The Trump Administration is (very quietly) looking at ways to reinvigorate the flagging private long-term care (LTC) insurance market. The recommendations are expected to surface later this year. And they likely will be very modest.
The ideas being considered would make some regulatory changes and create new tax subsidies to encourage consumers to purchase private LTC insurance. They would send an important signal that the Administration recognizes that this private insurance currently is not serving many middle-income consumers and that the federal government should work with states to “regrow” the private market. However, the proposals are unlikely to build much interest among those with middle-incomes.
To address LTC insurance, the White House set up an interagency task force that includes representatives from Treasury, the Department of Health and Human Services, the Centers for Medicare and Medicaid Services, the Internal Revenue Service, the Office of Management and Budget, and the Department of Labor. The effort is part of a much broader review of financial services laid out in Treasury’s 2017 Report on Asset Management and Insurance. The link is here. See page 143.
Focused on recommendations
The Task Force seems primarily focused on a set of recommendations proposed in 2017 by the National Association of Insurance Commissioners (NAIC).
Some would make regulations more flexible. For instance, updated federal rules could allow an expansion of products that combine life insurance or annuities with LTC insurance. In recent years, these combo– or hybrid– products have dominated the long-term care insurance market, though sales remain relatively modest. Perhaps 200,000-300,000 policies were sold last year compared to only about 60,000 traditional policies.
Another proposal would allow the sale of life or disability policies that convert to long-term care coverage at, say, age 65. This is similar to an idea being considered in Minnesota, where consumers could buy a term life policy that, for a modest additional premium, would allow policyholders to accelerate their death benefit to pay for long-term services and supports.
But many of the proposals on the table are tax-related. They include an expanded tax deduction for the purchase of long-term care policies, a new Health Savings Account-like product for long-term care insurance, and penalty-free withdrawals from retirement savings such as Individual Retirement Accounts to purchase LTC insurance.
These ideas would reduce the after tax-cost of policies. They’d mostly benefit high-income taxpayers– those who least need government subsidies—but do little to lower the cost for middle-income households, who are most in need of resources to finance their long-term care.
Take the medical expense deduction. Currently a taxpayer can claim the deduction for LTC insurance premiums. But this year it is available only if her total medical expenses exceed 10 percent of Adjusted Gross Income. The NAIC proposed allowing a full tax deduction for LTC insurance premiums with no AGI floor.
There are two problems with the idea.
First, a deduction is worth about 40 cents on the dollar for a top-bracket taxpayer, but only half that for a middle-income household. Second, since passage of the 2017 Tax Cuts and Jobs Act, almost no middle-income taxpayers itemize. The Tax Policy Center estimated that last year, only about 5 percent of middle-income households claimed itemized deductions at all. Thus, more generous itemized deductions would have no value for most middle-income households. Only those few who already itemize or are right on the edge of itemizing or taking the standard deduction would benefit.
Alternatively, Congress could allow a tax credit for LTC insurance premiums. That would be more progressive than a deduction, and the credits could be available to non-itemizers. But a decent new policy can cost a 60-year old as much as $5,000 annually. A 10 percent credit would reduce the after-tax cost of that policy by only $500—hardly enough to generate many more sales.
The biggest beneficiaries
The problem is similar with an HSA-like savings incentive or penalty-free withdrawals from IRAs or 401(k)s to pay premiums: The biggest beneficiaries would be high-income taxpayers.
There are a couple of reasons. First, high-income people are most likely to contribute, and to contribute the most, to these accounts. Often, these high-income participants do little more than shift taxable savings to a tax-favored account. Thus, they could collect a new tax subsidy by merely shifting taxable savings to a tax-free account, then writing a check on that account for their insurance premium.
More important, moderate-income workers, whose wages have been stagnant for years, often don’t have the discretionary income to put into existing accounts, to say nothing of new ones. The median IRA balance for someone aged 50-59, the prime age when people buy long-term care coverage, ranges from about $30,000 to $40,000, hardly enough to finance decades of long-term care insurance premiums.
Barely moving the needle
Those with low balances who do withdraw money from their retirement savings to buy LTC insurance would be making a poor financial choice since they’d be reducing savings they’ll likely need for medical or other costs in old age.
If the White House wants to boost the long-term care insurance industry, the new tax incentives and other efforts may increase policy sales somewhat. But if its goal is to create a viable insurance option for financially-strapped middle-market consumers, this effort would barely move the needle.