The National Underwriter conducted an informal poll in December 2004 stating the assumption that the largest growth in LTCI over the next few years will probably be as a group product sold at worksites and asked readers for comments. Readers responded:
This is, of course, an unscientific survey, but it is particularly interesting that 74% of those responding either agreed somewhat or strongly agreed that the heaviest future growth of LTCI is in the group area. Whether this stands the test of time will depend somewhat on what legislation in the tax area will be passed by Congress in the near future. In any event, this should not be a surprise as Americans generally look to their employers for health benefits, so this, in the eyes of most Americans, is just another health product.
Group Long Term Care Insurance has become more “interesting” as an employer-sponsored benefit because of the Health Insurance Portability and Accountability Act of 1996 (HIPAA), as for the first time, the rules in respect to the taxation of employers who provide Long Term Care Insurance for their employees have been published. Several insurers have entered the Group Long Term Care Insurance business as a result of the Act, but success has been limited but is increasing. The primary provisions of this act involving Group LTCI or Employers furnishing LTC Insurance coverage for employees:
- Employers who pay LTCI premiums on behalf of an employee will be entitled to deduct that premium as a business expense, as they do for medical insurance.
- LTC Insurance premiums paid by an employer on behalf of an employee will not be treated as income to that employee.
- Long Term Care Insurance is not permitted under Section 125 cafeteria plans; nor can long term care expenses be reimbursed by a Flexible Spending Account.
- Long Term Care Insurance premium is, however, an acceptable expenditure for the new medical savings accounts that this law makes available to self‑employed and small businesses of fewer than 50 lives.
- Long Term Care Insurance premiums are tax deductible to the self-employed within the overall self-employed deductible limits.
In 1987 insurers began offering the first employer‑sponsored or group Long Term Care Insurance plans. As has been the case with policies marketed to individuals, insurance companies have both entered and withdrawn from the market since that time. Ten years ago, of the 121 companies marketing LTCI policies at that time, less than 20% offered employer‑ sponsored plans. Still, the number of employers offering group LTCI has begun to rise dramatically, with the most noticeable increase being in small businesses with less than 500 employees.
Many of the employer‑sponsored LTCI plans in place are located in very large employee environments such as IBM, Ford Motor Company, Proctor & Gamble, and state government employee groups. In addition, most of these plans are not "off the shelf" policies. Instead, they have been designed specifically for a given group through consultation between the employer and the insurance company. As can be seen from the figures above, some insurance companies have begun to target small companies as lucrative markets for their plans, though the numbers show that only a very small percentage of all U.S. employer groups have been affected to date.
It has taken some time for insurance companies to enter the group LTCI market, the delay usually attributed to the high cost of entering this market. A significant start-up investment, including case management structures to deal with a myriad of variables in long‑term care, is required. With a little more than a decade of experience in group LTCI, insurance companies do not yet have a large body of statistical data that they would like to finely hone policy provisions and pricing ‑ factors that can either promote profitability or contribute to high losses. Things are changing, however.
Insurer reluctance is not the only factor responsible for the small number of employer‑sponsored LTCI plans. Employers who aren't exactly scouring the marketplace for additional employee benefits to offer have not yet fully embraced the concept. Perhaps the main stumbling block to a rapid growth is usually attributed to the high cost of other health benefits – medical insurance, by itself, can create a drain on profitability of a company as it still continues to grow. Therefore, they are really not interested in an additional benefit. However this is changing also as employers recognize tax breaks for premiums paid on an LTCI policy.
An agent can be a persuasive force in helping to change this attitude toward group coverage by promoting the following advantages:
- LTC Insurance can be especially appealing as an addition to an employee benefits package, although the employer must commit a certain amount of time and money to handle administrative details, including payroll deduction.
- The HIPAA Act of 1996 (as described in detail in this text) gives tax considerations to employers (as also discussed) for the first time, and treats Long Term Care Insurance benefit payments the same as other Health insurance products.
- There is still another factor that makes employer‑sponsored LTC Insurance attractive. Employers are beginning to recognize the economic loss that occurs when an employee must deal with the financial stresses of long‑term care for a spouse or for elderly parents. Group LTC Insurance can help relieve the burden, both financially and by reducing employee work hours lost from providing care for a family member. LTC Insurance can help maintain or restore employee productivity by removing one of the reasons for loss of productivity.
With Group LTC Insurance, some of the conventional features of group plans remain intact while other features are more similar to individual insurance policies. First of all, the policies might actually be individual LTCI policies. If so, the policies are fully "portable" if the employee leaves the plan and need not be converted in the traditional way. Optionally, the employer‑sponsored LTCI plan may be set up like other group coverages, requiring employees who want to continue the insurance to convert to individual policies within a certain period after termination. (This is called a conversion privilege and not all group insurance plans offer it.)
Examples of various Group products and the features are discussed in detail later in this text.
