Updated as of 12/16/2022
The nation’s most populous state, California, has taken preliminary steps to implement a payroll tax. The proposed California payroll tax may fund a small amount of state-provided long term care (LTC) coverage, but there are many questions about what the legislation might include. A feasibility report, commissioned by the legislature, was released in its final draft form on December 14, 2022. An actuarial report with additional specifics on cost and financial viability will be released in 2023.
This information may help individuals interested in exploring their private LTC insurance options.
In this article, we provide insight and make assumptions based on the California Long Term Care Insurance Task Force preliminary recommendations to be finalized prior to January 1, 2023.
We’ve outlined some key takeaways from the California Task Force recommendations along with corresponding differences from the Washington law.
- The proposed CA benefit designs vary from $36,000 of coverage up to $144,000 for the most comprehensive option. In comparison, the cost of care for a 3-year long-term care claim event projected out in 30 years is around $1,000,000. In WA, the amount of coverage was $36,500 with nominal increases.
- We anticipate the California payroll tax to be priced based on how comprehensive the program design is. In WA, the payroll tax is 0.58% of annual wages including income, bonuses, vacation time, and the value of annual stock grants.
- The CA tax may be a level payroll tax split between employer and employee – unlike WA which places the tax burden on the employee.
- Considerations for individuals with (eligible) private insurance:
- Opt-out provision if purchased before the Program’s effective date
- Reduced Program contributions if purchased after the Program’s effective date.
- There are no specifics yet on how the state will define what is eligible as private coverage. In WA, the definition of LTC insurance was broadly defined to include both traditional and hybrid products with LTC riders.
- Regardless of how the exemption is structured, CA employees may want to start the process of purchasing private insurance before any final state announcements are made. This could help avoid the rush for long term care insurance coverage that we saw in WA.
- IMPORTANT: The state may assess the financial impact of changing the deadline for the purchase of opt-out eligible private insurance policies from the Program effective date to the beginning of the year preceding the Program effective date. (Final Draft Feasibility Report, page 15)
- There are slightly fewer group and individual products and carriers in CA than in WA, mostly because product approvals from the state take longer. However, taking steps to purchase coverage now means there is a robust market of options available, before the expected increase in demand if a law gets enacted.
- There are approximately 16,500,000 employees in CA, more than four times the number in WA. BuddyIns expects a limited capacity of individual and group products with qualifying LTC riders in California.
START YOUR LONG TERM CARE PLAN NOW
Now is the time to begin the process of obtaining meaningful long term care insurance (LTCi) coverage. Why? Because as we experienced in Washington if the state announces the implementation of the payroll tax, LTCi applications may flood insurance companies. In Washington, many companies decided to exit the state in the face of high demand, creating a temporary shortage of available solutions.
Another reason to start the process of obtaining coverage is that planning early may result in the best value solution. If you begin planning when you are younger, you get a better overall value assuming your health is good. Waiting could mean that the premium costs are higher, or a health event may make you ineligible for insurance.
A LIFE INSURANCE OR LONG TERM CARE PRODUCT THAT FITS YOUR NEEDS AND BUDGET
At BuddyIns, we recommend obtaining meaningful coverage. What does that mean for you? Meaningful coverage provides the insurance benefits that may best cover the risks you believe will impact you. The cost is affordable, and it is a plan that you can financially manage over your lifetime. The most popular solutions in Washington came from not only affordable LTCi-focused coverage but also life insurance coverage with LTC riders. Younger clients who did not have their life insurance plans used the WA payroll tax as an opportunity to protect their families with affordable hybrid policies.
The ideal candidate to purchase long term care insurance or life insurance is someone who would have pursued coverage regardless of the tax. They may now decide to buy sooner than they would have because of the new government program and the ability to opt-out or supplement the limited state benefits.
Higher earners with more income and assets to protect may see the best value from purchasing a private plan that may also provide the benefit of being exempt from the payroll tax. If the payroll tax is a percentage of all wages, like in WA, a higher earner could pay more into the payroll tax than they could get in benefits.
For example, a 40-year-old employee is making $200,000 per year and expects her wages to grow 3% per year. If she retires at age 65, she will have put in a projected $42,293 over 25 years. If the lifetime maximum is similar to the Washington State benefit, it will be around $36,500 with nominal increases.
As the specifics of the California payroll tax to fund a minimum long term care benefit becomes clearer, your private long term care insurance policy may provide the coverage you need to satisfy the payroll exemption requirements. Reach out to a long term care specialist to begin the planning process. Even if you are not ready to purchase yet, understanding your options and meeting with an LTCi specialist will allow you to act more quickly later.
LONG TERM CARE INSURANCE-FOCUSED SOLUTIONS
Traditional Long Term Care Insurance or Life Insurance Hybrids with LTC Extension
Let’s look at some numbers by considering another 40-year-old CA employee. This employee decides he wants to purchase traditional long term care insurance. He anticipates needing care at age 80. In this scenario, he could obtain a policy with 6 years of protection to provide a total maximum benefit of $1.1 million of tax-free LTC benefits. California has some of the highest costs of care in the country. By adding these benefits he maintains control over his care rather than leaving it to his family to decide on their own.
By using our BuddyIns proprietary software, Benefit Buddy, we created the chart below. It reflects the impact of purchasing long term care insurance vs. self-funding a long term care event that begins at age 80.
- Traditional LTC Pie Chart: The “Insurance Multiplier” or the maximum amount of coverage one might receive relative to the premium at age 80. It reflects the total premiums paid versus the total long term care benefits.
- Self-Funding Pie Chart: Reflects self-funding the total amount of care. Self-funding assumes a person earns a 5% rate of return on their savings and incurs a 20% tax rate if the investment returns result in taxable gains.
Traditional long term care insurance is not the only option when it comes to long term care coverage. Some hybrid options provide excellent LTCi coverage, including:
- An extension of benefits feature
- Cash value flexibility
- A death benefit if the long term care rider is never used
Purchasing a hybrid now offers our employee above the ability to change his mind about the coverage later. That allows him to retain some or all the value of the premiums already paid into the policy.
Don’t worry. You do not have to figure all of this out on your own. A long term care insurance specialist can help find the product that is a good value for you.
LIFE INSURANCE-FOCUSED SOLUTIONS WITH LTCI FEATURES
Permanent Life Insurance with LTC Acceleration or Term Life with Conversion Options
For those who desire life insurance, several popular options on the market also include true LTC riders. These solutions include permanent life insurance like universal or whole life. Both products have unique features and benefits at affordable rates, especially for starter plans.
There are no term life policies with true LTC riders but some strategies allow conversions. That means you can obtain term coverage today, then can convert to a permanent product and add the LTC rider later. This allows you to:
- Maximize your life insurance death benefit with term insurance now
- Maximize the flexibility and cash values with permanent insurance later
You may also do both while retaining the option to receive “living benefits” in the form of an LTC benefit that may qualify for the payroll tax opt-out.
This option might be a great choice if you are younger and have a greater life insurance need.
The deadline for purchasing private coverage is still unclear or even if there will be an opt-out with certainty. If you purchase the coverage you need now, that can be a win regardless of how the law plays out.
START NOW TO OPTIMIZE YOUR CHOICES REGARDLESS OF THE CALIFORNIA PAYROLL TAX
The great news is that approximately 85% of working employees should be able to obtain coverage. Starting the process sooner rather than later can provide you with the most options and peace of mind. We highly recommend that you begin your process by speaking with a long term care specialist.