For those with significant wealth, planning for estate taxes is always an ongoing part of legacy planning. For cents on the dollar, and sometimes using leverage, life insurance policies can pay all or a large portion of the estate taxes due allowing a family to pass its legacy to the next generation intact.

At the time of this blog, most Americans do not have to worry about estate tax planning because the estate tax exemption per couple is $23.4 million. Only couples with estates in excess of that amount will be paying estate taxes at 40% on the excess—if the estate exemption does not change.

However, the estate tax exemption is on the chopping block in the upcoming push for tax reform. With the proposed changes, more Americans might see themselves above a new exemption limit. By some estimates the federal exemption per couple could be lowered from $23.4 million to as low as $3 million. Meaning, couples with estates more than $3 million could pass on a large tax liability to their children or grandchildren.

Boohoo, right? Passing on only a portion of your estate to the next generation isn’t such a sob story to outsiders, but to those in the family, it’s a big deal! You might not think that you’re at risk but read on for additional perspective.

First, wealth is not always liquid. A lot of wealth can be held in commercial real estate, business ownership, and other long-term investments. Liquidating such assets to pay the estate taxes due can result in fire-sale prices. Or, maybe you have a concentration in real estate and death happens during a market downturn; not a good time to sell! A business and real estate holdings may be part of the family’s identity and liquidating to pay taxes is not an acceptable alternative.

Second, illiquidity can cause family strife as the executor (often an adult child) must decide what to sell. And, the headache for person in this unenviable position might result in family dissention and potentially, could go to court to solve.

Third, these are your properties and if your goal is to pass them to your children and grandchildren, you’ll want to find a method of minimizing what goes to the government and ultimately have funds to pay Uncle Sam his legal share. Remember, when your children inherit this tax liability, the clock is ticking. They must pay estate taxes (or negotiate a payment plan with the IRS) within nine months after you die.

One of the most efficient ways to pay these taxes is to use tax-free proceeds of a life insurance policy. For couples, a terrific option is a survivorship product, also known as a Second-to-Die policy, to help with legacy planning. These policies have lower premiums and are easier to underwrite because the death benefit is paid out at the death of the surviving spouse. Potentially, the insurance company is collecting premiums for a longer period of time, and they can grow their investments before a deferred payout.

Legacy planning is just as it sounds: planning for the next generation (and possibly several after) to ensure family wealth beyond your lifetime. Planning ahead for the estate tax that is due after the second parent dies doesn’t ease the pain of that loss but it does help create the legacy you worked so hard to achieve over the years of your life.

The State of Washington is implementing an employee tax of .0058% or 58 cents for every $100 earned to help pay for long-term care coverage starting in 2022.  Claims may be filed as early as 2025 and is the benefit pool amount is $36,500 or $100/day for 1 year.  This is an automatic opt-in for W2 employees who are at least 18 years old and work in the State of Washington.

For those earning $50,000 per year the tax will equate to $290 annually.  Not a considerable amount for the benefit, but for those higher wage earners the tax could equate to a significant amount more.  For example, a household earning $400,000 this could be up to $2,320.  While some might argue that these higher earners can afford this extra tax, they should keep in mind that premium comparatively to the pool of benefits is extremely high and private insurance options might provide a better benefit for the tax aka premium amount.

Note, that you must also live in the State of Washington to receive these benefits.  For those planning on moving out of state this is certainly not a good deal.

State LTCi systems have been stressed and have had troubles in recent history.  Take California’s CalPERS opt in system for example.  In 2013, CalPERS notified policyholders they would be receiving rate increases of 85% in 2015/2016 and stated they may also do this again if needed.  New policy holder premiums have planned increase of 52% in 2021 and 25% in 2022.  This might not be the case for Washington since the benefit pool is very low, but we have seen rate increases amongst policyholders in other programs.

In my opinion the state is looking out for the best interests of its residents, but the program might not make sense for some individuals.  Luckily, Washington has given its residents a one-time opt out or exemption.

The window to apply for an exemption on the State’s LTCi program is small.  Individual’s wanting to purchase private insurance will be allowed to submit an exemption application beginning October 1^st, 2021.