A feature that sets group LTCI coverage apart from other types of group insurance is who may be covered. Most plans are offered not only to employees and their spouses, but also to the parents of both parties and, sometimes, to children and to retired workers. In most cases, employees are exempt from medical underwriting ‑ they won't have to have a medical exam ‑ but it is likely that other family members must have some type of medical screening. Know the requirements for policies marketed because some insurers require medical underwriting for all parties, including employees, while other group plans might not require medical information about any of the parties. In some cases, even if medical underwriting is required, it is less stringent than for individual policies, especially for older parents. The NAIC's shopper's guide encourages older people to investigate their children's Group LTCI coverage if available, indicating that, while medical screening is likely, group coverage might be more advantageous than individual policies.
The age at which individuals may purchase employer‑sponsored LTCI coverage is often earlier than the age minimums for individual policies. Typical existing plans specify ages 30, 35 and 40 as the minimums and at least one plan designed by a large corporation is offered to 20‑year‑olds. While there are individual policies insuring at these earlier ages, they are fairly rare. Upper age limits vary considerably but generally are similar to individual policies, ages 79 to 85 being typical maximums for purchasing coverage.
Employer‑sponsored LTC Insurance may be virtually identical to individual policies marketed. In fact, this would apply to the policy discussed in the Pseudo-Group discussion later in this text. Most offer a range of daily benefit amounts, benefit periods and elimination periods. One should always be aware that in many of the existing plans, the employer has worked with the insurance company to decide on the range of features from which employees can choose.
While the employee makes the final choice, the options available may be pre‑selected and, therefore, more limited than with an individual policy.
As for the availability of other benefits and provisions that are found in individual policies, group LTCI plans vary considerably but there is a trend toward including more benefits. Some existing employer‑sponsored plans include or make available inflation protection, Nonforfeiture or return of premium features, death benefits, reinstatement, restoration of benefits, home care benefits, and others. Group plans usually pay for care at several levels, have no prior institutionalization requirements, and cover care for Alzheimer's and other organic brain disease. Exclusions and pre‑existing conditions limits are similar to those in individual policies.
Another way group LTC Insurance differs from other group coverages is that the rates typically vary by the age of the individual. Although there might be some premium savings over individual policies, this is not always the case, unlike group medical insurance, for example, which may be less expensive than individual medical policies. Depending on the insurer offering the plan, the age of the buyer, and the actual provisions included, group savings might be as little as 2% up to as much as 30%. One major advantage of some employer‑sponsored plans, however, is that the premium might be guaranteed for as long as the employee remains in the group, no matter how old he or she is ‑ a real bonus for an employee who can lock in a low premium at perhaps 30 years of age. Not all group plans guarantee rates for life, but in most cases the premiums will increase only if they increase for everyone in the group.
It is important to stress that an agent must learn about the specific details of employer‑sponsored plans he/she wants to install in the workplace. The insurers will provide guidelines concerning policies that may be offered to employers and provide assistance to the agent on customization to meet client needs. However, each insurer probably has certain conditions it will not change, so an agent needs to determine exactly where to be flexible and what provisions are not negotiable prior to making a presentation to a prospect.
Group LTC Insurance may also be offered by an association such as the American Medical Association, the American Association of Retired Persons (AARP), and others at both national and state levels. Association plans, which are available only to members of the particular group, vary as widely as other group plans and LTCI coverage in general. Some associations offer more than one type of LTC Insurance policy to members, as is the case with the AARP.
While the AARP policy is written by a strong nationally‑known insurer, that is not the case with all association policies, so it is important that both the agent and the customers know with whom they are negotiating. Buyers are especially warned by consumer advocates to avoid association policies that do not originate with bona fide associations. Unfortunately, a few insurers "invent" associations as a way to sell LTCI policies that are cheap in both price and benefits. This is not likely to be a concern for most agents since this type of insurer usually operates by direct mail rather than through agents.
Later in this text, the Pseudo-Group plans are discussed. Associations as discussed here are examples of “Pseudo-groups.”
Because of HIPAA, if an individual is self employed and had a net profit for the years, were a general partner (or a limited partnership [LTD] receiving guaranteed payments); of received wages from an S Corporation in which the individual was a more than 2% stockholder (and who is treated as a partner); the individual may be able to deduct as an adjustment to income, up to 100% of the amount paid for qualified Long-Term Care Insurance on behalf of the individual, spouse and dependents.
F This deduction cannot be greater than the tax-payer’s net earnings from his or her trade or business.
Additionally, if a person is a wage-earner from an S Corporation in which the person is more than a 2% shareholder, they can enter the premium amount on their 1040 (Schedules A and the amount should be shown on Box 14 of the W-2)
The LTCI plan must be established under the trade or business and the individual cannot take the deduction to the extent that the amount of the deduction is more than the earned income of the individual from that particular trade or business.
As with any wage-earner, the individual cannot take this deduction for any month in which they were eligible to participate in any subsidized health plan or LTCI plan maintained by the employer of the employer of the spouse. This helps to eliminate the possibility of “double-dipping.”
This rule is applied separately to plans that provide Long-Term Care Insurance and plans that do not provide Long-term Care Insurance (plans that provide other health insurance only).
