The Essential Guide to Group Long-Term Care Insurance
Most employees planning for retirement have three major concerns - an unexpected health event, outliving their income, and passing away financially unprepared. Life Insurance programs and retirement savings programs such as 401(k)'s can address two of these major concerns. Many serious health events are covered by Medicare or supplemental private health insurance policies. However, there is a large gap in most employees personal planning - the possibility of needing help due to the effects of aging or extended healthcare.
Conditions such as Alzheimer's, Parkinson's Disease, Stroke, or simply just getting older can lead to needing help with care. Care can take place at home, an assisted living facility, or a nursing home - and it can be expensive! Since Medicare won't pay the costs, it has to be funded through savings, Medicaid, or long-term care insurance.
A long-term care insurance plan can't prevent Alzheimer's or other chronic conditions that result from disease or getting older. However, it can help the family tremendously at time of crisis, by offering access to a pool of money that can be used to pay for care. For employees who plan ahead and buy LTC coverage in their working years they can typically buy comprehensive long-term care (LTC) coverage for around $100 per month. And buying through an employer offer includes several advantages we will discuss in this report.
Whether you are an employer or a benefits professional, you may have heard that group LTC Insurance is no longer available to employer groups. That is not the case! Several LTC Insurance products are available in the marketplace, from traditional LTC coverage to policies that combine life insurance and long-term care insurance in one policy. Read on to learn more!
Why Employers should offer LTC insurance as a benefit
Long-term care insurance is a product that has been available for over 30 years, but only a small percentage of those who say they need coverage have a plan. One reason could be that a LTC Insurance plan is not available through their employer, despite the desire of employees to have this option. In fact, according to 2017 survey of 1,200 adults conducted by Genworth Financial, four out of five Americans want the option of buying long term care insurance at work, 68% of survey respondents would prefer to purchase LTC Insurance through an employer compared to a financial professional.
There are many advantages to an employee buying LTC Insurance through the employer:
- Premium Discounts: Insurers typically discount premiums compared to what is available in the individual market. They can do this because offering LTC to a large number of buyers lowers their customer acquistion cost. The discount can be extended to spouses and often extended family members.
- Underwriting: Another advantage for employees is often streamlined underwriting. Most long-term care products include a health evaluation - important to keep the block of business stable and combat adverse selection by the employee. However, many carriers will simplify the underwriting process on a group case with an open enrollment period which can allow more people to access plans.
- Unisex rate structure: Unlike products in the individual market, employer standalone long-term care plans offer the additional advantage of gender-neutral premium rates. Because they tend to live longer and need more long term care, woman pay more for LTC in the individual marketplace - but not in the employer market.
- Employee buying experience: Finally, an employee buying LTC Insurance through an employer group may have a better buying experience than someone buying in the individual marketplace. A robust education and awareness campaigns available can help employees make a thoughtful decision. The product offering has been vetted by the employer, and an employee may avoid a high-pressure sales approach. Finally, these products offer convenient online enrollment.
Employers create thoughtful programs that help employees prepare for retirement, but the best plan can be devastated by a long-term care event. Offering employees long-term care coverage can help employees protect their retirement income and lifestyle. Want to know how LTC Insurance works? Keep reading!
How long-term care insurance works
At it's basic level, the concept of LTC Insurance is just purchasing access to a pool of money when care is needed. Buyers select how big that pool of money is initially and decide whether the pool will automatically increase over time to keep up with inflation. LTC Insurance will pay for care in a variety of settings, based on the policyholders individual needs.
Two types of group coverage - Standalone and Life/LTC combination
Group Long-term care Insurance programs come in two flavors - traditional "standalone" health-based LTC Insurance and group life insurance that includes a long-term care insurance benefit. There are some differences in how these plans work, both products will pay once policyholders need assistance with either two of six activities of daily living or have a cognitive impairment requiring supervision. The benefit received by the policyholder is typically received tax-free for expenses incurred for care giving. Both policies also allow for care to be received at home, in assisted living, or at a skilled nursing facility.
