#280 | Ready or Not: State Mandated Care in Washington
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The state of Washington has launched the WA Cares Fund, marking a milestone as the first state-mandated long-term-care insurance program. Ten other states are considering similar legislation (CA, CO, IL, MI, MN, MO, OR, NC, NY, and UT). Unfortunately, Washington’s failure to engage the insurance industry early on has understandably resulted in some insurers temporarily restricting or suspending long-term-care insurance sales there.
For Washington, W-2 employees will automatically pay the new long-term-care premium tax beginning January 2022 at $0.58 per $100 earned. The only way to avoid the tax is (a) obtain an exemption before the deadline with proof you own existing insurance or (b) run, and don’t walk, to purchase a new policy before Nov. 1, and also obtain the exemption.
Why States Are Acting: As aging Americans are increasingly in need of long-term-care services, it leaves states on the hook to bear the growing cost of expenses through Medicaid. The pandemic placed an additional strain on states’ budgets. For many, lost jobs meant lost revenue from income tax and sales tax, not to mention the burden of paying unemployment benefits. Billions in lost revenue have cut into their reserves with some states predicting shortfalls for years to come.
In Washington, the cost of care is among the highest in the country. It also happens to be one of nine states with no income tax. Mandating a payroll tax can help ease this burden. Consequently, it stands to reason that Washington is leading the charge. By reducing the pressure on its Medicaid system, the WA Cares Fund is estimated to save taxpayers $3.7 billion by 2052.
Best Intentions: Hats off to Washington for taking the bull by the horns. On May 13, 2019, Governor Jay Inslee signed the legislation. Soon lower-income Washingtonians will be better off with the opportunity to access up to $36,500 in long-term-care benefits beginning in 2025. (Higher wage earners will pay more in taxes than they can receive back in benefits. The same goes for younger employees who work for many years).
Regrettably, when politicians move forward to implement insurance legislation without first vetting it with the insurance industry, it can leave consumers, agents, and insurers at risk:
Risk to Consumers: If they purchase a tiny, private policy, expressly to circumvent the payroll tax (and successfully obtain the exemption from Washington), it can leave them with a shortfall of much-needed benefits. This is especially true if they subsequently allow their policy to lapse, ending up with a double whammy of not having private long-term-care insurance and also not having Washington’s benefit (permanently ineligible).
Risk to Agents: Setting the expectation with clients that their policies will be issued in time to meet the deadline – and then being wrong. (Some insurers are reporting a backlog in underwriting).
Risk to Insurers: In Washington, there are no metrics written into the legislation that require consumers to maintain their private long-term-care policy (yet they still fully expect to enjoy a lifetime of being exempt from the tax). The insurance industry is in the business of providing suitable, meaningful coverage that lasts a lifetime. It is not in the business of writing policies for tax avoidance schemes. Furthermore, when policies lapse, especially early on, it leaves insurers stuck with the cost incurred to issue them.
How Some Insurers Reacted:
* Suspended sale of traditional long-term-care insurance or of long-term-care riders
* Increased minimum issue ages to 40
* Increased the minimum daily long-term-care benefit amounts
* Require inflation options be selected
* Increased minimum initial premium on hybrid policies to $7,500 for issue ages below 60
* Increased minimum face amount to $250,000 for policies with long-term-care riders
* Decline applicants not seen by physician in last 24 months
* Restrict sales to career agents
* 100% commission chargeback for applications signed through Nov. 1 with lapses in the first year
Clear as Mud: In an informal survey, I asked 10 insurers if, as a gesture of good will, they had reached out to their existing Washington policyholders to notify them they already have an existing long-term-care policy or rider (as they may choose to apply for the exemption). With no responses in the affirmative, it is a reminder that initially Washington was not clear on which types of insurance qualify. (It’s also a reminder that insurers may not want to be perceived as giving advice.) On June 21, Washington finally disclosed the list of insurers with qualified long-term-care riders that meet their exemption.
Lingering areas of frustration:
* Do chronic illness riders qualify? No.
* If consumers allow their private long-term-care policy to lapse, are they still exempt from the tax? Probably. But who knows if Washington will ever do an audit and require annual re-certifications?
* If an employee spends years paying the tax, and then moves out of state to retire, is the long-term-care benefit portable? No.
* Suppose due to lengthy underwriting (attending physician statement, etc.) the long-term-care policy isn’t issued before the Nov. 1 deadline? Who will be at fault: Consumer? Agent? Insurer? Doctor’s office? What if this consumer is a young, highly compensated executive and could’ve paid $1,000 per year for a private solution, and now must pay $3,000 per year in taxes?
Despite serious concerns with the WA Cares Fund, overall progress has been made. Today we see the phenomenon of consumers reaching out and asking to buy long-term-care insurance. The demand is literally greater than the supply. Agents are seeing a windfall in sales and some insurers are still accepting applications, especially for the riders and hybrid products.
Good has come out of this legislation and will continue to be born. But for other states to improve upon what Washington has built will require collaboration. The WA Cares Fund is far from perfect. Interestingly, it represents: one small step for long-term-care insurance and one giant leap for state-mandated care.
Ramona Neal, CLU, ChFC, CLTC, REBC
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