By Dr. James M. Dahle, WCI Founder
One of the worst pieces of legislation I have ever seen was passed in 2019 by the Washington state legislature and signed into law by Gov. Jay Inslee. The law forces every resident of Washington to EITHER buy Long-Term Care Insurance (LTCI) OR pay a payroll tax of 0.58% on earned income. The deadline for this law (Jan. 1, 2022) is rapidly approaching and the deadline for opting out is already here (Nov. 1, 2021). Predictably, this law has had a ton of unintended consequences, not the least of which is the fact that you haven't been able to buy LTCI in the great state of Washington for months. To make matters worse, other states are reportedly considering similar laws.
Why Did Washington Pass the Law Requiring Long-Term Care Insurance?
The law started with good intentions. Lawmakers realized that lots of people need Long-Term Care (LTC) and very few people can actually afford it. The vast majority of people who need LTC pay for it through the Medicaid program which, for those who are not aware, is a jointly funded program between the federal government and state governments. In Washington state, the federal government currently pays for 88% of it and the state pays for 12% of it. The idea behind this new law was to save $3.9 billion over 30 years in state Medicaid costs, although it is unclear to me how much of that “saved” $3.9 billion was supposed to come from money raised from this new tax and how much of it was supposed to come from people not needing Medicaid to pay for their LTC because they bought insurance to avoid paying the tax.
The tax was coupled with a new program that provides a lifetime benefit of up to $36,500 in “home healthcare and an array of services related to long-term healthcare including equipment, transportation, and meal assistance.”
The Washington Cares Act Fund Director Ben Veghte says, “Long-term care insurance has been around for four decades and they’ve never managed to cover more than 7% of the population. That’s never proved to be an affordable product for the middle class.”
Well, that's true. LTC is really expensive. So the LTCI that pays for it is going to be really expensive, too. Since the median American household has an income of around $60,000 per year and the median 50-year-old has retirement savings of something like $150,000, Veghte is right. People can't afford LTC or LTCI. Apparently, the state government doesn't like the federal government's solution to this program (Medicaid) and thinks its program is better. I'm not really convinced.
Although the purpose of this post is not necessarily to criticize the Washington program itself (more the way the funding for the program has been rolled out), it has quite a few hoops to jump through in order to qualify.
Eligibility Requirements for Washington Care Act Benefits:
- First, despite paying the tax starting in 2022, you don't actually qualify for benefits for 10 more years. That's right. You're paying the taxes, but you're not getting any sort of insurance benefit for doing so for the first decade.
- Second, you have to work at least 500 hours per year to get credit.
- Third, you can't stop working for more than five years total, or three of the last six years, and still get your benefit. Even if you've already paid in for 10+ years!
- Fourth, if you're close to retirement, you get a little break, but only if you claim the benefit within three years of stopping working.
- Fifth, a private nursing home room in Washington costs $11,000 a month, but this program only covers $3,000 a month.
- Sixth, if you work in Washington but live in Oregon or Idaho, you still have to pay the tax. But you can't have the benefit. Also, if you live in Washington now but then retire to another state, you can't have the benefit. Sorry.
The only exclusions are federal employees (I guess because the feds have an LTCI-like benefit) and people that have LTCI purchased prior to November 1, 2021.
You can't make this stuff up.
How White Coat Investors Deal with LTC Costs
For years, Americans have dealt with LTC costs in the following ways:
#1 Hope and pray you never need LTC and
#2 If you do end up needing LTC, choose how to take care of that based on your wealth and marital status:
- If unmarried, spend down (paying for LTC) to Medicaid levels and then have Medicaid pay after that
- If married but with wealth less than $200,000-$500,000, spend down to Medicaid levels
- If married with wealth of perhaps $200,000 to $1.2 million-$2 million, buy LTCI
- If married with wealth > $1.2 million-$2 million, self-insure against this risk
Over the years, I've hoped that most white coat investors would find themselves in that fourth category by their 50s, the time when most people consider buying LTCI. Essentially, the only WCIers I've recommended LTCI to are those in the “donut hole” who don't want to impoverish their surviving spouse due to their LTC costs. Beyond this issue of whether to self-insure, LTCI has never really been ready for primetime. In the beginning, companies charged too little and then went out of business before the people who bought their policies ever needed them. These days, the policy premiums are likely to be raised to unaffordable amounts before you need the benefits. It's just a really problematic area of the insurance world.