The difference is that plans that combine life insurance will pay a long-term care benefit by allowing early access to the death benefit. Some products also include an extension of benefits rider once the initial benefit has been exhausted. If no long term care is needed, then the plan will pay a life insurance benefit to a family beneficiary upon death. Let's look at the advantages and disadvantages of each approach:
Advantages of Standalone LTC
- Best value in pure LTC Benefit. Similar to term life insurance, Standalone LTC insurance provides the most LTC benefit per premium dollar
- Includes Inflation Protection Options. Inflation protection options are designed to keep pace with the cost of care over time.
- More coverage options A Standalone LTC policy can be designed to cover either the full cost of care in the future or a portion of the care cost.
- HSA friendly. Employees with Health Savings Accounts can use HSA account dollars to pay LTC premiums.
Advantages of Standalone LTC
- Use it or Lose it. If a policyholder never needs Long-term care there is no return of premium or cash value.
- Limited Carrier Options. Due to historically low interest rates and widespread pricing errors on early LTC policies, many carriers have exited the market. As interest rates stabilize, it is expected new carriers will enter or re-enter the market.
- Standalone LTC is not for everyone. With the average premium of Standalone LTC around $1,200 annually, this benefit tends to be more appealing to employees 45 - 65 with total household incomes of $100K or more.
- Requires some medical Underwriting. LTC Insurance provides substantial benefits and carriers are carefully underwriting coverage to avoid past mistakes. No Guarantee Issue options are available in the standalone LTC market, however there is worksite or streamlined underwriting not available in the individiual or retail market.
Life/LTC Combination plan Advantages
- Guaranteed benefits Either in the form of LTC benefits or a death benefit, this product will provide a benefit to each insured who maintains the coverage
- Provides Life Insurance and LTC. Allows insured to cover two risks with one policy.
- Robust Market of Highly Rated Carriers.
- Guarantee and simplfied Issue underwriting Available. For many products, 100% of eligible employees will be accepted up to the GI limit regardless of health. Employees may have the option to purchase coverage above the GI limit with medical underwriting.
- Affordable plan designs Life with LTC allows for a broader range of benefits and premiums that fit many budgets and needs
Challenges of Life with LTC Benefits
- Limited Inflation Protection Options. With most products, total and monthly benefit of Life with LTC remain level for the life of the policy subjecting plan participants to inflation risk.
- Smokers will have higher rates than non-smokers
- Higher premiums per Dollar of LTC Benefit. Due to the addition of Life Insurance, the cost is higher per dollar of LTC benefit
- Smaller pool of LTC Benefits available. The flipside of easier underwriting is small limits on the total pool of LTC benefits available.
- Life Insurance benefit may be exhausted by an LTC insurance event.
The Shift from "True Group" LTC Plans to Multi-Life
For many years the only way for employers to offer standalone long-term care insurance was using group plans - a master policy was issued to the employer and each employee was issued certificates of coverage. Participants in this market included Unum, John Hancock, Metlife, Prudential, CNA and Aetna. Plans were offered with guaranteed issue underwriting, and premium rates were designed to remain level for the lifetime of the certificate holder.
Group coverage allowed for efficient census driven enrollment of employees, payroll deduction of premiums and coverage based on the situs state of the employer. Although nearly all group carriers no longer offer coverage to new employer groups, millions of American employees and retirees still have group LTC benefits through these insurers.
Now, most long-term care insurance sold at the employer is individual contracts - so-called 'mult-life' LTC. Why did the market for standalone LTC move from group contracts to individual contracts issued at the worksite?
- Group carriers left the market. None of the true group carriers listed above are enrolling new groups, and some of them have stop accepting applications on existing groups as well. Because LTC Insurance was underwritten on a guaranteed issue basis and in most cases was a voluntary program adverse selection could occur as employees more likely to need care in the future may buy richer plans.
