If you are fortunate to live to 83,
you will have lived 30,000 days on this beautiful blue planet.
The first 10,000 days, you grew from a child, dependent on parents, to an adult, striving for an education. The next 10,000 days, you worked hard to create a professional career, marriage, family, and community ties. The last 10,000 days are for you to fulfill heartfelt dreams; to master new goals; to protect your health; to reflect on gratitude.
In the present moment, we often put aside concerns for future health.
Here’s an early warning: Whether you’re the head a company or you’re a member of the C-suite, you could fall through a gaping hole in your executive benefit program those last 10,000 days unless you secure the safety nets available to you now.
An employer-paid benefit, executive long-term care insurance (LTCi) attracts, rewards, and strengthens retention of select executives for their contribution and loyalty to the business. If you don’t offer LTCi to your executives, we ask that you reconsider.
Executives play a crucial role in the larger corporate structure. Typically, their responsibilities are more demanding than those of the average employee. Also, the pressures on them are greater from innovating new products and expanding revenue to controlling costs and managing human capital. When companies fail to acknowledge these facts, they can lose coveted talent to other employers.
Self-insuring for long-term care demands a financial sacrifice many executives are unwilling to make. Consequently, an LTCi policy may be the only option available for executives to manage their lives after accidental injury or sudden health complications. Without LTC coverage, one misses a critical link to security in later life.
Look at the facts:
- One out of every two people (52.3%) turning 65 will experience a long-term care need during their lifetime.
- Those in the highest income quintile (22%) face a long-term care need of two years or longer.
- Median annual nursing-home cost for a semi-private to private room, $82,125 – $92, 378; however, if you’re a Manhattanite, you’ll need to pull together a whopping $164,250 per year in 2016 dollars.
What’s more, you need coverage to help you conserve assets for personal use; preserve an estate for children; ensure against becoming a burden to them; and, to minimize physical and emotional strain on a caregiver spouse
Without a robust LTCi policy, you will face other challenges.
At least 15 percent of individuals turning 65 between 2015 and 2019 will spend more than $250,000 on long-term care, absent a policy. Can you save and set aside a quarter of a million dollars in time?
Without an LTC policy or substantial savings, your family is severely exposed in a long-term care event. Your spouse will be allowed to retain only $120,900 in assets for you to be eligible for long-term care benefits provided by Medicaid.
More than seven million Americans own long-term care insurance policies. As recently as 2002, a thousand or so insurers offered the product, Ray Farmer, director of South Carolina’s Department of Insurance explained in a CBS News interview. “Now there are probably a dozen left,” he said, due to the rising cost of care and claims.
So, you need it. Your executives need it. And soon.
Clearing the Hurdles
No doubt, we’ll all agree that executive turnover can be brutal on a small, mid-sized or major company. The cost of losing one key executive causes untold lost productivity. To replace the executive can cost the employer 2.5 times of the departing executive’s annual salary. One effective way to secure the executive ranks is the provision of a robust benefits program, the best of which include LTC coverage.
The employer buys a long-term care insurance policy for each member of the executive group. Let’s say a company employs 500 people, and a small group of executives directly drive the strategic growth of the business. Can an employer risk discrimination against the entire workforce if it only covers a small group of executives? Isn’t LTCi prohibitively expensive? What about full medical underwriting?
We’ll answer these and other important questions in this post, the third in our services of executive benefits.
In our first post, we discussed the importance of disability insurance, when you cannot work due to an unexpected health setback. Then, we addressed the need for executive carve-out life insurance with death benefits commensurate with the highly compensated executive lifestyle.
Similarly, LTC coverage can be offered to a select few (an executive carve-out) with non-taxable premiums for the employer; job portability and control for the executive.
Unfortunately, few people are prepared to handle the costs of long-term care. On average, it costs
$46,000 a year for nursing home care in the United States. In some regions, this figure can soar to
$100,000 and more. Further, costs will continue to rise.
As a result, 70 percent of all single employees who require long-term care can be wiped out financially within a year. Half or more of married couples can face bankruptcy if one spouse enters a nursing facility for a year as their existing assets must be spent down to fund the care—without LTCi coverage.