Buy Insurance or Opt-Out and Pay the Tax?
So what's the issue? Government is always coming up with new programs and, of course, those programs have to be funded. How else would they be funded besides a new tax? The issue was this ability to opt-out of the tax caused a lot of high earners to buy insurance products they would otherwise not purchase. At a certain level of income, it's cheaper to buy LTCI than it is to pay the tax. Consider a couple making $800,000 per year.
$800,000 x 0.58% = $4,640
That's a lot of money. How much does LTCI cost? Well, let's first figure out what kind of policy qualifies for the exemption. Per the law itself:
“(5) ‘Long-term care insurance' means an insurance policy, contract, or rider that is advertised, marketed, offered, or designed to provide coverage for at least twelve consecutive months for a covered person. Long-term care insurance may be on an expense incurred, indemnity, prepaid, or other basis, for one or more necessary or medically necessary diagnostic, preventive, therapeutic, rehabilitative, maintenance, or personal care services, provided in a setting other than an acute care unit of a hospital. Long-term care insurance includes any policy, contract, or rider that provides for payment of benefits based upon cognitive impairment or the loss of functional capacity.
(a) Long-term care insurance includes group and individual annuities and life insurance policies or riders that provide directly or supplement long-term care insurance. However, long-term care insurance does not include life insurance policies that: (i) accelerate the death benefit specifically for one or more of the qualifying events of terminal illness, medical conditions requiring extraordinary medical intervention, or permanent institutional confinement; (ii) provide the option of a lump sum payment for those benefits; and (iii) do not condition the benefits or the eligibility for the benefits upon the receipt of long-term care.
(b) Long-term care insurance also includes qualified long-term care insurance contracts.
(c) Long-term care insurance does not include any insurance policy, contract, or rider that is offered primarily to provide coverage for basic Medicare supplement, basic hospital expense, basic medical-surgical expense, hospital confinement indemnity, major medical expense, disability income, related income, asset protection, accident only, specified disease, specified accident, or limited benefit health . . .
(8) “Qualified long-term care insurance contract” or “federally tax-qualified long-term care insurance contract” means:
(a) An individual or group insurance contract that meets the requirements of section 7702B(b) of the internal revenue code of 1986, as amended; or
(b) The portion of a life insurance contract that provides long-term care insurance coverage by rider or as part of the contract and that satisfies the requirements of sections 7702B(b) and (e) of the internal revenue code of 1986, as amended.”
If you go to Section 7702B(b) of the internal revenue code, you find that the policy must pay a benefit of $175 per day, or $63,875 per year.
Per the American Association for Long-Term Care Insurance, average policy costs in 2020 were:
So this theoretical couple making $800,000 is actually better off buying insurance ($3,050 premium < $4,640 tax) than they are paying the tax. Not only do they pay less overall, but they theoretically get the benefit of having some (admittedly unnecessary) insurance to boot! Easy decision (assuming you can actually get LTC insurance, that is).
However, since most people make less than $800,000, they are faced with a dilemma. Do I pay the tax or do I buy insurance? If you are a single, healthy, 65-year-old man with an income of $100,000, you can get insurance for $1,400 a year or you can pay a tax of $580 a year. Which is better? Much harder to say.
It gets even more confusing when the insurance agents start getting involved. You see, you don't have to buy LTCI to avoid the tax. You can also buy a life insurance policy with an LTC rider or even an annuity with an LTC rider.
Lovely. My three least-favorite insurance products all combined together. I would hope that the vast majority of white coat investors could avoid all three of them. Now you see why I hate this piece of legislation. If you want to pay for a new social program, just raise the darn taxes. Don't combine your new tax with some sort of boon to the sleaziest part of the financial services industry and force people into all kinds of weird financial dilemmas.
