short lived opt-out opportunity affected the ability to get LTCi business issued in a timely fashion all around the country. WA state alone accounted for at least 60% of all LTCi policy sales in 2021 with both stand-alone policies and combination life/LTC insurance.¹ The surge of sales in WA created food for thought as insurance companies prepare for future state programs that may offer an opt-out. Other states are also looking to learn from WA and will have better control over any opt-out opportunities that might be considered should they propose and pass their own LTC Cares Fund.

The CLTC Digest for Q1 2023 featured an informative article by Stephanie Moench focusing on the work done in California to explore a publicly financed LTSS solution. I have been immersed in watching states consider their own programs since the WA Cares Fund came to light. Most notable to mention is the care that CA has taken in considering a variety of options, putting LTC actuaries on the task force, and being willing to listen to guidance from the LTCi industry. While WA is still attempting to fix the problems with their program – passed but with delayed implementation – CA has put together five well designed options currently being studied and priced.

Unfortunately, not all states pushed the WA bill aside – either to build their own unique program, or at least wait to see what CA would ultimately come up with. But none of those other state bills passed in 2022, so there is time to perhaps study and consider the better designed CA options as they try again in the future.

What was learned from the WA Cares Fund “opt-out” opportunity?

One of the biggest lessons all states learned from WA is how many people are willing to buy LTC insurance if it will get them exempted from a tax! WA expected about 100,000 people to opt out of the WA Cares Fund – but in the end it was nearly 500,000 people. That fact has clearly been noticed by other states who are considering more limitations on the period of time people will have to purchase LTCi coverage for any opt-out offered.

Another factor to notice was the ratio of policies sold vs. premium paid in 2021. According to the 2022 Milliman Long Term Care Insurance Survey, insurers of stand-alone LTCi reported 44 times as many policies sold in WA in 2021 than 2020, but only 12 times as much in new annualized premium¹. One could conclude at least two reasons for this anomaly. First, there was an unusual number of younger people purchasing policies to avoid the tax – and whose premiums would cost far less than that of the typical older buyer. But another factor could be that WA buyers were shopping for the policy with the lowest premium or coverage just to get the exemption from paying the WA Cares Fund tax. With no minimum policy requirements, Washingtonians had the option to buy anything as long as it was a qualified LTCi product under Section 7702B.

Will other states offer an opt-out? And how will they control the number?

There’s a Catch-22 to opt-outs. Legislators may feel that optics require them to offer something to reward constituents who were “responsible” and purchased LTC insurance. But those are often the same individuals making higher wages – who could pay more tax into the program.

One way to control the number of people opting out is to require a minimum policy amount, and require that inflation be on the policy. And these are the rumblings we are starting to hear that states could implement.

But another way to control the number of people opting out of the program, and at the same time reward people who buy private LTC insurance, is to follow the lead of an idea CA is considering. This idea would provide a continuous opportunity for people to buy a qualifying LTCi policy after the full opt-out has closed. While the individual would not be exempt from the full tax, their tax would be discounted. In exchange, the individual would use their own LTC policy first, and only be able to use the CA LTC benefit as back end coverage. This would be a win-win for both the individual and the state.

How do we guide clients with their purchase of LTC coverage?

That is the big question. Our first goal should be comprehensive long-term care planning, not tax avoidance. But people are human, and who doesn’t want a tax break? Therefore, all we can do is try to present the best plan the client can afford – and with luck, the client will enjoy some icing on the cake with a tax break.

Unfortunately, with some state programs, the policy qualifiers may not be publicized until it is too late to buy a policy prior to the opt-out deadline. Here are a couple of ideas to consider that may help.

1. Add 3% compound inflation to polies you are selling today. Most states are looking at inflating their state benefits based on a CPI (consumer price index) formula. However, in WA, as well as several of the CA options being considered, the inflation is not guaranteed. Adding guaranteed 3% compound inflation to a client’s policy should closely align with CPI inflation. If the client can afford 5% compound inflation, all the better.
2. Read the state bill to see what type of benefit they are considering, and at least match it. But that is not always easy. Going back to CA, they are considering five different programs that range from a basic benefit of $1,500 a month paid over two years and totaling $36,000, to a rich benefit of $6,000 a month for two years and totaling $144,000.

With the above logic, and living in CA, a purchase of $6,000 a month in LTC benefits for at least two years with 3% compound inflation (5% compound would be even better) in theory could make the cut. The next best solution would be $4,600 a month to match another option CA is considering. Of course there are no guarantees, so it must be made clear to the client you are trying to help them develop a quality LTC plan and you can’t guarantee their plan choices will ultimately qualify for any tax breaks.

Final thoughts

I wish the LTC industry could come up with as powerful of an incentive to buy LTCi coverage as the WA Cares Fund unexpectedly did. When Washingtonians were threatened with a tax, people ran to buy LTCi coverage! For me, the reason I have three policies is that LTC insurance makes you more marketable as a patient. When you consider that 81% of nursing homes receive less than the cost of a Medicaid patient’s care, and the median Medicaid base payment rate in 2019 was 86% of costs, it is pretty clear that a private pay patient who can pay the full billable rate will be welcomed. Since I own three policies - should I need LTC one day, I am hoping to see big smiles from my caregiver of choice.

¹2022 Milliman Long Term Care Insurance Survey - By Claude Thau, Allen Schmitz, FSA, MAAA and Chris Giese, FSA, MAAA - July 1, 2022

²“81 percent of nursing homes receive less than cost of care for Medicaid patients: analysis” – by Kimberly Marselas; McKnight’s Long-Term Care News, January 5, 2023