Here are the requirements for a permanent exemption of the State’s long-term care insurance program.

• Apply and be approved for the exemption in the given time window.
• Be at least 18 years old
• You must purchase a private long-term care insurance plan before Nov. 1^st, 2021.

Written by Bijan Noori

For information on the specific private plan options in the State of Washington please reach out to me by email: bnoori@baypointgroupllc.com

 

Stop-Loss Long-Term Care Insurance

Stop-Loss LTCi was developed from a Hybrid LTCi policy chassis to create a partially self-insured LTCi policy.  The idea was to design a product option that would fit the LTCi needs of those couples who have a net-worth between $3.5mm to $10mm+.  This is a large range, but some argue that in this range one might be able to self-insure.  We know without a doubt $15mm+ should be able to self-insure most if not all their potential LTC costs.

There aren’t any Stop-Loss LTCi policies on the market for individuals so I wanted to see if I could put together partially self-insured stop-loss product with the available policies on the market.  This is to meet the needs of a couple who have a net-worth in this $3.5mm to $10mm+ range and can take on the extra risk of not being fully insured.

Product requirements:

-It needs to have a high deductible or in this case a long elimination period

-The benefit pool needs to be large once the stop-loss is triggered

-A low or no-loss product is preferred, meaning that a benefit was going to be paid out either via long-term care claim or at death.

-The product needs to make sense financially

Case Study: Husband and Wife both age 50.

In this scenario, we are assuming that the Traditional LTCi policy does not increase in premium although history shows it most likely will.  The Hybrid LTCi policies are the base for the Stop Loss LTCi chassis and have guaranteed premiums.  We typically will choose to go with an LTCi policy over a Traditional LTCi policy except in a few scenarios.  An example would be a single male in his early 60’s.  Traditional LTCi has priced this category very well.  It’s assumed the reasoning being the known the LTCi claims history of this demographic is in the carriers favor.  Traditional LTCi does not typically payout any death benefits.

The Stop Loss LTCi has an initial elimination period of 60 days of long-term care service.  Once this has been met, there is a small initial benefit that will start paying out for the first 50 months in Illustration A or 33 months in Illustration B.  Once that 2^nd elimination period has been met (50 or 33 months) by one or a combination of the husband/wife couple then the larger benefit will be paid out.  In this example we used a benefit payout starting at age 88.

The couple can each take the full benefit amount.  In Illustration B, this is almost $40,000 tax-free if they are both on claim at the same time.  This benefit will continue for as long at they are both on claim without limit.

If neither husband or wife use the long term care benefit then a death benefit will be paid out after the 2^nd spouse were to pass away.

If you look at the “Total Premium Paid by Age 88” column, in most cases the clients will pay about half as much in premium by partially self-insuring the first several months.  They are not fully self-insuring because they will still receive a small amount of benefit for the first 50 or 33 months of claim (combined).

RMD reduction tool:

A QLAC (Qualified Longevity Annuity Contract) allows individuals to re-allocate and shelter 25% up to $130k of their qualified assets from Required Minimum Distributions.  While this isn’t a large amount of funds it is one of the tools individuals can use to defer taxes.  Note, the amount is $130,000 per person.  For a couple it could be up to $260,000 that they could defer RMD’s up to age 85.

The Two Core Benefits:

1) Reduced RMD’s (up to 25% reduction)

2) Protection against “living too long” (substantially leveraged lifetime guaranteed income in the future)

 How QLACs work:

• One can re-allocate 25% of IRA or $130,000 (whichever is less) to buy special QLAC deferred income annuity
• The new QLAC allocation is excluded from RMD calculations (existing IRA still has RMDs)
• QLAC income can be deferred until age 85, if death before 85, heirs get 100% of deposit back

Case Study:

• Client: Male Age 70 w $520,000+ IRA and longevity in his family
• Situation:Facing RMDs he doesn’t need, client asks his advisor for specific help on his IRA
• Result:Advisor successfully reduces RMD by 25% and ensures a lifetime of future income equal to nearly 33% of original deposit every year for life – GUARANTEED!
• Guaranteed Income Payment:$32,914/yr guaranteed for life (starting age 85)