Unintended Consequences of the Washington State LTC Program
Naturally, Washingtonians rushed to buy long-term care insurance. The state program clearly wasn't very good, so they might as well get some better insurance instead of paying that tax. Insurance carriers saw the number of applications go up by 48X. I don't know about your business, but no business I have ever been associated with could handle that sort of sudden increase in demand, especially if it just going to be a short-term bump. However, Forbes columnist Howard Gleckman hypothesized that the insurance companies pulled out of the market for two other reasons:
#1 The purchasers were way too enthusiastic. They feared the risk pool would worsen since those who buy LTCI are typically those most likely to need it.
#2 Insurance companies were worried (with good reason) that Washingtonians would just purchase a policy to opt-out of the state plan and then cancel their coverage once they officially received their LTCI exemption (duh, of course they're going to do that if the state allows it). That would be bad for the companies, since they would not be getting ongoing premiums, and potentially bad for the Washingtonians, who would have neither a private LTC policy nor the backstop of the public program. The only winners? You guessed it! The agents selling the insurance products and pocketing the commissions.
So the companies started telling the brokers they would have to pay back the commission if the policy was canceled in less than a year. Voila! The companies don't want to sell it. The brokers don't want to sell it. And for months, nobody has been able to buy it—even people who would have bought it without this goofy law being put in place. The legislature just put the kibosh on an entire industry. #unintendedconsequences
Long-Term Care Insurance Substitutes
So Washingtonians could no longer buy LTCI and have not been able to for months. So where do people turn? That's right, entirely different insurance products they would have never considered if not for this law. Some universal life insurance policies have a long-term care rider attached to them. A single premium policy averages $75,000. So for $75,000 or so, you have a policy and it has a long-term care rider that allows you to get out of the tax. NerdWallet uses the following example:
“Combination policies differ, but here’s a hypothetical example for a MoneyGuard II policy from Lincoln Financial: a 60-year-old female nonsmoker pays a single $100,000 premium for up to $453,783 in long-term care benefits, or about 4.5 times the premium. Long-term care benefits could pay out for up to six years, at up to $6,303 per month. If she never used the policy for long-term care, it would pay a death benefit of $151,261 to her beneficiary. And after year 5, she could get her $100,000 back if she didn’t want the policy any longer and hadn’t used any of the long-term care benefits.”
Pretty hard to get excited about that, but is it surprising that agents can use fear of this tax to sell policies like this? Their sales pitch goes like this, “Well, you'll get out of the tax and save a few thousand a year. If you need LTC, this will pay for it at least for a while, and if you don't, you can leave the death benefit to your kids as an inheritance.” I think most wealthy people looking at that proposition would say, “Well, I can buy this policy, cancel it in five years and only lose the earnings on my $100,000 (maybe $50,000), and never pay the tax, at least until the Legislature catches on.” Honestly, I think most WCIers would still just pay the tax. Note that accelerated death benefit riders and critical illness benefit riders do not count with Washington.
The other option is to purchase an annuity with a long-term care rider. Some people like that option because, like single premium life insurance, it's one lump sum and you're done. No ongoing LTCI premiums. It might be an especially nice option if you could buy a tiny little annuity and qualify to opt-out of the tax. I spoke with one agent in Washington who said he had heard people were buying annuities as small as $35,000 and qualifying, but his company didn't sell them. He also told me that not long after LTC policies became unavailable, so did life policies and annuities with LTC riders. No surprise, I suppose.
Can You Really Cancel Your LTC Policy?
It seems that you can (there is no penalty for doing so in the law), but that tactic would really only work until you change jobs. Each new employer will ask for proof of LTCI when they are doing your onboarding paperwork. If you don't have it, they'll withhold the tax from your paychecks.
What Should You Do About the Washington Cares Fund If You Live There?
