One of the biggest policy changes in recent history came when insurance companies began using the ability to perform Activities of Daily Living (ADLs) as a metric to determine who was eligible for long-term care insurance. Previously, companies could choose which candidates qualified based on arbitrary data; now, a specific set of guidelines took the guesswork out of the equation. “Long-term care insurance became more viable for people because it was no longer a question of whether the insurance company wanted to pay or not,” explains Jason Andrew, a financial advisor with OFS Financial Services, located at Olympia Federal Savings (OlyFed).
Recently, Washington State passed a new tax law that will also substantially impact long-term care insurance. The new Employee Payroll Tax Law for Long-Term Care Benefits is a mouthful, and it’s also complicated enough to require an expert like Andrew to break down what it means for Washington State residents and what factors to have in mind when considering different options.
First, the law. Starting on January 1, 2022, each Washington employee will be assessed a premium of .58% based on their wages for long-term care insurance. Once they become eligible, employees can receive approved long-term care services of up to $36,500 over the course of their lifetimes. To be eligible, you must be 18 years old, a resident of Washington, have been either temporarily or permanently vested (meaning you have contributed taxes over time or at some point), and have been identified by the Department of Social and Health Services to need assistance with at least three daily activities such as bathing, dressing, or eating. Benefits begin for qualified beneficiaries in 2025.
But what does all of that mean? According to Andrew, the first thing to understand is what long- term care insurance is and how it works. The essential function of such policies is to cover costs of in-home care or assisted living if or when someone needs it in their later years. Someone in their early 60s, for example, will purchase a policy and decide on the amount of coverage they want. The policies will usually cap the amount paid out per day and over a lifetime. From that point on, the policyholder will begin paying monthly premiums.
They may never need to use the insurance, but if they reach a point where they are unable to do at least two out of six ADLs or are suffering from Alzheimer’s or dementia, the policy will kick in. Policies typically cover all or part of in-home care and assisted living facility costs for people who qualify.
“The biggest benefit is that it offsets how costly long-term care is in general,” says Andrew. “In Washington, it costs an average of $90,000 per year for a care facility. If you’re paying $7,000 to
$8,000 a month, your assets can be eaten up quickly if you don’t have insurance.”
Now, rather than seeking personal policies, every employee in Washington State will automatically pay for their own long-term care insurance policy unless they choose to opt out of the program. Employees have a one-time exemption opportunity from the tax if they show their employer proof of having purchased comparable private long-term care insurance before November 1, 2021.
“We’re telling people to talk with their financial advisors,” says Andrew. “Does it make sense for you to get your own policy and opt out, or to accept the tax? Everyone’s situation is different.”
Such decisions will depend on variables like income level, age, and where you intend to live in the next 10 years. The way the program is set up, anyone who moves out of the state is no longer eligible for benefits, even if they’ve been paying premiums. Also, the more money an employee makes over the years, the higher the taxes or premiums. To qualify as permanently vested, employees must have worked in Washington for at least 10 years; those nearing retirement could potentially pay into the system for several years yet still be ineligible for benefits.
Perhaps the biggest consideration is the benefit cap of $36,500, which equates to approximately four months of living expenses in a nursing home or assisted living facility. “If you’re someone who is making a six-figure salary, it’s going to make sense for you to get a private policy,” says Andrew, “because you’re paying a lot more into it than you’ll receive as a benefit.”
Regardless of what individual employees decide, the most important action anyone can take regarding long-term care is to have a plan, he maintains. “You need to know whether your family members will be looking out for you, whether insurance will play a role in that, and the part Medicaid will play,” he says. “You need to discuss these things with your family. Insurance is just a piece of that.”
Learn more by visiting the OFS Financial Services Website.
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