Normally, if the self-employed individual (or partner or wage earner of S Corp. who is not more than 2% stockholder) qualified to take this deduction, they must use the Self-Employed Health Insurance Deduction Worksheet in the Form 1040 instructions to calculate the amount that they can deduct. The Worksheet is not used if there were more than one source of income subject to self-employment tax; if they file Form 2555, Foreign Earned income, of Form 2555-EZ, Foreign Earned Income Exclusion; or if they use amounts paid for qualified LTCI to figure the deduction. If they cannot use the worksheet in the Form 1040 Instructions, they can use the worksheet in Publication 535, Business Expenses, to calculate the deduction.
(The tax information is provided in case a client asks exactly how they deduct the premium for tax-qualified LTCI, the names and numbers of the forms will help…besides it would be impressive.)
One other item, if advance payments of the health coverage tax credit were made on behalf of the individual to their insurance company, they should not include any advance payments made for them when calculating the amount to be deducted for insurance premiums. And if they are claiming the health coverage tax credit, they should subtract the amount shown on line 4 of Form 8885 –– reduced by any advance payments shown on line 6 of that form — from the total insurance premiums that they paid.
F NOTE: The tax information provided is an interpretation of federal guidelines. Clients should always consult with their financial advisor or a tax consultant regarding tax advantages.
(Regular, C Corporate employer pays premium on insured employee). (LTCI coverage provided by a 501(c) organization to its Employees will receive similar tax treatment to that provided by a C Corporation).
Income exclusion (Code section 106) applies to the entire premium/coverage provided by the employer. Thus, even if the cost exceeds the age‑based limit on deductibility for individuals and/or the level of coverage exceeds the periodic limit, the employee will not recognize income from the receipt of employer‑provided qualified long term care coverage.
Generally, a corporate employer can deduct all premiums paid for accident and health coverage for its Employees as a general business expense. This deduction also applies to the cost of coverage paid for the spouse and dependents of the employee.
The deduction is available for LTCI paid by the corporation since long term care is now considered accident and health coverage. The corporation's deduction applies to the entire LTCI premium paid even the premium in excess of the age‑based limits for the deduction of individuals (and self‑employed persons). There is no requirement that the long term care coverage be provided by the employer on a non‑discriminatory basis.
The premiums are deductible by the corporate employer whether the coverage is provided under a group policy or under individual policies. The corporation in the example would be able to deduct the full $2,000 premium paid for the employee. If the corporation paid $2,400 for the 61‑year-old employee, it would be able to deduct the full premium, even if the premium exceeds the age‑based limit for the individual deduction.
NOTE: The LTCI plan must be tax qualified.
With respect to the benefits received under employer provided qualified long term care coverage, payments received by the insured are tax free as well, under Code Section 105(b).
The employee in the example would have no income from the employer‑provided coverage; and any benefits received under the policy would not be taxable.
Morgan’s LTD., a partnership, purchased a tax-qualified LTCI policy with an annual premium of $2,000 for a 62‑year‑old individual with unreimbursed medical expenses of $5,000 (including the long term care premium). Adjusted Gross income = $50,000.
(Partnership employer pays premium for (a) non-partner Employees, and (b) partners who perform services; and such coverage is provided in connection with the performance of such services.)
Since the partners are self-employed, the exclusion for employer‑provided coverage does not apply to them, and the premiums paid by the partnership are includible in their individual income. The partner is treated as paying the premiums and is eligible for the self‑employed deduction on 100% of the premium.
A partnership, like any other employer, may deduct any premiums paid for tax-qualified LTC Insurance (as well as other accident and health coverage) for its Employees and their spouses and dependents in accordance with the rules outlined above for corporations. Therefore, if a partnership paid a $2,000 premium for a 62‑year‑old employee (non‑partner), the partnership would deduct the entire amount. If the premium was more than $2,510 (in excess of the 2004 age-based limit on deductions for individual purchasers), the partnership would still deduct the full premium.
If a partnership pays long term care or other accident of health coverage premiums for its partners (and their spouses and dependents) for services rendered by the partners which payments are not based on the income of the partnership, the partnership deducts the premium from its taxable income as a business expense in the same manner it would for premiums paid on behalf of its Employees. The amount of the premiums attributable to each partner is included in the partner’s income (including premiums paid for spouse and dependents) and reported by the partnership on each partner. The partnership would deduct the full $2,000 paid on behalf of a partner, and $2,000 would be included in such partner’s income from self-employment.
A Limited Liability Corporation purchased a tax-qualified LTCI policy with an annual premium of $2,000 for a 62‑year‑old individual with unreimbursed medical expenses of $5,000 (including the long term care premium). Adjusted Gross Income = $50,000.
(LLC pays premium on Employees and LLC member‑owner of the entity).
A limited liability corporation is treated as a partnership for purposes of these rules. The LLC can deduct Long Term Care Insurance premiums paid on behalf of both its owners (members) and its Employees. The deductions are not limited by the age‑based limits on premiums for individual deductions or the per diem limit on periodic payments.
Applying this example, the LLC would be able to take the full $2,000 deduction, regardless of whether the recipient of the long term care coverage was an employee or an owner. The only difference is that if the insured is an owner, the $2,000 will be included in the owner's income from self‑employment.