At this point, it's too late to buy an LTC policy, a life insurance policy, or even an annuity and then cancel it in a few months. The deadline is Nov. 1, 2021. I think the law is absolutely ridiculous that it even allows you to opt-out of a tax permanently by owning a policy for just a few months anyway. I suspect the law will be modified in the future eliminating that option, but who knows.
I think the best perspective to take here is that this is just another tax. It's a payroll tax, so it goes away when you stop working and it does not apply to anything but earned income. It might make an S Corp a little more attractive than it otherwise would be, but Congress is in the process right now of making S Corps dramatically less attractive in every state by eliminating their primary benefit.
While I encourage you to write your state legislators, at this point I think you should just pay your tax and feel good about your tax dollars perhaps eventually helping out a few of your fellow Washington residents with their long-term care costs. Maybe someday you might even see a little benefit from the program yourself.
If you are in another state and this happens in your state and you want to opt-out, do it as soon as the law passes. When the masses find out about the opt-out option, the insurers will probably stop selling policies relatively quickly. Hopefully, other states learn from Washington's mistake and either choose not to allow an opt-out or simply do not pass the law at all.
What do you think? If you are in Washington, what did you choose to do? Did your practice put a group LTCI policy in place? Did you buy a policy yourself? Did you buy a life insurance policy or annuity with a rider? Are you just planning to pay the tax? Give us the details in a comment below!
Great post and was fortunate as a WA resident to learn about this before it became impossible to get a policy. 2 points you made that differ from my experience (though I am not an expert so certainly open to correction):
1. I do not believe you need to provide proof of coverage to each new employer to avoid the tax. After applying for an exemption, you get a letter from the state granting the exemption and this is what is provided to each new employer to avoid the tax. Whether or not there will be some sort of ongoing verification of coverage process in the future for those who have opted out is uncertain.
2. You cite a $175/day minimum to qualify for the exemption. In my reading of the code you linked, I read this to be a $175, and therefore a maximum (and inflation adjusted from 1997 so would be much more than that now). I am definitely a novice when it comes to read IRS code so I may be wrong. However, I heard from multiple LTC agents and other experts that there was no defined minimum coverage in the WA CARES act. I can’t imagine that these agents would pass up an opportunity to self more coverage if it was required by law. I would suspect if there truly is a $175/day minimum many who think they have adequate coverage for the exemption would actually not qualify.
1. I agree it’s not super black and white. I read that in only one place and it was a Washington-based insurance company’s website I believe. I can’t imagine that if it isn’t already a thing, it will be eventually. I mean come one, they can’t possibly make it that easy to game, right?
2. You may be right. I linked to my source, but that’s all I have. I had hoped to get an agent in WA to write this post, but in the end gave up researched and wrote it myself.
I sure hope you’re wrong about the 175/day minimum coverage or 63,875 a yr coverage.
Our company plan is 36,000 a yr for 3 years or 108,000 total.
If you’re right and I’m wrong I’ll be forced to pay the LTC tax and pay 1,000+ net a yr more than what the cheapish private plan costs. This is so frustrating since I don’t want to insure myself for a 36-108k cost as an under 40 yr old attending who saves and invests 70% of his net income and is on pace to reach financial independence at about 43-44 yrs of age. I can understand insuring with life and disability coverage since that is 1-3 million coverage. But not for a 36-100k situation.
I’m honestly fretting that our company plan isn’t eligible now!
I searched the web, and the legislature knows of the issues you raise and grasp they need to repair the bill’s text. From recent news stories, all involved know a fix is critical.
But some of what you write and object to still holds if the pols clean up the language. As a group, we as physicians are not the median, and as most LTC needs post 65 yo can be remedied with home care and supports, not full-time custodial care in a nursing home, even an insufficient LTC plan on net may realize a (+) ROI for the state. Considering the unpaid caregiver costs that exist today, in the tens of billions, the payout will help many folks.
