Executive long-term care insurance can be an attractive benefit both for the company offering it and the insured.
For one thing, a company is not required offer coverage to lower level employees because long-term care insurance is not subject to "discrimination testing." An employer can "carve out" selected key employees for long-term care insurance.
Also, premiums for group coverage typically are lower than premiums for individual policies, says Ron Hagelman, a Braunfels, Texas-based long-term care insurance specialist. Underwriting is more lenient when policies cover more than 15 executives. Reasons: insurance companies lower adverse selection risks when more are covered, and lapse rates are lower, because premiums are paid by the employer.
Executive carve outs also have these tax advantages:
- The company can deduct the cost of an employee's long-term care premiums. In fact, a C corporation can deduct 100 percent of an employee's premiums. Note, however, that for Subchapter S corporations, limited liability partnerships and partnerships, Internal Revenue Service rules limit income tax deductions, based on the insured's age.
- The policies are "tax-qualified," that is to say that benefits are not considered taxable income to the insured.
- Employees pay no income tax on employer-paid premiums.
Despite the benefits of an "executive carve out," some companies prefer to let employees purchase policies themselves. But execs usually still receive a premium discount if the policy is offered through the company. Employees in poor health also may find it easier to get coverage through a group.
If an employer offers coverage but the employee pays premiums, the policy is tax-qualified (policyholders won't pay taxes on their benefits). In addition, employees with medical expenses, including dental, exceeding 7.5 percent of their adjusted gross incomes, can deduct long-term care premiums. The deductible amount is based on a person's age. In 2006, a 41-to-50 year old could deduct only $530. By contrast, a 61-to-70 year old policyholder could deduct $2,830, according to the Internal Revenue Service.
Whoever pays for the coverage, it's important to review a policy's features.
A policy should have "front-end underwriting." This means you should be able to get coverage if you're in good health. With "back-end underwriting," the insurer may subject the original application to more scrutiny before approving a claim for a major illness.
Consider policies that trigger benefits based on the inability to perform two of six "Activities of Daily Living" (ADLs). The ADLs are bathing, dressing, eating, transferring, continence and toileting.
Be sure to get coverage with a cost-of-living adjustment to cover the rising cost of nursing home care.
Also, many policies offer a "return-of-premium" rider. If you don't use the policy, you actually get your premiums back. But be advised that the premium for this coverage can run about 50 percent more than that for a non return-of-premium policy.
Hagelman notes that companies often purchase coverage that is fully paid in 10 years; this creates a very attractive benefit for executives, as the policy is portable. In addition, new types of policy riders let the insured expand the total dollar amount coverage if long-term care is necessary early in life.
Kimberly Lankford, author of The Insurance Maze: How You Can Save Money on Insurance-and Still Get the Coverage You Need (Kaplan Publishing, Chicago, July 2006), suggests that anyone considering long-term care insurance:
- Examine waiting periods in relation to cost. The longer the waiting period before coverage kicks in, the lower the premium. A 60-day waiting period, she says, typically is the best balance.
- Consider the length of the benefit period. The shorter the period, the lower the cost. The average nursing home stay is about two and a half years, according to the National Health Center for Statistics latest figures (1999). However, coverage can be purchased for several years or for a lifetime. Most, she says, select the three-year period.
- Buy coverage while the insured is in his or her 40s or 50s, when premiums are lower. A policy with a $200-a-day benefit and 5 percent annual inflation protection may cost a 45 year-old $1,824 per year. At age 55, that cost jumps to $2,227. At age 65, the cost becomes $3,427.
- Stick with a large insurer that has a history of not raising premiums. Long-term care insurance premiums may rise over the years based on the claims paid on the block of people that are insured.
On the downside, providing long-term care insurance to a large number of executives can prove costly. Plus, the insured may never use the policy. Hagelman says recent statistics reveal that only about half of all 65 year olds use long-term care services.
Alan Lavine's forthcoming book, coauthored with his wife, Gail Liberman, is Quick Steps To Financial Stability, Que/Penquin Group.
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