Key for Individuals Who:

• Are approaching age 70 (RMDs for first time)
• Don’t need RMDs to live off and/or who want to reduce RMDs
• Cringe at the thought of additional taxes (RMDs) each year
• Want to reduce tax liability. With $25,000 Standard Deduction, reduced RMDs using a QLAC can get clients into lower total tax bracket or eliminate/reduce taxes on Social Security.
• Are more conservative and worry about market movements and value certainty/guarantees
• Have longevity in their family history or concerned about outliving their money

These plans are very simple to implement and can be a great tool to help reduce some of your RMD’s.

Yes, self-insured plans can potentially reduce an employer’s overall healthcare costs and lead to lower annual premium rate increases. Before discussing the positive aspects of self-insured medical plans, let’s determine if you can stomach some of the insurance nuances that make it all work.

Self-Insuring is exactly as represented – you are underwriting the majority of the risk. Can your entity take on the financial risk that is assumed with a self-insured plan? When a large individual claim occurs or when the group has an overall high claim year, you as the employer must have the cash on hand to fund up to the “stop loss limit“ on those claims. The “stop loss limit” is the claims loss insurance limit you will purchase through a private carrier that would act as the corporation’s re-insurer. Over a 10-year period, the average employer with 100 employees or more will typically see 2-3 years of above average claims.

As an employer, are you willing to take on an in-depth and ongoing role in plan management? Knowing the details of your employee and family member’s health is critical to determining plan costs, care, and design.

Many employers cannot and do not want to take on certain roles and responsibilities. However, for those employers who have the bandwidth to do so, self-insured medical plans are an excellent way for the employer to potentially reduce overall medical costs and annual rate increases, keep employees healthier, improve cash flow, and eliminate fully-funded carrier plan state taxes and margins.

Fully-funded carrier plan rates follow trends. They hurt those employers who are managing a healthy workforce and help those who are not. With rates increasing significantly over the past 5 years it is no surprise that 3 out of 5 workers are insured by self-insured plans. With the uncertainty in the healthcare market, carriers are currently conservatively pricing new rates. This means higher premiums to consumers which can provide a larger cushion to the carriers.

Since employers with self-funded plans monitor and manage their own claims, they have direct knowledge of their employees’ health. This allows the employer to beef-up their focus on wellness and preventative care programs that help educate employees in areas of concern due to claim results.

Most employers with self-funded medical plans see lower premium rates than fully-funded carrier plans due to a healthier employee population and claims knowledge. They also do not have to pay state taxes and carrier margins that are imbedded within fully-funded plan premiums.

It is important to have the right broker and TPA to partner with, but here’s what an employer can typically anticipate when they move forward with a self-funded medical plan:

1. The medical plans have national provider networks
2. Stop-loss insurance will protect the employer from large individual claims and high aggregate claim years
3. Custom plan and coverage designs
4. National pharmacy networks
5. Plan designs are identical for out of state employees
6. Proactive care management
7. Disease and wellness management
8. Detailed experience reports

These plans best fit employers with 100 or more employees, but may make sense for even those with 50 or more.

Someone told me I can pay my personal cell phone, and home internet bills pre-tax through my paycheck, what do they mean?

This is true. In fact, employees can use certain programs through IRS code 132(d), which allows the employee to pay for a portion of their personal cell phone bills, home internet bills, association or union dues, tools, supplies, certifications, etc., all on a pre-tax basis. Why does the IRS allow this? It’s simple, here’s a couple of examples. When you call in sick to work, you’re probably using your personal cell phone. When you send a work email from your home computer, you’re probably using your home internet. There are many other examples of everyday expenses that might be converted to legitimate tax-deductible business expenses.

Paying for these types of expenses on a pre-tax basis can add more money to your paycheck. Take an average $100/mo. cell phone plan. You can save 30% or more in taxes, which means your monthly income goes up by $30/mo. When adding these various expenses up and paying them pre-tax then you can generate some extra spendable cash.