Viewing the plan, not as indemnity but social insurance–the rich cross-subsidizing the those with less–policymakers made a choice. But x-subsidization has its basis on moral and political grounds, and how the middle class solves its LTC quandary–a real one–has policy options we all have different views on. As inadequate as the Washington bill might be, it’s a starting point, and I am open to seeing how it plays out. Like the flaws you highlight, how the bills’ urgent defects get repaired, and whether the legislature follows up and monitors the rollout will determine its prospects.
I can’t imagine there won’t be some fixes down the road. It’s just pathetic the way it was put through. Really makes the WA legislators look bad IMHO.
I’m not a huge fan of it as social insurance (aren’t we already paying taxes that pay for Medicaid?) but I agree that’s a stronger argument for those who could self-insure this risk.
One correction: The WA Cares benefit isn’t $36,500 per year, it’s $36,500 total lifetime benefit.
Another point that I cannot find addressed anywhere. Washington State in its constitution has a prohibition against an income tax. How is this not an income tax?
Yes. In the example of the $800k income, you would pay in premiums over the ten years it takes to qualify for the insurance far more then your expected benefit would be. And should you decide to move to Montana or anywhere else other than WA state, you would not be eligible to receive those benefits.
Thanks for the correction. Makes my argument even stronger. It’s like a short-term LTC benefit isn’t it? It basically covers 4 months of nursing home care. Heck, Medicare gives you 3!
Own an S-corp with my wife and we both take reasonable W-2 wages. I’ve spoken with multiple insurance agents and all seem to be annoyed with this new law. Both my wife and I applied for cheapest life insurance with a LTC rider. Both applied for the exemption and both plan to cancel life insurance/LTC rider ASAP!
How much life insurance did you have to buy? (Premiums/Death Benefit etc)
I live in WA state. The WA State Medical Association told physicians that if you plan to retire within 10 years, you would not be able to use the state benefit even if you paid the 0.58% tax. That is our situation, so my wife and I bought LTCI since we would lose the 0.58% anyway and get nothing in return. Our agent told us that “National Guardian Life (NGL) [sells] the minimum-benefit (2-years each, $100 day with 3% benefit inflation increases).” Premium for my wife (59) and I (60) combined: $2,288.00/year. That is just $400 more than what the tax we would’ve had to pay if we did not opt out. My wife and got qualified just in time and will likely go with this minimum benefit.
Thanks for sharing your experience!
Had to buy a $50k life insurance policy to get the LTC rider. I think the premiums are around $60-70 per month. I’m in my late 30’s and despite my increasing weight and ability to rapidly bald, would be considered healthy:)
Thanks for sharing your experience.
I’ve observed another way to deal with LTC costs in non-WA states: get legally divorced, with asymmetric assets. The infirmed spends down to Medicaid levels.
Really interested to see what others think about this type of long-term care plan.
But I strongly suspect that Medicaid requires you to be divorced some prescribed period of time, for this to work. And it will make you look like a monster to those around you.
I suspect this may have been what Newt Gingrich did when his wife had cancer and he “divorced her while she was dying in the hospital”… that he was simply avoiding significant hospital bills and follow-up long-term care. (Newt didn’t really defend himself on this, because divorcing a disabled / dying person looks really bad, no matter how you spin it)
Just my opinion.
Lots of ways to game the system aren’t there? Sad that it’s even an option to do so.
Thank you for a very informative article. I think this article is a great example of the mantra to save and invest early and often and live below your means. Having to rely on LTCI or Medicaid is a scary proposition. Get on Medicaid and be a ward of the state. Who would want to stay in a Medicaid nursing home? Get LTCI and hope the insurance company is still in business. And then provide mountains of paperwork and phone calls to prove you really are deserving of the benefit. And you may lose all of your premiums if you end up not needing any LTC. Anyone who reads WCI, will not need Medicaid or LTCI.
I chose to pay the tax. My wife and I plan to work only 7-10 more years at the most and self-insure after that. I have friends who used the purchase and cancel option and at least one friend who used the $35k lump sum annuity option. I chose to think of it as subsidizing some of my fellow Washingtonians. I’d thought through a lot of these points before ultimately deciding to just pay the tax, but I really appreciated the section you wrote on the break points for spending down to Medicaid levels vs buying LTC vs self-insuring. That was very helpful for at least making me feel better about my decision.
