• An interesting long term care idea

    A commenter LT posted in response to this post:

    a little OT (off topic), but what if LTC insurance were handled like health insurance is now. Your employer can purchase LTC insurance tax free as a benefit for you the employee….

    If Duke paid LTC insurance premiums on my behalf, the amount Duke paid  for my premiums would not be subject to income tax and therefore preferenced in the same way that the premiums paid by Duke for my major medical insurance are. These premiums would also be deductible as a business expense by an employer, again like major medical.  Duke offers employees LTC insurance, but pays no premium; the employee pays the full cost to the insurance company, though it is payroll deducted, making it pre-tax, which does convey a tax advantage (I am fairly sure; checking on this).

    The commenter goes on to offer an interesting suggestion that I have never heard:

    Have LTC insurance be “tokens” where for each amount put in you gain a fixed amount of coverage, rather than as a policy that needs to be continually held. So for example your employer could purchase you 5000$ worth of coverage for 1000$. If the next year they made the same investment you would have net 10000$ worth of coverage, and so on… With such structure LTC plans could be combined/portable even as people switch jobs or lose/gain employment.
    Anyways, I know this will probably come with many of the problems of health insurance today (how to cover those whose employers don’t offer insurance, or those who are not working…) but at least it could build a large pool of LTC insured individuals, and enroll them at a time when future LTC needs are hard to predict (30′s-50′s) thus creating good risk sharing.

    Now first, let me say that more tax preferenced spending all else equal seems like a bad idea to me. However, given how hard it is to imagine movement ahead on LTC policy after the demise of CLASS, this seems like an innovative idea that could provide a route for persons who wish to save for LTC expenses to do so. Perhaps you could agree with your employer to forego a fixed amount of wages for this LTC benefit, and the tax treatment would expand the amount. And there are so few persons purchasing private LTC insurance that it wouldn’t be that hard to improve on the status quo.

    Could this be done under the current tax code? Since private policies cover dollars per day, this is not that different from that. What would be different is when you would be eligible to use the money and for what. For private LTC insurance, typically you must show ADL limitations. How would you police the use of this money? Would it be taxable on the way out like a 401K since it was tax preferenced on the way in? Perhaps you make it tax free on both sides as a way to encourage LTC planning? That would seem to definitely require legislation. Lots of questions about this interesting idea. Thoughts?

    Update: This is somewhat reminiscent of this idea I wrote about back in 2008, but idea above would have tax preference and what I wrote was not voluntary.

    • The key problem with a tax break is that people buying LTCI are relatively high income and relatively wealthy. If we just have a straight tax deduction, like we do for health insurance, then it will advantage mostly the people who’d buy it anyway. The straight tax deduction isn’t likely to lower the (considerable) premiums enough to incite moderate income folks to buy it.

      I think only part of the problem with LTCI is the lack of portability. The poster’s idea has a major problem: if someone accumulates less LTCI than they need to avoid impoverishment, then they might as well have spent the money while they were working. Plus this is unworkable for the insurers: they need to invest your premium dollars (usually in bonds) to ensure that they have enough money on hand later. (By the way, my understanding is that one of the major causes of the recent spate of rate hikes was low returns on the bonds.)

      If you wanted to fix portability, I’d look at annuities: you can roll over annuities from insurer to insurer, although there is a lock in period. Perhaps the NAIC could set up a framework to allow such transfers. However, policies are priced with a certain set of assumptions about morbidity, mortality, investment returns, and what have you. If an insurer has underpriced their policy by a lot, then it’ll be hard to get someone to accept it if it were rolled over. Bottom line, I’m not sure this problem is easily fixable either.

    • Using employers for LTC faces enormous barriers:

      – most people change jobs 5-6 times in their lives.

      – many if not most of those changes involve a decline in income, at least for a time. The LTC coverage is first to go.

      – Even for the sheltered few who stay with one employer until retirement, their incomes go down also after age 65 or so……just when LTC premiums will go up.

      Academic employers in general are sensitive to providing benefits — partly because corporate cash flow is secure, and also because most administrators are of the same social/economic class as the professors.

      Needless to say, this does not apply to millions of insecure small businesses, who are worried about keeping the lights on and are hostile to any new employee benefits.

      This cultural divide is relevant to health care reform. It explains some of the hostility to ‘ObamaCare,’ even among persons who would benefit from ‘ObamaCare.’

      I apologize for the somewhat sarcastic tone of the above, but my facts are correct. Social insurance is of course the only answer for LTC.
      You do not see small businesses rising up against Social Security, because it is universal.

      Bob Hertz, The Health Care Crusade

      • @Bob Hertz
        The essence of what the commenter meant was that the already vested benefits would be portable; whether the next employer would participate would be an issue. I agree on social insurance…just seems hopeless politically now.