Long-Term Care Defined
LTCi is business insurance that allows employers to insure a select group of their workers for the long term. With the increasing costs of semi-private and private rooms in nursing homes, protection from such long-term care costs makes good financial sense for both employers and executives.
Simply put, a long-term care policy makes it possible to deliver care in the home or in a facility (semi-private or private room) to individuals who need assistance with the activities of daily living such as feeding, bathing, dressing, or handling personal hygiene, defined as toileting, transferring, and incontinence.
Specifically, you meet the definition of long-term care when the individual is unable to perform any two of these six activities. What’s more, if the person suffers severe cognitive impairment as in Alzheimer’s disease, he or she is a candidate for long-term care.
Apart from nursing home care, alternatives are limited to an adult day care center; home health care; an assisted living facility, which enable people to live in an apartment-like setting; or hospice care, which is purely for the terminally ill.
Compared to traditional medical care, long-term care is designed to assist someone to live as comfortably as possible, although it may not help improve or correct underlying medical problems. Long-term care may also include care management services that evaluate a person’s needs while coordinating or monitoring the delivery of services.
An employer-sponsored LTCi group plan can provide significant advantages like discounts and streamlined health underwriting and remain 100 percent voluntary with the employee paying the whole premium. But you need a better package for executives. And, importantly for employers, coverage can pinpoint select employee groups, the arena for an executive carve-out plan, and offered to spouses, partners, parents and parents-in-law, retirees and even spouses of retirees.
Employers—Don’t Look Away
Unfortunately, many employers overlook the need for LTCi coverage, believing their executive benefit plans adequate to cover retirement goals, making little or no provision for long-term care.
This oversight surprises me because employers conscientiously invest in benefit plans designed to assist highly compensated executives meet retirement goals yet stop short of protecting that retirement against the erosive nature of long-term care costs.
These costs can devastate a person’s lifetime savings and cost corporate America double-digit billions in lost time, lost executive talent, and lost productivity.
Of the 30.2 million small businesses in the U.S., most with fewer than 100 employees, and the 18,500 corporations with 500 or more employees, only about 25,000 (LIMRA 2010) offer long-term care to their employees. This tiny fraction indicates the true width of the needs gap.
Further exacerbating the situation, we cannot depend on the government to help cover long-term care cost; it is the largest unfunded liability facing Americans today. Neither Medicare nor Medicaid is set up to cover long-term care.
Employer Options for Executive Carve-Outs
As the employer, you are not required to offer coverage to lower-level employees because long-term care insurance is not subject to “discrimination testing.” An employer can “carve out” selected key executives for LTCi from the pool covered under the group plan and still confer the group cost-savings to the executive. Premiums for group coverage typically are lower than premiums for individual policies.
What’s more, underwriting is more lenient when policies cover more than 15 executives. Insurance providers lower adverse selection risks when more are covered, and lapse rates are lower because employers pay the premiums.
Of course, if your employer does not offer any form on LTCi, you can (and should) buy an individual policy.
Here’s a brief discussion on the preferred policy features available for these immensely valuable plans:
Preferred Policy Features
As you study the LTCi options, look for policy features to complement your personal situation and include them in your or your executives’ carve-out policy:
If you’re in good health, you should get coverage. Try to avoid back-end underwriting because the insurer may subject your application to more scrutiny before a claim approval.
Guaranteed Issuance and Renewal
Need help here Joe. Is there guaranteed issuance and renewability with an exec carve-out?
ADL Benefits Trigger
Consider a policy that triggers benefits based on the insured’s inability to perform two of six activities of daily living (ADL).
The time a policyholder must wait before becoming eligible for benefits matters. Best to select between 0, 30 or 90 days.
Daily Benefit Rider
Daily benefit amounts vary. Be sure to understand the full daily cost of care for a nursing home, assisted living facility, or home and community-based care in your state. One easy way to calculate a daily benefit: Take the average cost of care where you live (or likely to live when need care) and subtract from that your daily income. For instance, nursing homes cost $300 a day, and your income is $3,000 a month, or $100 a day, then your daily benefit should be $200 a day.
