,
October 2005
Stop for a moment and consider the following questions:
* Would business suffer if a key employee suddenly were responsible
for the primary care of a chronically ill or disabled loved one?
* Should an employee need extended care, what effects would that have
on his or her family and retirement plans?
It is commonplace today for employees to pull double duty at home as
caregivers. The administrative assistant who took extended leave to care
for her father recovering from a stroke. The payroll executive who seems
distracted and behind in work lately may be worried about his ailing
mother, living alone 1,000 miles away. Who will take care of her?
Most employees do not have the financial resources to stop working in
order to care for a relative. Balancing their own life and providing
care may jeopardize their employment or their own health. Yet, many
employees today are experiencing this, sandwiched between caring for
young children and aging parents. They need help!
Workplaces are beginning to notice this. Growth in employer-
sponsored Long-Term Care Insurance (LTCI) benefits is increasing at a
rate of 32 percent per year, according to the Health Insurance
Association of America. LTCI is a convenient way for an employer to
offer a benefit that more and more employees need. In fact, seven out of
10 employees want the coverage, according to a joint study by the
National Council on Aging and John Hancock. Coverage is extendable to
retirees, spouses, siblings, parents, and in-laws.
Employers can offer LTCI as a strictly voluntary benefit. In other
words, the employer makes it available, and employees pick up the cost
of premium. Alternatively, an employer may elect to pay part or all of
the cost for everyone. Even better, IRS code allows that an employer may
pay LTCI costs for a select group.
LONG-TERM CARE INSURANCE: BETTER THAN A BONUS
Offering LTCI on a voluntary basis to all employees is a good first
step. It will encourage the employee and the employee's family to
discuss the consequences of long-term care. However, for the employer,
helping a select group of key people acquire LTCI-often called carve
out-is an accepted and intelligent way to attract, retain, and reward
top employees.
In this instance, LTCI is smart planning. When an employer gives a
bonus, the employee must pay taxes, and it counts against the company as
well. However, when the company pays the LTCI premium, the amount paid
is excludable from the employee's gross income, the benefits are
received tax-free (limits are cost indexed each year) and employers may
deduct 100 percent of premiums paid.
For self-employed, partnerships, S Corp., and limited liability
companies paying premiums for a non-employee, consult with a tax advisor
for amounts of premiums paid that are deductible.
What is the cost of a policy? That is very difficult to answer. The
age and health of the applicant are key factors as well as policy
design. Some may opt to acquire coverage that is more basic, and others
will be looking to acquire a more comprehensive plan. What does a car
cost?
Some of the core benefits an applicant will consider:
* Benefit Period-the amount of time benefits will last. Most carriers
offer somewhere between two to eight years or an unlimited coverage.
* Daily Benefit-typically ranges from $50 to $500 per day. Benefits
may also be available on a monthly basis. To determine policy limit,
multiply daily/monthly benefit by the number of day/ months in the
benefit period.
* Elimination Period-number of days one elects to pay before the
policy benefits begin. Most carriers offer a range of 0-180 days.
* Inflation Protection-an annual benefit increase to keep up with
rising long-term care costs. Most carriers offer a guaranteed five
percent increase on a simple or compound basis. The option to buy more
protection after the policy has been in force may also be available.
One may opt for additional riders as well. Here is a general idea of
cost based on a few different plan ideas for a senior executive named
Pat. Again, the employer may opt to pay all, some, or none of the
premium.
Pat is 55 and in average health. Pat had a heart attack four years
ago, but has no residual effects. Pat takes prescription medication for
high-blood pressure, and is slightly overweight. The plan:
Term: 3 years of care
Benefit: $5,000 a month; the average cost of care in Pat's city is
$6,000 a month.
Deductible: 90 days
Pat is applying with spouse, so a spousal discount applies. Depending
on the group size applying for coverage, Pat could possibly qualify for
a group discount as well. For this example, no group discount was
included. The premium includes an optional ten- pay rider; after ten
years, the premium is paid in full and not subject to any future rate
increases. At this point, Pat will be 65 and plans on retiring. The
policy is portable anywhere Pat may go.