Thank you for sharing your experience.
How about moving to a state that respects individuals? Might be difficult to do out there. I do wonder if anybody sued the state to stop this. Thanks
A few things are clear to me.
First of all, talking about “unintended consequences” assumes that all the attorneys in the legislature do not thoroughly understand insurance law nor have access to those that do. That would be a very questionable assumption. I’ve worked with state legislators and my guess is they knew exactly what would happen with regards to insurers pulling out of the state and everyone having to pay the income tax. This happened in many areas with Obamacare. BUT there was a government option, The Exchange.
You can’t enforce a penalty on someone who doesn’t buy a product that is unavailable in the marketplace.
Your politicians clearly I knew this could happen, because that’s exactly why Obamacare set up the government Exchange. These are politicians and they wanted to appear to fix the problem without being accused of raising taxes on everyone. (The WCI is correct that they are simply indirectly raising the Medicaid tax to cover LTC.)
Your State Legislature structured this insurance differently than they did the individual mandate under the Patient Protection Affordable Care Act Care Act / Obamacare, where if one doesn’t buy Private health insurance, one must pay the IRS a fixed annual $700 “penalty”. Your state has a progressive tax.
So therefore, there’s not a clear precedent for such a law with an insurance mandate at the federal level. The current US Supreme Court will likely shoot it down.
One additional thing, and it’s just my opinion. There should be a carve-out for those that want to “self insure”, similar to that which is done with Workers Compensation Insurance for business. (And I am quite aware that with WCI, the business has to post a bond). That makes me suspect that this is actually intended as a tax. And I’m shocked that those making below a certain level don’t have to pay this tax.
Please correct me if I’m wrong on any of this. Thank you.
And yes, I will call my state representatives and have them read your blog.
My wife and I do not live in Washington state… Fortunately.
I recently looked into long-term care insurance for my wife, and was told that she’s currently uninsurable due to an underlying health condition. (And she IS working. For those in a similar situation in Washington state, this is where the law will fall apart when challenged in court. It’s discriminatory… unless she can have an exclusion.)
What does the Washington law say about someone like her?
And for those of you planning to take care of your spouse in retirement at home… That both of you may be disabled, requiring long-term care 24/7. And one spouse almost always dies before the other spouse- also not leaving anyone at home to help care for the other.
Counting on children who have children of their own to take you in is not always the best plan.
The law says she can just pay the tax.
This post was in response to someone who stated that they intended to divorce their wife leaving her with minimum assets if she ever needed long-term care.
The assets would quickly be depleted. Then she would be eligible for Medicaid.
I also just thought that most courts would not allow this uneven distribution of assets if the wife had any kind of mental impairment, as a result of the disabling condition. And court are pretty smart when it comes to this kind of thing.
I’m from the government and I’m here to help!
If they really want to help financially they should put money in advertisements for their euthanasia law and call it a day
If you take advantage of their “death with dignity” act do your heirs get a credit back?
I just moved to WA after finishing training this summer, and was fortunate to have a residency friend already in WA who let me know about this ahead of time. I’m employed with a larger health system and my employer worked with a company to offer a Universal Life with LTC to employees (78k benefit) and advertised it as compliant with the requirements to opt out. I was able to sign up and be approved for this policy almost instantaneously, very easy to sign up and get the policy. This was fortunate as I also tried to go through an insurance broker for a similar policy (100k benefit Indexed Universal Life with LTC rider). The policy through my employer is ~600/yr vs 1000/yr through the broker vs thousands per year for the tax (potentially for 20-30 years in a high paying specialty). Seemed like a pretty straightforward financial decision at this stage of my career. I didn’t ultimately have to show any proof of insurance to get approved to opt out. At this point, I’m just planning to keep the policy since it’s not that expensive and I feel more comfortable being able to show proof of the policy.
Thanks for everything you do WCI.