Cost-of-living adjustments built into your policy can keep pace with the rising cost of nursing home care.
If you end up not using your policy, your premium amounts return to you. This benefit can cost you about half or more of a non-return policy.
Fully Paid-Up Coverage
Employers can purchase coverage that becomes fully paid in ten years, an attractive benefit for executives given policy portability. New policy riders let the insured expand the total dollar amount coverage if long-term care is necessary early in life.
Other options include premium payment (typically made on an annual, semiannual and quarterly basis); choice in waiver of premium, professional services, home care services, respite care, alternative plan of care, restoration of benefits, and more. These complex choices warrant your working with a long-term care expert who can assist in key decisions with sound analysis.
Kimberly Lankford, author of The Insurance Maze: How You Can Save Money on Insurance-and Still Get the Coverage You Need suggests anyone interested in LTCi should do their homework:
“Examine waiting periods in relation to cost. The longer the waiting period before coverage kicks in, the lower the premium. A 60-day waiting period, she says, typically is the best balance.
Consider the length of the benefit period. The shorter the period, the lower the cost. The average nursing home stay is about two and a half years . . . coverage can be purchased for several years or for a lifetime. Most, she says, select the three-year period.
Buy coverage while the insured is in his or her 40s or 50s, when premiums are lower. A policy with a $200-a-day benefit and five percent annual inflation protection may cost a 45 year-old $1,824 per year. At age 55, that cost jumps to $2,227. At age 65, the cost becomes $3,427.
Stick with a large insurer that has a history of not raising premiums. Long-term care insurance premiums may rise over the years based on the claims paid on the block of people that are insured.”
LTCi Tax Advantages to Both Employer and Executive
Under the Health Insurance Portability and Accountability Act of 1996, LTCi policies that meet certain requirements may be eligible for federal income tax advantages, known as “qualified” LTC insurance. Those that do not meet these requirements are “non-qualified” LTCi policies. When deciding whether to purchase a qualified or non-qualified policy, tax consequences should be one of many factors you consider.
In an executive carve-out policy, employers can deduct the cost of an executive’s LTCi premiums. A C- corporation can deduct 100 percent of the executive’s premiums. For Subchapter S corporations, limited liability partnerships and partnerships, however, the IRS rules limit income tax deductions, based on the insured’s age.
These policies are “tax-qualified.” Benefits are not considered taxable income to the insured. Executives pay no income tax on employer-paid premiums. Even though some companies prefer to let employees purchase policies themselves, executives can still receive a premium discount if the company offers the policy.
If an employer offers coverage and the employee pays premiums, the policy is tax-qualified (policyholders won’t pay taxes on their benefits). Also, employees with medical expenses, including dental, exceeding 7.5 percent of their adjusted gross incomes, can deduct long-term care premiums. A person’s age determines the deductible amount.
The LTCi contract must also meet the requirement of Consumer Protection Provisions. A contract may be considered a qualified LTCi contract even if benefit payments are made on a per diem or other periodic basis, and even if the expenses happen during the period to which the payments relate. Non-tax-
qualified LTCi policies exist. However, the premiums are not eligible for the favored tax treatment that tax-
qualified policies receive. If your tax situation calls for a qualified LTCi plan, consider these requirements:
- only protection provided in the contract must be qualified long-term care services
- contractdoes not pay for expenses covered by Medicare
- contractis guaranteed renewable
- contractdoes not provide for a cash surrender value or other money pledged, assigned, or borrowed
From a tax standpoint, participants in an employer-paid LTCi plan for a C-corporation may exclude from income any premiums the employer pays (IRC Sec. 106). Employer expenses for LTCi premiums paid on behalf of employees, their spouses, retirees, and their spouses are deductible as a business expense.
Even if the plan is discriminatory in favor of highly compensated employees, the employee’s exclusion of the premium paid by the employer, and the employer’s deduction for such premiums, are permitted. The IRS allows you to deduct qualified medical expenses that exceed 7.5 percent of your adjusted gross income for 2018.
Other essential tax issues apply specifically to partnerships, S-corporations, and limited liability companies. Review these different issues with a benefits consultant or tax accountant.