Members and/or owners of the LLC are treated as partners (and are self-employed). Thus, the premiums paid by the LLC for the qualified long term care coverage for themselves, and their spouses and dependents are included in their income. Such premiums are eligible for both the self‑employed deduction and the deduction for all medical expenses in excess of 7.5% of AGI.
An “S” Corporation purchases a tax-qualified LTCI policy with an annual premium of $2,000 is purchased for a 62‑year‑old individual with unreimbursed medical expenses of $5,000 (including the long term care premium). Adjusted Gross Income = $50,000. An S-Corporation can pay premium on Employees and Shareholders.
A SUB‑S corporation is treated as a partnership for purposes of these rules. The SUB‑S corporation can deduct long term care premiums paid on behalf of both its owners (shareholders who own 2% of the stock) and its Employees. The deductions are not limited by the age‑based limits on premiums for individual deductions or the per diem limit on periodic payments.
Applying this example of a Sub‑S corporation, it would be able to take the full $2,000 deduction, regardless of whether the recipient of the long term care coverage was an employee or an owner. The only difference is that if the insured is an owner, the $2,000 will be included in the owner’s income from self‑employment.
In respect of the owner/employee, 2% shareholders are treated as partners (and are self‑employed). Thus, the premiums paid the Sub‑S corporation for long term care coverage for 2% shareholders and their spouses and dependents are included in their income. Such premiums are eligible for both the self‑employed deduction and the deduction for all unreimbursed medical expenses in excess of 7.5 % of AGI. Under the example, an employee would have no taxable income.
(Employer pays part of the premium; employee pays the rest).
Again, a tax-qualified LTCI policy with an annual premium of $2,000 is purchased for a 62‑year‑old individual with unreimbursed medical expenses of $5,000 (including the long term care premium). His Adjusted Gross Income = $50,000.
The employer receives the same treatment on the portion of long term care premium it pays that it does on the entire premium in the employer‑pay‑all situation.
Thus, all employers corporate, partnerships, Sub‑S corporations and LLC's) get a full deduction for the premium paid on behalf of its Employees without regard to the age‑based premium limits applicable to individual deductions. In addition, partnerships, LLC's and Sub‑S corporations may deduct the premiums it pays for its owners (2% shareholders for Sub‑S corps) for their services, but the portion of the premium paid by the entity for such self‑employed persons is includible in their income.
Qualified Long Term Care Insurance contracts, which provide benefits on a per diem basis (or other flat amount per fixed period), are treated somewhat differently for tax purposes than indemnity policies. The payment of premium by individuals and the tax treatment of the employer‑provided coverage is subject to the same rules outlined with respect to indemnity policies. The tax‑free receipt of benefits under a per diem policy is limited so that policyholders will be taxed on the amount of benefits which exceeds the greater of: $2510 at age 62 (See previous discussion of deductible amounts), or the amount of long-term care expenses incurred by the insured.
Only benefits paid under a policy specifically to reimburse actual expenses are not subject to the cap. Thus, payments made on a daily, monthly, annual, or even a lump‑sum basis will be periodic payments subject to the cap, unless limited by the policy to the actual expenses incurred by the insured.
Periodic payments are excluded from the insured's income up to the maximum (See Chapter on taxation of premiums and benefits). If the periodic payments exceed the cap, the amount of benefits over the cap may be excluded from the income only to the extent the individual has incurred actual expense for long term care services. The excess payments will be included in income without regard to the individual's basis in the contract from the premium paid for coverage.
The Treasury Department has released guidelines (Notice 97‑31) which provide temporary IRS interpretations of what changes can be made to "Grandfathered/Qualified” status. Per the IRS, if a Grandfathered policy is materially changed after December 31,1996, it loses its Grandfathered/Qualified status.
A material change, per the guidelines, could include any change in the terms of the contract altering the amount of coverage or timing of any item payable by the policyholder, the insured, or the insurance company. (A material change could eventually be determined by the IRS to be any client‑requested increase in benefits.)
Information similar to the following can be provided to an employer, either as part of an informational brochure or as a memorandum. It can be especially useful to Board Members when a Corporate Resolution pertaining to the furnishing of Long Term Care Insurance to their officers and dependents.
F NOTE: Tax Laws change frequently, so the client’s tax attorney should always review information of this type furnished to a client.
TAXABILITY OF PREMIUMS
Treatment of Long Term Care Insurance premiums, as of January 1, 1997 under the Health Insurance Portability and Accountability Act (HR3103), that are provided for Long Term Care Insurance for officers and their spouses to cover the costs of an extended stay in long term care, are summarized as follows.
Long‑term care insurance protects the insured against financial hardship caused by an extended stay in a nursing home or similar facility. It was unclear for some time whether such insurance qualified for favorable tax treatment as health and accident insurance under internal Revenue Code (Code) Sections 104, 105, and 106. Legislation passed in 1996 (Health Insurance Portability and Accountability Act) cleared up the confusion by characterizing qualified Long Term Care Insurance as health and accident insurance making it eligible for favorable income tax treatment under Code Sections 104, 105, and 106.