- Individual contracts allow for carriers to more effectively manage pricing and underwriting. By using individual contracts, carriers can ensure that the products they are placing are using the latest underwriting standards and pricing assumptions. True group plans suffered from new entrants to the group that were subject to older rates. For example, many older group plans only offered one type of benefit that may have paid only for professional home care. Individual plans allow new employees or late entrants to the plan to get the latest product features and premium rates.
- More flexibility in policy benefits: Individual multi-life products offer more flexibility in up to date product features. For example newer plans often can offer "cash alternatives' that can pay a benefit even if an at-home spouse is doing the caregiving - a feature often not available on "one-size fits all" group plans.
- Technology allows for individual products to be enrolled online: As mentioned above, an appeal of group products was a census driven enrollment - individual contracts years ago would have required pages of paper applications. Now, individual multi-life plans offer online applications.
Recommendations for Employers with in-force Group LTC Plans
Over years numerous employers, both small and large, implemented group LTC plans for their employees. Some of the carriers that used to offer group coverage but are no longer writing new groups include Aetna, CNA, John Hancock, MedAmerica, MetLife, Prudential, and UNUM.
These programs provide valuable benefits for employees and retirees, but they can present employers some challenges. Here are some of the issues:
- Most of the legacy true group carriers no longer offer coverage to employees who didn't participate in the initial plan offering or new hires
- Numerous carriers have suspended new business sales or exited the marketplace
- Carriers are implementing in-force rate increases
- Older plans don't incorporate the latest LTC benefits, such as plans that pay for informal care at their home
Employers in this position may need help with:
- Marketplace analysis (in-force coverage versus today's coverage)
- Help determine whether a new offering (and carrier) is suitable for employees
- Managing the communication of in-force rate increases
- Advising employees of their options for what to do when they receive a in-force premium increase
Voluntary Long-term care insurance - an overview
More and more employers are offering voluntary insurance products including long-term care insurance. Long-term care insurance is unique in that it both augments a medical plan and also helps protect retiree savings and investments.
Once an employer has decided voluntary LTC fits into their benefits offering they'll need to work with their benefits specialist to design an effective communication and enrollment strategy. Here is a broad overview of the key aspects of a successful voluntary offering:
- Employer Support. The important way to insure success is to have an engaged employer committed to a robust education campaign.
- Email communications campaign. A customized email campaign including personalized rate quotes and enrollment deadline reminders are critical for success.
- Live and pre-recorded webinars. While on-site meetings are still an effective way to educate employees, more and more employers, especially those with remote employees, are using webinars.
- On-line enrollment and education.
- Call center support with LTC planning specialists
- Direct billing for employees. LTC Insurance is 100% portable and a product that employees and dependents take with them beyond their working years. Payroll deduction is not necessary.
- Dual-enrollment strategy. Due to the lack of awareness in LTC planning, most employees need time to determine if the benefit is right for them. An off-cycle enrollment can be complimented by offering coverage during an employer's core enrollment. This enables employees to better understand and plan for long-term care.
The above represents a list of the basics of enrollment success and each piece is part of the puzzle. In order to really encourage planning, read on....
Behavioral Finance and LTC Enrollments best practices
We all have unconscious and conscious biases that direct our decision making, especially with financial decisions such as retirement and healthcare planning. As someone who works in the financial services and insurance industry you've heard about how the evolving field of Behavioral Finance is changing the way benefits are communicated. Behavioral Finance is a relatively new field combines behavioral and cognitive psychological theory with conventional economics and finance to provide explanations for why people make irrational financial decisions.
As an example, for years 401(k) plans lacked participation that would have been expected with a benefit that often provided "free" money. The breakthrough in 401(k) participation came when more employers engaged in automatic enrollment for employees. Much of the thinking behind these "nudges" became the basis for the field of behavioral finance, led by research from economists like Richard Thaler who won the Nobel Prize in 2017 for his work.