Will you be the one out of every two people who need long-term care in your lifetime?
Can you afford the risk of no insurance?
I cannot overstate the value of an experienced and knowledgeable professional to guide you through the complexities of planning a suitable long-term care benefit plan. By planning for this life stage now, you will determine the level of comfort you will enjoy in Act Three of your life’s play.
To your well-being in health, wealth, and life
Joseph E. Henehan, president and chief executive officer
The Henehan Company
In our practice, we are often asked to build total compensation and benefit plans that give employers the extra power to attract, reward and retain talented executives and key employees.
One common dilemma for employers is how to reward select executives. A group executive carve-out plan is a smart way to reward key executives beyond what is available through a typical group term life insurance plan.
Group term life insurance is a standard in most employee benefit plans, and typically features a minimum $50,000 death benefit pay-out—woefully short of the financial needs of most top executives and their families. Even if the plan stipulates a six-figure pay-out at death, it is doubtful the money will adequately cover mortgages, college tuition, or other life essentials, when the primary income-earner passes, leaving the family with unpleasant options.
So, let’s say, you’re an employer with a top-notch executive team. And you’ve covered your entire leadership team on a group term-life policy with a six-figure death benefit. The typical policy contract will include provisions that may raise premiums and reduce benefits.
For example, what happens when your executive turns 65? Depending on contract provisions, coverage drops: the death benefit on that group term-life policy reduces by 25 percent; at age 70, it drops by 50 percent; at age 75, it drops by 75 percent. What’s more, the presence of older executives in the risk pool pushes up rates for everyone in the pool.
Worse yet, the executive cannot easily go out and replace the policy with permanent life insurance because premiums will rise substantially, right when income decreases at retirement. By this time, too, the executive can face health hurdles such as passing the medical exam, common to elder years.
Executives can easily lull themselves into a state of false security, thinking their group term-life policy will carry them throughout life, a high-risk assumption. Here’s why:
Limits of Group Term Life
Ordinary group term-life insurance carries a non-discrimination requirement (everyone must be treated equally). If the employee retires or leaves an employer (or high expense to continue it) and imputed income costs for coverage over $50,000.
- Coverage must be provided on a nondiscriminatory basis (If not, employees may face disadvantaged tax treatment and employer’s premium payments may become taxable income to plan participants);
- Coverage is adversely affected, reduced or terminated at retirement (If executive wants to obtain permanent life insurance, premiums increase when income decreases);
- Coverage is lost upon termination (if executive leaves employer, coverage stops);
Consider the Executive Carve-Out Solution
An executive carve-out life insurance plan rewards key, tenured executives, managers or team leads beyond standard group term-life insurance benefits. Those deemed eligible for this special policy can access potentially significant life insurance benefits capable of accumulating cash value over time.
Inside a Carve-Out Plan
When eligible for a group carve-out plan, the executive holds onto his or her $50,000 of ordinary group term-life insurance coverage, then the employer subsumes and supplements the coverage with a higher value universal life (UL) insurance plan. The employer decides which individuals it wants to “carve-out” of the standard term-life policy.
A UL policy upgrades the quality of insurance benefits because 1) it is portable from employer-to-employer; 2) it can create supplemental retirement income through its cash value; 3) employers can be highly selective and offer this policy to only those executives or employees making the greatest contribution to the company because the non-discrimination rule does not apply.
Carve-Out Benefits to Employers
If you’re an employer, or an executive who wants your employer to know the critical advantages of group carve-out plans, please note these plan benefits:
- Reduces potential for a discrimination violation in group term-life insurance
- Adds no additional costs unless death benefit increased or supplement contributions made
- Provides better cost efficiency than group term plan
- Gives freedom to selectively limit participation
- Provides a current employer a tax deduction on all premiums paid
- Encourages executives to participate in plan and stay the course
Carve-Out Benefits to Executives
A select group of top executives stands to benefit from a UL carve-out plan even more than the employer. With a separate plan, they now realize:
- An opportunity to maintain death benefits beyond retirement
- Tax-deferred accumulation of voluntary contributions
- Policy ownership and portability across employers as the policy continues in force
- Ability to use cash values to supplement retirement income
Carve-Out Options for Plan Designs
Employers can choose from three primary designs, each with pros and cons. See chart below.