Because Pat is 55, this policy also has built-in five percent
compound inflation rider, which automatically increases benefits on each
policy anniversary. This option is costly but necessary. Considering
factors such as age, demographics, health care inflation and uncertainty
of future social programs in America, it is fair to assume costs of
health care will increase and more of the load will fall on the
shoulders of the individual.
LTCI: CLAIMS BY TYPE OF SERVICE
Finally, this policy also comes with one other optional rider:
* Cash Benefit: Once Pat is eligible for coverage, the policy pays
$5,000 per month for as long as he is eligible for benefits (three years
in this example). Regardless if the provider of care is licensed or not,
this policy pays. Regardless of cost incurred, the policy pays. Without
a cash benefit, the policyholder is reimbursed only for actual care
costs that are provided by a licensed caregiver. In both cash-benefit
and reimbursement policies, however, the benefits are received tax-free.
Indemnity policies reimburse full daily benefit, provided there was some
care received and the caregiver is licensed.
This loaded policy costs approximately $4,000-$7,000 a year,
depending on carrier. Remember, this policy includes a ten-pay rider. A
lifetime annual premium for the same policy would be approximately
$1,500-$3,000, again, depending on carrier. Perhaps the applicant likes
the idea of longer coverage. Working with a reimbursement model instead
of the cash model, for roughly the same premium one could obtain an
unlimited coverage. This is where working with a LTCI specialist may be
desirable. A specialist can help review carrier and benefit proposals so
the applicant can obtain the best value.
So, why do it? For a relatively small expenditure on the company's
part, and one that is fully tax deductible, it is an effective way to
convey to a top executive or high performer that the company values his
or her contributions. LTCI is an attractive component of a competitive
benefit plan because it accomplishes two key goals for the employee. It
assures quality care when needed, but equally important, it helps the
employee protect assets for retirement. With somewhat lower expectations
on investment earnings, top wage earners are mindful of ways to protect
what they already have accumulated.
LTCI benefits the company's bottom line as well. Working caregivers
often have to come in late to work, leave early, take time off, decline
promotions, choose early retirement or leave work altogether. Estimates
are that such workplace accommodations by employees cost employers from
$11.4 to $29 billion annually in lost productivity, according to The Met
Life Study of Employer Costs for Working Caregivers (1997).
Asset protection aside, LTCI policies can be an invaluable source at
a time of need. Those who have gone through these experiences understand
how LTCI can be a benefit to the caregiver as well as to the one
receiving care. Embedded in LTCI policies are care coordination
services. If a policyholder wants assistance in finding a qualified
caregiver to administer their doctor's plan of care, they can turn to
the policy for help. It is completely at the policyholder's discretion.
This is an especially useful benefit if family does not live near the
policyholder. It is very difficult to arrange and monitor care when one
lives across the country. With care coordination, the policyholder will
have help right in their hometown.
LTCI: MINIMUM-COST, LOW-RISK, AND CONVENIENT
The flexibility of LTCI allows companies to pay partial or full
premiums for some employees and offer it as a voluntary benefit to
others or make it purely voluntary for all. With the cost of health
insurance rising and employees and retirees paying more of the cost,
LTCI is way the company can give back-without adding a dime to the
bottom line if it so chooses.
When offered on a voluntary basis, the employees (or retirees) pay
the premiums. The employer has the option of the employees paying the
premium through payroll deduction or of having premium notices sent to
the employee's residence. If the employee leaves the company for any
reason, they retain ownership of the policy and continue to pay the
premium. LTCI is one of the few portable group plans. Coverage is also
available for the employee's spo\use/ partner, parents, in-laws, and
even siblings.
An additional incentive is that one may use Health Savings Accounts (HSA)
to pay for eligible LTCI premiums.
The convenience of LTCI as a voluntary benefit is that the company
can choose to have minimal involvement by bringing in a LTCI specialist.