Although auto-enrollment for long-term care coverage would be ideal, not many employers would be willing to do this on a voluntary basis. However, there are several lessons that behavioral finance teaches us that can help increase participation plan in group LTC Insurance plans. Here are some of the most powerful:
- Keep choices as simple as possible. Long-term care insurance can be very complicated with many moving pieces. However, a smart voluntary LTC program will pre-package two or three choices that employees can select from, without removing their ability to customize plans if they'd like.
- Use stories, not statistics. Statistics, such as the odds of going into a nursing home and how long care will last, are the typical starting point for education on LTC. However, a more powerful approach is through stories.
- Focus on the possible gain LTC will provide instead of the possible loss. Research has shown that, just like gamblers, we all want to win, and we don’t like to think about losing. People who are considering LTCi don’t want to think about loss when planning for care, such as how their retirement savings may be depleted. Instead, focus on the fact that a small LTCi premium gives the policyholder the possibility of a big payoff in benefits. For example, a $120 monthly premium could result in $250,000 to pay for high-quality care at home.
- Focus on “now” benefits, not the future. It’s incredibly difficult for people to imagine aging and needing help. Instead, focus on the “now” benefits of LTCi. The now benefits are more difficult to quantify, but they can include peace of mind, streamlined underwriting and locking into a lower premium before a birthday.
- Forced choosing. LTC planning is easy to delay, and people need motivations to keep them from delaying this decision. One technique is to require an eligible employee to make a decision on learning more about group LTC coverage before being allowed to complete their open enrollment.
Decision Support Technology in enrollments
Most of us need guidance when purchasing voluntary products. Traditionally the most used enrollment technique has been face to face enrollers meeting with employees at the worksite.
Although this method continues to be effective and used in some voluntary long-term care settings, there are some challenges as well:
- Scheduling without mandating meetings
- The rise of a remote workforce
- The majority of LTC sales are purchased by couples - and it is challenging to meet face to face with busy families today
The good news is there are alternatives. The rise in online buying has meant people feel comfortable researching and buying products online. Helpful online coaches can help guide a decision, from plan design options to applying for coverage.
Enrollment best practices and timing
A successful long-term care insurance enrollment won't get 100% participation - but it should try and achieve 100% awareness. A robust educational campaign to build awareness includes:
- Emails communications that are well designed, educational, and allow for those not interested to opt out for additional reminders.
- Personalized rate quotes that help employees suitability of this benefit.
- Live and on-demand webinars
- On site employee group meetings
- A call center of LTC planning specialists who can answer questions from employees and spouses
- On-line enrollment with live chat functionality
The tax treatment of LTC Insurance
With the passage of HIPAA in 1996, long-term care insurance was given similar tax treatment to health insurance - deductibles to businesses, premiums paid are not taxable to employees, and benefits for qualified long-term care services are income tax free. This unique and preferential tax-treatment is why LTC Insurance is an especially attractive group and executive benefit.
Here's an overview of the tax treatment of long-term care insurance:
Benefits for LTC Insurance are received tax free - the only exception is for "cash" style benefits, which are tax-free up to a certain daily amount.
Here's a helpful overview of the tax advantages of LTC Insurance, from the most favorable to the least.
Note: This does not constitute tax advice. Nothing contained on this webpage represents a guarantee that amounts paid for or received through LTC insurance are excludable from gross income for tax purposes. This material is provided for general informational purposes only. Consult with your LTCi advisor, attorney, accountant or tax advisor regarding tax implications of purchasing Long Term Care Insurance
Health Savings Accounts and LTC Insurance
The growth in Health Savings Accounts over the last several years has been tremendous. More employers and employees are becoming comfortable with the plans and the flexibility they provide.