Executive Bonus Plan
Premiums tax deductible to employer
Taxable income to executive
Executive owns policy
Employer cannot cost recover
Executive accumulates cash value to add to retirement income
Does not incent executive to remain with employer
Death Benefit Only Plan
Employer holds cash value
Employer premium payments not tax-deductible
Employer can deduct benefits payment
Benefit to beneficiaries taxed as income
Strong executive retention tool
Endorsement Split-Dollar Plan
Little to no tax implications if plan tweaked
Premium paid to employer not tax-deductible
Employer can cost recover expense
To buy-out employer policy rights requires substantial cash
Moderate retention effect
Of course, this chart simplifies a complicated topic. Allow the professionals at Henehan review the intricacies of these policies with you to ensure you can make an informed and successful decision.
Managing the Tax Bite
Tax implications are often the deciding factor as to which policy will suit your company. The IRS requires employees to report the value of group term-life insurance coverage in excess of $50,000. The IRS then imputes a value to that “excess coverage.”
These “Table I costs” are based on government rates and shown in the chart to the right may be higher than the actual coverage cost.
Consider that before a carve-out, an eligible key employee could hold $250,000 in group term-life insurance coverage. Of that coverage, the IRS taxes amount above $50,000 as imputed income.
Here, the company would be taxed on $200,000, representing a significant tax consequence. However, after the carve-out, the employee holds $50,000 in group-term coverage, capped at that level to avoid sustaining the imputed income and any tax penalties.
Since the employer pays the group UL carve-out premium, it also pays the policy costs levied on a per-policy or per-thousand-dollar basis. That’s why the executive’s voluntary contributions (in excess of the minimum premium) result in better returns than the policy’s interest crediting rate may offer.
If the executive makes additional voluntary premium contributions of $6,000 each year for the 20-year period, the cash value at age 65 increases to $282,000, or $274,500 in added funds. In other words, the $6,000 voluntary contribution made each year accumulates to almost $275,000, an approximate 7.3 percent annual return.
The table below assumes your executive saves $6,000 annually in a 36 percent marginal income tax bracket. The difference swells to an additional $73,108 at the end of 20 years at a 7.55 percent assumed interest rate. See chart below.
When we consider growth in the policy’s cash value as entirely tax-deferred until withdrawn, the 7.3 percent return may be much higher considering the executive’s marginal income tax bracket. Due to the FIFO tax treatment afforded any policy withdrawals (not a modified endowment contract) the executive’s voluntary premium deposits become a smart tax-efficient investment strategy.
So, an employer-funded UL carve-out policy provides necessary additional coverage, which grows in cash value over time. Both employer and executive benefit from tax savings and administration with the beauty of added retirement income for the executive—an excellent way to hold onto your best talent. And for the highly compensated executive, any form of tax deferral is worth pursuing.
To your life well-lived,
Joseph E. Henehan, president and chief executive officer
The Henehan Company
What happens if one of your top executives becomes disabled?
Will he or she be able to support their families?
Make the mortgage payments?
Keep the kids in college?
By age 65, one in three working Americans will face a disability lasting more than three months1
Unexpected disability can devastate employees, especially highly compensated executives earning $100,000 or more per year, without adequate disability insurance. A Harvard study shows that nearly half of all personal bankruptcies and 48 percent of all mortgage foreclosures stem from illness of injury disabilities.
Employers cover most of the more than two million top executives in the corporate market in 2018, with group disability policies. But there’s an overlooked problem: They cover typically only up to 60 percent of salary during the disability. Sixty percent of what?
Unfortunately, many executives and even those HR managers who communicate benefits believe they’re adequately covered when, in fact, they do not fully understand the limits of their policies.
For instance, total executive compensation will be far greater than salary alone and may include:
- annual and long-term bonuses
- commission income
- partnership distributions
- restricted stock units
- lost deferrals/employer matches
These numbers add up, surpassing the annual salaries of high-earners. For example, one corporation offers a group long-term disability plan, covering 60 percent of salary, but with a monthly benefit cap at $15,000.