Someone above is correct about not having to show proof of policy to every new employer, but you will supposedly need to keep your exemption letter (once approved by the state) to show to any new employer.
Since the maximum lifetime benefit is $36k my wife and I opted out with a private policy that we will cancel immediately upon receiving our exemption and self insure.
The state has received over 100,000 applications for people trying to opt-out. I found it interesting (though not surprising) that the exemption/opt-out application does not require that you upload or submit your LTC policy. You only have to attest that you have one and upload a form of ID. Not saying someone who couldn’t get a policy should just apply to opt-out any ways, but I certainly wouldn’t blame the person who did…
I was actually fortunate enough to learn about this sometime in September. I was scrolling through Reddit and saw a post on r/Washington and applied right away. Someone had mentioned state farm may still be offering it so i called them up, asked, and thanks to Jesus they were selling it. My cost was nowhere near the numbers you wrote though. My monthly bill is $65 BUT! I am 22 years old. I am also assuming I’ll get accepted since i did ask the broker specifically for LTC and mentioned wanting to avoid the tax. The main reason why i opted out is because i hate taxes, jay Inslee, and i plan to go to the moon when GameStop blows. I thought about cancelling once I get accepted but i read the packet they gave me and i didn’t know I had the option to borrow against it or even surrender it for cash. Due to that I’m thinking of keeping it since it is also much more flexible than the taxed version.
I live and work in WA state for a large tech company. Our employer’s HR department used it’s negotiating power to work with an insurance company to create an offer for all WA employees and was eligible for all employees in the state. I was told by the insurance agent that there was no miminum coverage requirement specified in the law if you want to opt-out so I selected the lowest cost offering which was a $25k LTC/Life policy. I thought it odd that I was not required to buy at least $36.5k in coverage to at least match the amount of the WA plan but I’m not complaining. My actual payment in this plan are about 40% of what I would pay for the WA plan. Some of my younger colleage pay about 20% of what the WA plan will cost. Forced insurance is a bad idea. I hate my private plan and would never have bought it if I wasn’t forced into an even worse WA manadated plan. All my peers feel the same way.
Thanks for sharing your experience.
Via email:
Jim and WCI staff,
A good friend recently forwarded me your article regarding WA State’s Long Term Health Care payroll tax.
I wrote a brief summary (June 2021) which I’m attaching to this email. It was sent it out to my clients (new RIA…growing group of clients), friends, and, most importantly, my elected representatives and other officials within WA State. Obviously, you have a much wider audience than I and you authored a great article. I hope it gets some traction in WA State and leads people to ask questions….many don’t even know about it yet!.
While there are several things that I find disturbing (as you’ll note if you read the attachment) I think the biggest issue is the fact that my elected WA State reps and officials (to include the Attorney General) back-pedaled off the topic and EVERYONE of them said there was nothing they could do. As though it was a done deal and water under the bridge. Interesting that none of them supported it but it passed anyway.
That is disturbing.
It’s terrible legislation and will not have the effect these legislators were led to believe (assuming they even took the time to debate the merits of the legislation…which is in doubt).
I do have a couple of points to add:.
1. I don’t think it started out with good intentions. I think it started out with misinformation from the insurance industry. I believe the insurance lobby approached WA State legislators. Although I have no proof of this, the unfolding of the payroll tax and my interaction with legislators leads me to believe they were grossly misinformed. Your quote from Ben Veghte supports my claim…the insurance industry wanted a government-backed incentive for the purchase of LTC- and they certainly wanted the commissions to go with it! WA State was a prime market!
2. Although many folks cannot afford the premiums of a LTC plan, they have other options. As you well know, most of the average family’s wealth is tied up in the value of their home. It is a viable plan for those who cannot afford a policy to use that equity to pay for the first entrants long-term care. It also neglects the fact that a large portion of in-home care is provided by family members for free. What this plan does is limit the options available to individual and family financial plans.
3. $36,500 is not enough to cover the average cost of long-term care AND, if you buy a policy, you have to purchase a greater amount than the WA State coverage (the fine print reads a private policy requires 2x the state coverage).
