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Update on California Long-Term Care Insurance Legislation (Nov  2023)

Update on California Long-Term Care Insurance Legislation (Nov 2023)

November 29, 2023

Introduction

In response to recent developments in California's legislative landscape, this article provides a concise update on the state's long-term care insurance legislation. Building on our previous coverage, we aim to clarify the latest changes and implications following the California Task Force's new draft actuarial reports. This update is essential for individuals navigating the evolving long-term care tax and insurance considerations in California. For background information, please refer to our previous article, “State-mandated long-term care insurance update” available at Taurus Financial.

Recent Developments and Timeline

On November 16th, 2023, the California Task Force convened for Meeting #23 to discuss the draft actuarial report. The final actuarial report is scheduled for December 2023. Legislative discussions regarding the establishment of a long-term care program may occur in 2024/2025. Further details about this meeting are available at California Department of Insurance.

Key Takeaways from the November 2023 Draft Actuarial Report:

  1. CA Payroll Tax pricing: Looks similar to WA Cares Fund, with the lowest benefit level set at 0.6% of income.
  2. Income Cap: A proposed cap at $400,000 of income, unlike in Washington.
  3. Maximum Tax Rate: Potential tax rate up to 3% of income for the highest plan design.
  4. Shared Tax Cost: Employers and employees may share the tax cost.
  5. Opt-out provision: The actuarial estimate of the private insurance opt-out seems to be lower than initially expected.

Proposed Benefit Designs

California proposes five benefit designs, ranging from $36,000 to $144,000 coverage. For context, the cost of a 3-year long-term care event projected over 30 years is around $1,000,000 (based on Genworth’s cost of care survey at Genworth Financial). In contrast, Washington's coverage amount is $36,500 with nominal increases.

Payroll Tax Structure

The California payroll tax might be a level tax split between employer and employee, differing from Washington's employee-only tax burden. The tax rate is expected to vary based on the comprehensiveness of the program design.

Considerations for Private Insurance Holders

  • Opt-Out Provision:
    • Availability: Private long-term care insurance policies must be purchased before the program's effective date to qualify for an opt-out from the state-mandated program. The state is evaluating the financial impact of changing the deadline for purchasing opt-out eligible private insurance policies. More details can be found in the final draft of the feasibility report (page 15).
    • Impact: This provision provides a window of opportunity for individuals to secure private coverage that may offer more flexibility or broader benefits than the state program.
    • Important Dates: It's critical to keep abreast of the program's date.
  • Reduced Contributions:
    • Application: For policies bought after the implementation of the state program, reduced contributions towards the state's long-term care tax may be available.
    • Benefit for Late Buyers: This offers an incentive for those who purchase private insurance post-implementation, though the reduction scale and criteria are yet to be clarified.
  • Eligibility Criteria for Private Coverage:
    • Pending Definitions: California is still in the process of defining the specific requirements for private policies to be considered eligible for opt-out or reduced contribution benefits.
    • Comparative Example: In contrast, Washington State includes both traditional long-term care insurance and hybrid products with long-term care riders under its eligible coverage types.
    • Scope of Coverage: The eligibility criteria will play a crucial role in determining what types of private insurance products will be viable alternatives to the state program.
  • Suggestion to California Employees:
    • Proactive Approach: Given the uncertainties and potential demand spikes, California employees should consider acquiring private long-term care insurance sooner rather than later.
    • Learning from Washington: The experience in Washington State, where a significant rush for private policies occurred following state announcements, serves as a cautionary tale. Early action can help avoid limited choices that come with increased demand.
    • Balancing Choices: By acting early, individuals have a better chance of finding a policy that not only meets the state's criteria for opt-out or reduced contributions but also aligns with their personal coverage preferences and financial planning goals.

Market Availability

California has fewer group and individual products and carriers compared to Washington, primarily due to longer state approval times. However, purchasing coverage now offers a robust market of options before any expected demand increase, especially considering California’s employee base of approximately 16.5 million.

Advice for Prospective Insurance Buyers

  • Meaningful Coverage: It’s advisable to seek coverage that offers significant benefits, affordability, and long-term financial manageability.
  • Ideal Insurance Buyer: Those who would have considered coverage irrespective of any payroll tax but may now decide to purchase earlier due to potential government programs and opt-out opportunities.
  • High Earners: Those with higher incomes and assets may find more value in private plans, especially if the payroll tax is a percentage of all wages, as in Washington.

Case study

Let's consider a hypothetical scenario involving a 45-year-old employee named Alex, earning an annual salary of $400,000 year and expects the wage to grow 3% per year. Alex plans to retire at the age of 67. This case will help illustrate the potential financial implications of the long-term care tax in both Washington and California.

  • In Washington:
    • Annual Salary: $400,000
    • Contribution Rate: Consistent with the current WA Cares Fund, approximately 0.58% of total income.
    • Total Contribution Duration: From age 45 to 67, totaling 22 years.
    • Total Accumulated Contribution: Calculating 0.58% of $400,000 annually over 22 years with 3% income increase, Alex would contribute more than $75,000.
    • State Benefit: The maximum benefit available from the WA Cares Fund is around $36,500, with possible nominal increases.
  • In California (Hypothetical Scenario):
    • Annual Salary: $400,000
    • Proposed Contribution Structure: Assuming a contribution rate up to 3% for the highest plan design.
    • Total Contribution Duration: Again, from age 45 to 67.
    • Potential Contribution Rate: If the rate is 1.5% (as a midpoint in the proposed range), Alex’s total contribution over 22 years could be close to $200,000.
    • State Benefit: The highest benefit amount among five designs is with $144,000 total benefits only.

Final Recommendation

We strongly recommend consulting with us before purchasing long-term care insurance. It’s crucial not to buy a policy solely for opting out of a proposed payroll tax, as the situation remains uncertain.

References

  • California Assembly Bill 567 Feasibility Report: View Report
  • California Assembly Bill 567 Actuarial Report: View Report