The specialist can implement and manage the educational and enrollment
processes. The LTCI specialist can even prepare articles for company
newsletters or Web pages to keep employees informed. However, the
ultimate success of any voluntary benefit is contingent on whether the
company believes in it and how much senior management helps promote it.
OTHER CONSIDERATIONS
LTCI has been around for many years. It is within the last decade or
so that financial and estate planners have come to recognize it as a
viable option for protecting portfolios. LTCI is not for everyone
though. One must review LTCI relative to other important priorities, as
well as take into consideration affordability and insurability issues.
When looking into LTCI, here are a few common misconceptions:
Myth: LTCI covers nursing homes, and I am not going to a nursing
home.
Fact: LTCI is anti nursing home insurance! LTCI avails the
policyholder to many other choices of care other than a nursing home.
LTCI also covers care received in the policyholder's residence,
community care such as adult day care and independent assisted living
facilities. In fact, the majority of claims paid are not for nursing
homes (see chart). No one wants to be in a nursing home. Unfortunately,
circumstances may dictate that nursing care is the best or only option.
Myth: I am too young to consider this coverage.
Fact: In the employer/employee sector, the average age of an
applicant is 43. At this age, insurability is typically less of an issue
and there is a higher likelihood of qualifying for preferred rates. All
things being equal, it costs less to acquire coverage sooner than later
(assuming you can qualify for it later). As more and more data comes
back regarding claims, insurance carriers have begun taking actions to
contain costs. Applicants with certain health conditions once considered
insurable may have difficulty finding coverage today. For example, some
carriers are not even considering insulin-using diabetics or applicants
who have a prior history of stroke. As well, benefits found in today's
policies, such as unlimited coverage, may not be available down the
road.
Myth: Caregiving issues do not affect my employees.
Fact: Employees make up two-thirds of all caregivers, and the average
age of working caregivers for non-insured individuals is 48, according
to the National Alliance for Caregiving, and LifePlans, Inc. Caregivers
are at greater risk for depression and other illnesses.
By helping employees at home, employers can improve their performance
at work and reduce turnover and missed days. Those caring for ill
parents or disabled spouses with LTCI are nearly two times as likely to
stay in the workplace as are those caring for non- insured disabled
individuals, according to The MetLife Study of Employed Caregivers: Does
Long-Term Care Insurance Make a Difference (2001).
Remember, LTCI can cover employees and their family members.
Financially secure baby boomers with busy careers often experience great
peace of mind by acquiring a policy for themselves and their aging
parents.
Myth: Those with hefty nest eggs can self-insure.
Fact: This may not be a myth but it may not be wise either. Refer
back to the example of Pat for a moment. Pat retired at age 65 and
suffered a stroke 10 years later. Starting at age 75, 20 years after
acquiring coverage, Pat needed home health care and eventually nursing
home care for a total of three years.
If the cost of care at Pat's age of 55 was $6,000 per month and we
assume the average cost of health care increases five percent a year
every year thereafter, the cost of three years of care at ages 75-78
would be about $550,000. With the LTCI policy Pat's company paid for
while he was working, the out-of-pocket for the same claim would be
closer to $150,000 (90-day eductible plus balance of costs over policy
limitations). Regardless of net worth, this is a rather dramatic
out-of-pocket savings!
FINAL THOUGHT
Many of us cannot envision being unable to remain independent, and
LTCI is an expense that many of us would prefer not have. However, the
consequences of needing long-term care can be devastating, even for
those with a sizable portfolio and support of loved ones. LTCI cannot
replace the love and care a family can provide, but it builds on that
infrastructure of support so that the family can provide that love and
care better and for longer.
Consult with a professional about offering LTCI as an employer-
sponsored benefit. The business, employees, and families will all be
better for it.
Peter Florek is Sales Manager of MAGA, Ltd., an independent LTCI
agency in Deerfield, Illinois. He can be reached at
pflorek@magaltc.com.
Copyright Aspen Publishers, Inc. Oct 2005