With closely held companies, the plan is typically provided only for officers, but could be provided to a wider range of Employees. If non top-salaried Employees are covered under the plan, participation should be limited to fewer than 100 Employees if ERISA's full reporting and disclosure requirements are to be avoided.
INCOME TAXATION OF THE PLAN:
Participants in an employer‑paid, Long Term Care Insurance plan may exclude from income any premiums paid by the employer for such insurance. (Code Sec. 106). Employer expenses for Long Term Care Insurance premiums are deductible under Code Section 162 as a business expense.
The employee's exclusion of the premium paid by the employer and the employer’s deduction for such premiums are permitted even if the plan is discriminatory in favor of highly compensated Employees. Benefits payable under the policy are excluded from taxable income as defined in Code Sec. 213 to the extent such amounts reimburse the insured for actual expenses incurred. (Code Sec. 105)
There are significant advantages to an employer‑paid plan because qualified Long Term Care Insurance premiums paid by an employee - instead of his or her employer - may be deducted as medical expenses under Code Sec. 213 only to the extent that the premiums, along with all other non-reimbursed medical expenses, exceed 7.5% of adjusted gross income. In addition, the maximum allowable Sec. 213 deduction for such premiums is further limited by the following amounts that vary by attained age at the end of each tax year:
40 or below $250
41 through 50 $470
51 through 60 $940
61 through 70 $2510
71 and above $3130
(Memo to Employees outlining a plan to provide Long Term Care Insurance for officers and their spouses to cover the costs of an extended stay in a nursing home or similar facility.)
Memo to Employees Covered Under the Plan
TO: All Officers of ABC Company
From: Vice President of Human Resources
We are pleased to announce that the ABC Company Board of Directors has approved a plan to provide all officers of the company and their spouses with Long Term Care Insurance. The company at no cost will provide this valuable benefit to you.
Long‑term care insurance helps offset the costs of nursing home care in the event you or spouse is confined to such a facility for an extended period of time. This coverage helps prevent financial hardship that may result from an extended stay in a nursing home or similar facility due to old age or disability.
Your Long Term Care Insurance plan qualifies for special tax treatment from the IRS. Although the company pays premiums, the premiums are excluded from your gross income under the tax code provision that excludes employer‑paid premiums for health and accident insurance from an employee's gross income. Benefits payable under the policy are also excluded from your gross income to the extent such benefits offset long-term care expenses actually incurred by you or your spouse.
ABC Company is happy to provide this important benefit to you and your spouse. If you have questions about the long‑term care coverage you will be receiving, please contact the Director of Benefits in the Human Resources Division.
(An information sheet, which can be attached to the above Memo, or circulated separately, placed in the company newsletter, or mailed to each employee, could contain the following appropriate information :)
Long term care is quickly becoming a burgeoning concern for employers and Employees alike. Thirty‑four percent of the people who need help with the basic activities of daily living are between the ages of 18 and 65. Many more have parents or other aging relatives that currently require some form of care.
Current statistics indicate that lost productivity due to eldercare issues costs businesses $3,142 per employee on an annual basis. By the year 2020, it is estimated that 1 in 3 workers will require some type of eldercare.
Once considered as a luxury for the well‑to‑do, Long Term Care Insurance is rapidly becoming an absolute necessity and one of the most indispensable benefits an employer can offer.
According to a recent survey of 489 organizations by Hewitt & Assoc., 10% of employers currently offer long term care coverage and another 27% plan to do so within the next three years.
Furthermore, a study conducted by the National Council on the Aging found that the number of insureds enrolled through the employer market has grown from 20,000 in 1988 to 440,000 in 1994. Equally important is the fact that in 1994, 42% of all employers offering a long term care plan benefit made contributions toward the premium. Of the total 1,028 employer‑sponsored plans, at least 432 employers paid part or the entire employee premium.
In 1996, the federal government passed The Health Insurance Portability and Accountability Act that provides special tax incentives to both employers and Employees.
Today the market is growing, with more carriers offering innovative benefit designs and competitive pricing.
Employers like it because:
- It’s easy to administer and implement
- There's no cost to the company.
- Increases productivity by lessening the demands of eldercare on Employees.
Employees like it because:
- Long term care Insurance protects their assets, pension and savings
- Reduces the demands of being a caregiver
- Provides the means for affordable home health care, adult day care or even nursing home care.
- Includes spouses, parents and parents‑in‑law.
- Coverage is portable.
- 34% of the people who need help with the basic activities of daily living are between the ages of 18 and 65.
- The annual cost to companies for lost productivity from eldercare responsibilities is $30 billion a year or $3,142 per employee.
- By 2020, one in three workers will provide some type of eldercare.
- 50% of employed caregivers said they missed work time to care for elders, up from 42% a decade ago.
- 77 million Americans will turn 50 over the next 18 years ... that's one person every 7.5 seconds.
- 43 percent of individuals age 65 will enter a nursing home sometime in their lifetime, with 50 percent staying an average of 2 1/2 years.
- A year in a nursing home can average $40,000 and can exceed $70,000 in metropolitan areas.