4. Portability? Don’t count on it…other states are going to realize the % payroll tax necessary to fund it and quickly realize it won’t be supported by the residents.
5. Most information I’ve noted states that the prime time to price and purchase a policy is in your early 50s to mid-60s. That’s when the idea of longevity and family history come into play. This payroll tax starts when you have W-2 wages and you’ll pay it for as long as you have them in WA State. Is it feasible to say that an 18 year old entering the W-2 labor force making “X” per year may actually pay more than the equivalent of the future benefit they would receive? Yes and a Definite YES based on #6.
6. Given that there is no ultimate tax limit on the legislation, I fully expect that WA will soon realize the status is substantially underfunded; raise the payroll tax in year two (when allowed); and thereby cause the demographic who could not afford a policy to begin with (they’d have to go the impoverished Medicaid qualification route) to pay more- and this is the very demographic group they wanted to “assist”!
You hit the nail on the head! The goal would be to self-insure through funding allocated for such an event (passed along to heirs if not needed) or to use home equity for the first entrant and down-size the residence.
I make it a point to note to my clients what to expect for long-term health costs by adding the national average to their last two years of life (in our planning). They see what it does to their estate and legacy goals. Then I model it showing the purchase of a couples policy and what it does to their estate after paying $4000/year for the rest of their life expectancy (usually starting at 55 until 90). It’s then their choice and none have opted for a policy.
The VA allows family members to be paid as caregivers for totally disabled veterans in the home.
Does this state program allow the same? (and I know that the benefits are almost comically small)
I doubt it.
“ The tax was coupled with a new program that provides a benefit of up to $36,500 per year”
From my understanding, the insurance covers $36,500 ( inflation indexed) per LIFETIME. Also capped at $100/day, up to the $36,500 maximum lifetime benefit.
Yes, you’re right. I need to get that corrected….
Totally planned to self insure. Tried to get an exemption – whole life with LTC rider or annuity with LTC. Guess pre-existing conditions even if from long ago preclude you from getting one. So planning to pay the ‘tax’ and forget about it
Thanks for sharing your experience.
My wife and I (~age 33 ) and I live in WA and have been working to opt out of this payroll tax. We learned about the upcoming law and started getting quotes for LTC insurance mid-July. Your post did a good job summarizing reasons that we prefer to opt-out of the state’s requirement. Due to our age, no insurance companies would allow us to purchase standard LTC insurance; the only option was to buy a Universal Life policy with an LTC rider. Our applications were submitted at the end of July. I received approval on September 5 and my wife was approved on October 11. (My wife is the Dr. and makes the higher income, so it is more important that she receives the coverage.) My wife’s premium was auto-drafted from our checking account on November 3, but mine was not; we have not received any paperwork with actual effective date of the policy yet. I’ll be reaching out, but it appears that our policies may have started at least a day or two past the deadline of November 1, rendering this whole process pointless. I don’t know if we can certify that we had a policy in place prior to November 1 if our applications were approved, but we don’t have paperwork showing that effective date. This has been quite a frustrating process.
I do want to note that the current 0.58% tax is likely to rise. House Bill 1087 requires that the pension funding council must set the premium rate “at the lowest amount necessary” to maintain solvency and that the premium can be adjusted every two years. In December 2020, an analysis commissioned by the WA State Actuary was released, which stated that the initial premiums should be 0.64% and may need to be as high as 0.79% to maintain solvency (https://leg.wa.gov/osa/additionalservices/Documents/LTSS.Webpage.Key.Financial.Metrics-Update.pdf). The state knows that this program is underfunded even before it has begun.
Thanks for sharing your experience. Interesting that the tax can go up even more.
Hi everyone, NY state seems to be considering a similar law: https://www.nysenate.gov/legislation/bills/2021/S9082
Curious if anyone has taken any preemptive measures or plans for this?
Thanks
Not the worst idea to do something preemptively given how hard it was to buy LTCI in WA once the law was passed.