Employer-provided group disability plans do begin to help employees weather through an injury or illness. But they do not adequately protect ‘an important class of employee’—senior management and executives. Individual Disability Insurance can fill the gap.
Meet the SVP of Finance, Rachel Warden, who earns $300,000 annually with an annual bonus of $180,000 for total compensation of $40,000 per month. Under her employer’s group disability plan, she’s limited to 37.5 percent coverage versus 60 percent for lower-earning employees—a case of discrimination?
What happens to non-working family members when your executives go without adequate disability insurance? How do they carry the burden of your lost income?
Sell the family home? Move in with relatives? Give up college plans to work instead.
The Life Insurance Market Research Association (LIMRA) says that 70 percent of U.S. households with children under 18 would have trouble meeting everyday living expenses within a few months if a primary wage earner were to die or become incapacitated.
Executives are no more immune to illness and injury than anyone else. What’s more, top-income earners can just as easily fall into a living-paycheck-to-paycheck syndrome. And have. It’s all relative.
Mandate for the Underinsured
Group disability policies leave most high-income earners underinsured. If your full income power is worth $40,000 a month, how will you live disabled on $5,000 a month? See charts below:
Look at the difference with an additional (individual) disability policy.
As an employer, ask yourself the question your executives ask:
Can I replace a year of lost earnings if I’m disabled?
As CEO or business owner, can you?
Some of the executive population mistakenly believe that worker’s comp and social security disability insurance (SSDI) will cover a work-related illness or disability. In 2016, only one percent of American workers ever missed work due to illness or injury, so small as to not create a ripple. Besides, SSDI only approved 34 percent of all claimant applications from 2006 to 2015, leaving the plurality of need unmet.
Quick Tutorial on Disability Insurance
Executive disability policies supplement typical group policies by adding a critical layer of well-defined, extra income coverage. They can:
- cover more types of compensation
- better define disability and likelihood benefits payout
- extend the duration of benefits payments
- provide a hedge against inflation
Remember, policies are usually designed to provide a tax-free disability benefit, as such, a larger net benefit to the disabled participant. Your executive owns the policy. It’s also portable and extendable beyond the executive’s separation from service.
Many factors influence the cost of premiums for supplemental or individual disability income insurance. Generally, premiums may range between 1.5 and three percent of the executive’s gross income.
Age, gender, smoking, and the carrier’s claim experience all affect the premium price. Pre-existing health conditions are acceptable; they may add 25 to 100 percent to policy cost to cover added risk.
Many carriers provide plans that carry a DI benefit period payment maximum of two-, three-, five- and 10-year. Once again, the price increases to purchase an extended benefit period.
Disability policies stipulate a waiting or elimination period before eligibility for benefits payment which may require a 30 – 45 day wait period before the first benefit processes.
Benefits to Employer, Business Owner, and the C-Suite
With supplemental disability insurance, you do not have to choose between doing the right thing and doing the smart thing. You can do both.
Due to employers’ flexibility in determining eligibility, you can target with precision which group you want to benefit. Some call this an executive carve-out, where you separate those valuable contributors to the bottom line from those valuable contributors without line responsibility.
Best of all, as few as three participants can still earn substantial carrier discounts. Up to five participants, you may even warrant guaranteed issue, forgo painful medical underwriting, and no exclusions on pre-existing health conditions. Now that’s doing the right thing.
With IDI, you will increase the income replacement protection of your executives from the net 37.5 percent now to up to 75 percent of participants’ current pre-tax income. Talk about a glue-in-the-seat strategy right when the war for top talent rages on in most all vertical markets.
Let’s briefly address the issue of taxes and how it affects employers:
At Henehan, we never want to see you or your executives ill or disabled. But chances are, sometime in your lifetime, we will.
So, when was the last time you reviewed your disability policies, group or individual?
Please allow our insurance professionals to audit your current group disability policies. We can fill the coverage gaps for yourself, your highly compensated and, perhaps, save you money on premiums.[This is the first post in a series on supplemental executive benefits. Next, group life insurance.]
To your life well-lived,
Joseph E. Henehan, president and chief executive officer
The Henehan Company