- 50 percent of all couples and 70 percent of single persons are impoverished within one year of entering a nursing home.
- For every person receiving care in a nursing home, there are four people receiving care outside of a facility.
While there is a true group Long Term Care Insurance product, at this particular time several companies are using an individual product with a discounted rate structure for use within a group environment. There are many names for these plans, so for purposes of this discussion they will be referred to as “Pseudo-Group” plans, as they are actually neither individual or group policies. For those not familiar with “pseudo”, the definition of “closely resembles” is used in this context. Companies may use other terms – one such plan is called the “Affinity” plan (defined as “kinship in general; similarity”) - which is certainly an appropriate term.
There are usually no “discounts” of this type with true group plans but the discounts under the pseudo-group plans will be in the 10-15% range. (True Group may offer other discounts) More than half of the companies that issue LTCI offer a payroll deduction plan, which fits this category.
While the advantage of using a “True” Group product is that of underwriting, in a group situation, the underwriting is usually considerably more liberal and individual health situations are not taken into consideration. Depending upon the size of the group, it is possible to have a guaranteed issue product.
Conversely, there are several disadvantages to true group, which may weigh more heavily in considering whether to offer a discounted individual product or the group product.
One of the biggest problems with group products is that the plans are all “boiler-plate” and cannot be customized or individually designed to meet the needs of each individual. With the larger groups, the client company can pretty well dictate the plan (within actuarial guidelines and within reason), but even so, individual needs cannot always be met..
For true group plans, there are requirements that often are difficult of impossible to meet (as any group insurance specialist will state). The most difficult one is that of participation. An insurer will require that a certain percentage of those eligible for the plan, must participate. LTC Insurance has not risen to the level of health insurance, or even group life insurance, to where it is considered as a “necessity.” Therefore, rarely would enough persons enroll for the LTC Insurance coverage, especially if they had to pay for part of the premium. Individual plans sold on a group basis will generally have some sort of participation, but the participation requirements are much lower.
Another requirement is that the employer must participate and pay for part of the premium. Automatically, this eliminates Associations from this coverage. In the environment of high group health insurance premiums, many employers are hard-pressed to offer another benefit to their employees. With the pseudo-group plans, the employer does not have to participate. For example, with true group products, most insurers require at least 10 participants; for pseudo-group coverage, as few as three are acceptable. Also, most insurers require that the participation number continues each year and if participation falls below the required number, the plan will no longer be offered. Note, however, that the insured employee will be able to continue with the issued policy on the same basis.
Also, there are normally rather rigid guidelines as to the eligibility of groups. For group underwriting reasons, certain groups would not be eligible for coverage. With an individual product, underwriting guidelines would at least allow some persons to purchase LTC Insurance.
Most individual policies allow for a Spousal discount, and some plans allow a “preferred” rating for those in very good health. With true group, these discounts would not be allowed, whereas with an individual plan, both the group discount and the Spousal &/or Preferred discounts would be available.
One of the major Long Term Care Insurance carriers offers the pseudo-group type of plan. A review of their product and procedures will help in understanding how such a program works. The insurer also offers a true group product, conveniently making a comparison possible.
In this case, the insurer bases their product on a popular individual product that offers a “modified” guaranteed issue to groups with more than 200 employees (number of employees will vary, depending upon the company’s experience, competition, and market interest).
For an employee to be eligible they cannot have been diagnosed with HIV/AIDS, Neuro‑Muscular Disorder, suffered a stroke or TIA in the last 5 years, have Insulin ‑Dependent Diabetes or limitations in any ADL.
In some of the Group (true group) policies (see the next chapter), Benefits are limited to:
- Nursing Home only
- 2 year maximum benefit
- 90 day elimination period
- $100 or similar small daily benefit
As is obvious, this particular plan is restrictive as to benefits, but is liberal as to underwriting requirements. Obviously, there is an actuarial balance between benefits and premiums. Although the company’s plans involving this product is not known, one can speculate that this product would raise the awareness of individuals as to the need for LTC Insurance, and for those who can pass underwriting eligibility, a more comprehensive policy would be attractive.
For comparison, for true group, this carrier offers discounts of 10% for groups of 200+ employees (not actual participants) and 5% discount for groups under 200 members. In addition, this insurer also offers a 10% spousal discount, and a 15% preferred rating discount, plus a 2% list bill discount for groups with over 200 members. For pseudo group plans, the discounts are 10%, plus 10% spousal discount, with no discount for list bill.
Plans available today range from 5% to 7% to 10% to 13%, to 15%, with several companies offering the 10%. Obviously, it ranges all over the map so the policy has to be studied carefully.
For the pseudo group, the insurer required a minimum of 10 applications during the first six months. For true group the insurer has a production requirement of twenty‑five applications within the first six months and a total of 50 applications within the first year to continue the program.
Generally, both true group and pseudo-groups, cover full‑time Employees (or members) and their spouse and children who are over the age of 18. The extended coverage is one of the biggest attractions for group and pseudo-group coverage, as some carriers extend coverage to parents, in‑laws, grandparents and retirees.