Long-term care insurance premiums don't qualify as Section 125 pre-tax eligible. However, as more employees get HSA's and build balances, they will find that long-term care insurance is a natural fit. Health Savings Accounts can be used to pay LTC insurance premiums for employees and their spouses up to the annual tax limits shown above. As an example, if a 61 year old employee and same aged spouse both have LTC Insurance plans with a combined annual premium of $5,000 they can take that amount out of their plan to pay for the premiums using "pre-tax" dollars. That's because the combined limit for couples between the ages of 61 and 70 is $8,320.
What if an employee isn't able to pay their full LTC insurance premium from their HSA due to the limit associated with their existing age? The good news is that once they advance to an older age range, they can recoup the shortfall from previous years. For example, if an employee purchased LTC with a premium of $2,000/year when they were age 60, they would only be able to use $1,560 from their HSA and would need to pay the remaining $440 with after tax dollars. The next year, at age 61, their limit goes up to $4,160. They would be able to pay the entire $2,000 premium for that year from their HSA, as well as recoup the $440 they paid out of pocket the previous year.
Since employers often provide funds to HSA for employees, those employee who wish to purchase LTC Insurance have a nice pre-tax benefit.
Executive LTC Plans
Executives can benefit greatly from a long-term care insurance plan. Often executives are at an age in which they are dealing with aging relatives while paying for college costs for their own children - a "sandwich" that creates stress and anxiety. Adding LTC coverage to an executives benefit offering has several advantages, including:
- Tax incentives. Employer-paid LTC Insurance has the advantage of not being considered income to the employee, and benefits are received tax-free. Premiums are also deductible to companies - for more details take a look at the tax rules for LTC Insurance (provide link) Rules for hybrid life/LTC plans follow similar rules to employer paid life insurance.
- Ability to "carve-out" class of employees. Unlike many other employer provided benefits subject to non-discrimination (ERISA) rules, this strategy enables employers to ‘carve out’ and create a class of select employees to offer long term care insurance. It works well for closely held family businesses. It is suggested that an employer use a category such as years of service, job title, compensation or other criteria to create class and offer coverage. Often employers create a corporate resolution that spells out eligibility for the program.
- Streamlined Underwriting. Buying LTCI for an executive class means they may have access to special underwriting concessions. And, when they leave their employer or retire these plans are 100% portable.
- Limited premium plans. Some LTC Insurance carriers offer accelerated premium plans such as 10 premium payments or pay to age 65. These programs all for an executive to leave or retire with a fully paid up LTC Insurance plan. Some plans also offer a return of premium feature, so that a premature death can lead to the corporation recovering premiums paid. Limited pay plans are available for both traditional LTC and linked life/ltc plans.
- Planning for extended family. Depending on the plan, discounts on the program may be available for extended family members - including spouses, adult age children, parents and grandparents.
Should Your Company Offer Long-Term Care Insurance?
Offering Long-Term Care Insurance in the workplace provides numerous benefits to employees. Here are a few:
- Timely and valuable education on the need for LTC planning. Getting old and planning for care is hard! People have a hard time envisioning being dependent in the future. Education can have an impact - just has employer education has helped with retirement planning.
- Addresses a significant “gap” in the employee’s financial plan and helps protect their 401(k). The biggest risk to a well thought out retirement plan is an unplanned health or long-term care need.
- Simplified underwriting. Employees can often get easier underwriting than what they would be able to get on the individual marketplace. In some cases, plans may offer guaranteed issue coverage.
- Unisex rates and group discounts. An employer based LTC plan provides gender neutral multi-life rates that are generally lower than comparable coverage in the individual market. The rates in the individual market will be based on age, marital status, and state of residence.
- Ability to carve out select classes of employees. LTC Insurance can be offered in creative ways. For example, C-level executives could be offered a high benefit plan paid by the employer. Other executives and managers can buy meaningful standalone coverage, while younger employees can look at payroll deduct life insurance with LTC riders.
- Benefits are generally received income tax-free.
- Employees can pay for LTC Insurance through an HSA
Finally, employees offered a long-term care plan buy earlier than the general buyers. That's critical because buying earlier has multiple benefits. LTC Insurance can make a huge difference in a families life.