When was the last time you had the good fortune of working in an insurance market that was experiencing a 47 percent growth rate? When was the last time you told an employer that the federal government would provide him with favorable tax treatment on premiums paid on a health or disability income insurance policy? The employer could pick the people he would like to cover. When was the last time the federal government gave you all the fireworks you needed to make every day the Fourth of July? If the answer to these questions is never, you aren’t selling multilife long-term care insurance (LTCI).
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Taxpayer Relief Act of 1997 give you a tremendous window of opportunity to boost your LTCI sales, and you don’t have to be a big hitter to take advantage of that opportunity. Through these acts, businesses have a tax incentive to offer LTCI either as an employee benefit or a voluntary benefit at a discounted rate. This is because it wants Baby Boomers to stop thinking that Medicaid is an entitlement program that eliminates their need to buy LTCI.
Accelerated payment policies are LTCI policies that guarantee no more premium payments after a number of predetermined years.
The truth is that only LTCI provides your clients with choice—the choice of receiving long-term care services at home, in an adult day-care facility, an assisted-living facility or usually only as a last resort—in a nursing home. On the other hand, unless you require just a minimum amount of care, Medicaid puts everyone in a nursing home—even if they don’t have Alzheimer’s and don’t need to be in a facility.
The HIPAA regulations are easy to understand. They pertain to “tax-qualified long-term care policies” and divide businesses into three categories: self-employed individuals, C corporations, and all others including partnership liability companies and S corporations.
A self-employed individual and spouse can each deduct as a medical expense a portion of their premium payable for a qualified LTCI policy. The amount that may be deducted in 2003 will not exceed the Age-Based Maximum Deductible Amount listed in the table below. The nice thing about this deduction is that it increases each year because it is adjusted for inflation. For the deduction to be allowable, it cannot exceed an individual’s earned income derived from the trade or business that paid the premium.
In addition, the self-employed individual and spouse may be
able to deduct the remaining eligible LTCI premium as an itemized
medical expense deduction, but only to the extent that the
remaining premium and other medical expenses exceed 7.5 percent
of their adjusted gross income (AGI) in nonreimbursable medical
AMOUNT FOR 2003
Section 213(d)(10), Internal Revenue Code
|Age Before Close
Of Tax Year
|2003 Tax Year|
|40 or younger||$ 250|
|41 to 50||$ 470|
|51 to 60||$ 940|
|61 to 70||$2510|
|71 and older||$3130|
When a C corporation pays the LTCI premium for the owners (they must be employees of the corporation) and their spouses as well as for retirees and their spouses, that premium is deductible as a reasonable business expense to the corporation. The benefits received from the policy and the LTCI premiums paid by a C corporation are both excludable as income.
LTCI coverage is not an eligible benefit through a company’s cafeteria plan, commonly called a Section 125 Plan or a Salary Reduction Plan. This means that LTCI premiums cannot be funded with pretax dollars. Because of this, LTCI is not subject to discrimination rules or testing. This provides the employer with tremendous flexibility. He can offer different benefits to different classes of employees and can even choose to pay premiums for only one class of employees. The employer can elect to pay the premium for select key employees and their spouses and offer coverage on a voluntary basis to the remaining employees. If the employer sponsor does choose to pay the premium for all or some of the employees, the employer can pay for a minimum benefit plan for the employees and a plan with all the bells and whistles for key employees and their spouses. The employees can then purchase additional coverage for themselves and coverage for their spouses on a voluntary basis.
However, the rule is that if the employer decides to pay for coverage for a definable class of employees, for example, all managers who have been with the company for 10 years, all managers fitting this description must be covered. Any manager falling within these parameters in the future must also be covered when they qualify.
Partnership, limited liability companies and S corporations
When the employer sponsor is a partnership, a limited liability company or an S corporation and pays the LTCI premium for its employees and their spouses, none of whom are partners, members/owners or shareholders of an S corporation that owns more than 2 percent of the stock in the entity, the premium paid by the employer for LTCI coverage is deductible as a medical expense. Benefits received from the policy are not taxable, and employer-paid premiums are excluded from income.
Partners, members/owners or shareholders owning more than 2 percent of the stock in an S corporation are considered to be self-employed. The employer can still deduct the LTCI premium paid for these individuals and their spouses, but the premium then passes through the business and is deemed to be "distributable" income to the self-employed individual and spouse. Both can then deduct as a medical expense an amount up to, but not exceeding each spouse’s Age-Based Maximum Deductible Amount listed in the chart above. This amount is adjusted annually for inflation and has increased every year.
For example, in 2003, if an employer pays the LTCI premium of $1,500 for a self-employed individual who is 55-years-old, the $1,500 is deemed to be "distributable" income to the self-employed individual who can then deduct $940 as a medical expense on his personal return. The same thing would be applicable for the spouse of the self-employed individual, and the deduction would be based on the spouse’s age.
In addition, partners, members/owners or shareholders deemed to be self-employed individuals and their spouses may be able to deduct the remaining eligible LTCI premium as an itemized medical expense deduction. They can do so only to the extent that the remaining premium plus other medical expenses exceed 7.5 percent of their AGI in nonreimbursable medical expenses.
An array of possibilities
The multilife LTCI market offers a tremendous array of possibilities. A famous sales trainer once said: “The key determining factor for most people on whether they buy or sell a product is WII-FM.” This stands for “What’s In It For Me?”
What’s in it for you is selling a product that contains three levels of winners. The business wins by being able to offer the partners, members, shareholders and employees a product that many experts now agree has become a critical component of sound financial planning. If businesses want to retain their key employees, it’s essential that they keep improving their employee-benefits package while staying within their budget constraints.
The insured wins because he has filled a possibly devastating financial void in his retirement-planning package. The advisor certainly wins by increasing first-year and renewal commissions, starting today.
Harris A. Kivitz has been selling and conducting agent-training seminars on LTCI for 26 years. He specializes in the LTCI multilife executive carve-out and group markets and is a consultant for Corporate Financial Services. You may reach him at 800-446-7872 or at firstname.lastname@example.org.