If an employee terminates, with the true group product the employee will be able to convert to an individual product and continue the coverage on their own. With the pseudo-group plan, they are automatically portable since the employer does not own them. Also all discounts (except list bill) continue with the contract even upon termination or retirement.
With true group, as with any such group product, generally the commission paid is relatively small in comparison to the individual product. However, even using the pseudo-group plans will cause a reduction in both the first year compensation and renewal years as well.
For the pseudo-group plans, an endorsement letter and question form must be completed and submitted for approval before beginning the enrollment process with most, if not all, carriers. Once approval is secured, solicitation may proceed, with each submitted application being encoded in some fashion, usually with the specific group number assigned by the carrier.
A Sample Long Term Care Insurance Plan “Minutes and Resolution Minutes” is as follows:
A special meeting of the Board of directors of ______________________________ was held on the ______day of _________ for the purpose of considering the adoption of a long‑term care Insurance plan for all officers of the corporation and their spouses.
A quorum of officers and Board members was in attendance, and those Who were present are listed as follows:
The Chairman (introduced __________ ) who described to those present the need to increase the security of eligible executives and their families by providing Long Term Care Insurance to pay the costs of extended care in a nursing home or other similar facility. After the (Chairman's) presentation and discussion of its merits, it was unanimously
That the Board Of Directors has determined that if (company name) provided a Long Term Care Insurance plan, (the company) would avoid substantial financial loss to officers if they should acquire long‑term care expenses, whether due to disability or old age, and further, would relieve the officers of anxiety concerning the financial security of their families in the event of long‑term illness or injury and
That such a Long Term Care Insurance plan shall be provided to all officers of the Corporation and their spouses.
In Witness Whereof, the Corporate Secretary's name has been affixed
Hereto this day of
The Group Discounts have been illustrated earlier; however the purpose of such a discount, other than the obvious purpose of providing lower premiums, bears more discussion.
The published purpose of the discount, according to some insurers, would be to help the insurer’s agents reach an additional segment of the Long Term Care Insurance market. In the group and association market the sponsoring group typically wants to offer something to its members that they could not buy elsewhere ‑ such as a special discount. Notice that some emphasis on the discount explanation is on the Association Group market, as contrasted to the employer-employee group market.
For the larger insurers, a 5% “sponsored‑group discount” (as opposed to a true group discount of 10%, and some companies offer 10% for the sponsored-groups also) is available for eligible groups and is available in most states. As discussed earlier, first year and renewal compensation for these products are slightly reduced (“slightly” is not defined).
A 10% (or 15%, rarely) marital discount is available to applicants who are married and approved for coverage even if spouse does not apply or does not qualify for coverage (this is a liberalization of most individual policies). If both spouses apply for coverage and both are issued and remain in force, each receives a 20% discount (includes marital discount).
Some Long Term Care Insurance companies allow a Preferred Rate Class Discount. Generally, qualifying for the Preferred Rating Class decreases the Standard Annual Premium by a percentage, such as 15%. Keeping in mind that this is group or association group policies where no health questions (in true group) are asked, to less restrictive health questions are used for association (and pseudo-group) policies.
In order to qualify, one insurer requires that the applicant must be able to answer "NO" to the following questions on the application:
1. Have you ever been treated for or diagnosed as having any of the following: heart disease, emphysema, or COPD?
2. During the past 10 years, have you ever been confined to a hospital or treated by a physician for any of the following: cancer, hypertension, stroke, osteoporosis (or any bone or joint disorder), phlebitis, dizziness, epilepsy or any type of peripheral vascular disease?
3. During the past 10 years have you been given a prescription for medications to treat arthritis?
4. During the past 10 years have you been diagnosed or treated for alcoholism drug or substance abuse, mental or emotional disorder?
5. Do you now or have you during the past 5 years used any tobacco products, including cigarettes, pipe, cigar or chewing tobacco?
6. Can you walk 4 blocks at a normal pace without any difficulty such as: shortness of breath, dizziness or leg cramps? (Must answer yes)
Applicants should not have any current health problems or take any medications.
All applications will be submitted to the insurance company, accompanied by a check for the amount of the Standard Premium. If the applicant is approved and qualifies for the Preferred Rate Class, a refund check will be issued and delivered with the policy.
Insurers will, as a general rule, state eligibility rules wherein members of groups, their spouses, parents and parents‑in‑law are eligible when:
- the group was formed for purposes other than obtaining insurance ;
- solicitation of the group is expected to generate a minimum of ten paid policies;
- the group indicates its sponsorship of the LTC Insurance plan to its members in writing.
Particularly for the pseudo-group coverages, there are many (a multitude, in fact) of groups and associations that would be eligible, such as:
Employers Retiree Associations
Credit Unions, etc.
As with any insurance company, there are certain procedures that must be followed in order to write a group or pseudo-group. While all companies would not follow the following procedures, most company procedures would be quite similar.
Usually the agent who brings the group to the insurer will have an exclusive on the group and the discount with the following exceptions:
- If another agent licensed with the insurance company, has an existing client who is a member of this group, but who has not yet purchased the insurer's LTC Insurance policy, the agent can offer the group discount without going through the "exclusive" agent.
- At the discretion of the "exclusive agent," the insurer’s agent can offer the discount to a new prospect who is a member of the sponsoring group by submitting the business through the "exclusive" agent at an agreed upon commission split.
- Current LTC Insurance policyholders of the insurer, who are members of the sponsoring group, can only get the discount if they replace their policy with the policy being offered by the sponsoring group. (This will not be in the best interest of the policyholder in most cases because they would likely pay higher age rates, making the discount a wash.)
- If a policy is replaced, and it is replaced by the original writing agent the agent will be charged back the difference between standard first year commission and the lower sponsored group discount.
- If it is replaced by the "exclusive" agent (which is discouraged and done only at the request of the client) renewal commission will be paid.
This form will vary from company-to-company, but a sample of an insurer’s form is provided here as an illustration.
1. Name of Firm/Sponsoring Organization
Nature of Business
2. Total Number of Employees/Members
3. How many locations to be solicited?
In what states?
Are you currently licensed in these states?
4. Please describe the demographics of the LTCI prospects that are to be solicited. (age groups incomes ‑ assets)
5. How many Employees/members are included in the above profile?
6. Explain how the sponsoring group will sponsor/promote (The Insurer) independent care plan to its Employees/members?
7. Is this LTCI plan replacing another company's LTCI plan for this group?
If yes, Please provide a separate sheet, the name of other company; time period when other company's LTCI plan was sold; and why group is replacing other company's plan with (The Insurer). Please Include any materials describing the plan that is being replaced.)
8. What is your marketing plan? How will you solicit. How will the applications ‑ ‑ be taken? How will the case be serviced? (Use reverse side or attach plan)
9. What penetration/sales do you expect during the initial 18 months (__________%)
10. Is there any need for statement list billing or is direct billing (our preference) ~ acceptable?
1. Because of recent surveys, it would be safe to say
A. there is absolutely no future in Group LTCI.
B. that the future growth in LTCI over the next few years will be in group products sold at worksites.
C. Medicaid rules will change so that anyone can get them to pay for nursing home expenses.
D. all companies writing LTCI will soon quit writing those policies.
2. Many insurance companies have only recently entered the LTCI market, and one of the main reasons that they have delayed entering is because
A. of the high cost of entering the market.
B. no one is making any money at LTCI.
C. they were waiting for the federal government to take over total control of LTCI.
D. the commissions paid for this business are ridiculously high.
3. “Portability” is of major concern to a large corporation in determining whether their employees should be issued individual policies with payroll deduction, or under true group insurance rules. The best way to address this concern would be to
A. allow them to take the individual policies only as they are the only truly portable policies.
B. allow them to take the true group policies as they are all portable.
C. either take individual policies or to have a conversion privilege with their group plan.
D. not become involved but allow employees to get individual LTCI policies on their own.
4. One of the major features of Group LTCI that differentiates them from other types of LTCI coverage is
A. who may be covered.
B. the amount of maximum benefits.
C. the insurance company that issues the policies.
D. the fact that group LTCI does not pay commissions to agents.
5. For tax purposes, a corporate employer
A. can deduct all premiums paid for LTCI insurance.
B. can deduct only premiums paid for other health insurance, not LTCI.
C. may deduct 50% of premiums paid for LTCI on behalf of employees.
D. can deduct a percentage of the premiums paid on behalf of employers, the amount is determined by IRS tables.
6. On a Contributory Arrangement for LTCI, the employer
A. receives the same tax treatment on the portion of the LTCI that it does on the en tire premium in the employer-pay-all situation.
B. may not take any tax credit for any premiums paid on behalf of employees.
C. pays into a fund that is used for charitable purposes, with the charitable institution being a health care provider for long-term care.
D. is actually licensed as an agency for the LTCI company.
7. With True Group LTCI, one of the most difficult requirements for a plan to be true group is
A. commissions are too high to keep the product competitive with individual plans.
B. the insurer must be an A+ rated company.
C. every employee must have a physical examination.
D. participation – a certain percentage of eligible employees must accept the plan.
8. One of the main reasons that some large employers do not have a true group LTCI plan is
A. the employer must pay for all of the premium.
B. the employer must pay for all or part of the premium.
C. the employee must pay for all of the premium.
D. the employer does not receive any tax breaks on premiums they pay on behalf of their employees.
9. In establishing a Pseudo-Group (or Association Group) plan, before beginning enrollment
A. there has to be a report from Dun & Bradstreet attesting to the company’s financial standing, submitted to the insurer.
B. and endorsement letter and question form must be completed and submitted to the insurance company for approval.
C. the association must have an agent-of-record from other than the issuing company.
D. every employee must sign a letter of intent that they will buy the insurance.
10. For Association Group, there are three rules of eligibility, one of which is
A. the association must be A+++ rated by Dun & Bradstreet.
B. the association must be a member of the American Association Association (AAA).
C. the group (Association) must be formed for purposes other than obtaining insurance.
D. the Association must be registered with Department of Insurance.
ANSWERS TO STUDY QUESTIONS
1B 2A 3C 4A 5A 6A 7D 8B 9B 10C