This is also great news for your employers. Even though your net paycheck is higher than usual, your employer will also save. They save on things like payroll taxes and worker’s comp insurance due to their employees having lower taxable income. When adding these savings over multiple employees, your employer can save a significant amounts. Bringing this program to your employer’s attention will potentially save you money, and will make you an instant office hero to both your employer and your colleagues.

Added note: We have found that the average employee has $217/month in bills they can pre-tax. This saves them over $60/month in taxes. The employer will save about 9% on average if we include FICA and worker’s comp savings. That’s almost $20/month for each employer enrolled in this program.

Although my firm does not implement worker’s comp policies, I am often asked about ways to reduce premiums.  I should note, more claims = higher future premiums.  Reducing real claims may just come down to work-site safety and employee morale.  This is something to bring a worker’s comp expert or work-site safety expert in on.  I work closely with many worker’s comp professionals that actually have proven records for reducing real claims.

Real claims will happen from time to time and hopefully not at the fault of a dangerous work environment, but due to a pure accident.

Then you have the other side of the claims world, the fraudulent side.  Often it is cheaper for the insurance carrier to settle a claim that may look fraudulent in the eyes of the employer then to fight it, especially in my State of California.  This really pisses employers off for two huge reasons.  One, the claim will significantly affect their future insurance premiums and two, the employee got paid for lying (supposedly.)

In my opinion, humans tend to be good and want to do the right thing.  With that being said, when an employee is living paycheck to paycheck and needs to provide for their family they will do anything they can to keep dinner on the table.  You may have heard a version of this example before: Your employee in this scenario is at an annual family reunion.  Every year the family is divided into two softball teams.  Your employee is looking to make up for last year’s loss and smacks a ground ball to left field, sliding into second base.  Where he fractures, cracks, & tears parts of his body he never knew existed.  He manages to suck up the pain until Monday morning where he marches into work without any sign of distress.  While at the office, whom ever used the water-cooler before this employee managed to drip a bit of water on the laminate flooring which is now more like an ice-skating rink (plaintiff attorney’s words.)  Boom, crash, bang and here comes your worker’s comp claim.

This employee’s only option for keeping his income was to make sure his accident occurred while on-duty.

Like I said before, humans tend to be good and want to do the right thing.  If your employee had another option to replace their income without having to create a worker’s comp claim which could be risky and may take several months to see any money, wouldn’t they use that option.  As an employer, wouldn’t you want your employee to use the alternative option if their accident occurred outside of work?

Easy fix in 3, 2, 1…

Probably the second lowest cost insurance policy behind group life is group disability insurance.  Group disability insurance will replace a good portion of your employee’s income if they become sick or disabled and are not able to work.  In fact, they could start receiving income in as little as 7 calendar days and be paid out up to normal retirement age.  And again yes, these plans are very inexpensive.

Your broker should be bringing this insurance product up to you.  If they haven’t then ask them about it the next time you meet with them.  If they have and you have not opted in then maybe the product has not been explained to you in this way.  One fraudulent worker’s comp claim will cost you significantly more than a simple group disability insurance policy.  Plus, you will look like a hero to your employees for offering such a plan, especially if it is ever needed.

Written by: Bijan Noori is the Principal of Baypoint Insurance Services based in Long Beach, CA.  Bijan provides insurance benefit plans for groups ranging from 2 to 500 employees.

bnoori@baypointgroupllc.com

www.baypointgroupllc.com

Dir. 562.216.7846

Mob. 949.306.6746

Reduce Errors

I have found that over the years technology can be quite helpful when enrolling new groups.  It is helpful for all involved the broker, employer, employees and group administrators.  One of the main reasons is that when you are having employees use online platforms, you can avoid typical paper errors.

Typical paper errors most often include missing information.  Insurance carriers don’t just want certain employee information, but need certain information.  Software is usually designed to not allow employees to move forward without filling out required information.

Other “paper” errors occur out of non-legible writing.   Although most of us can read our own handwriting to others our penmanship can look like chicken scratch.

Hesitation

There is always some hesitation from groups who have always used paper enrollments in the past, but after our first round of online enrollments the groups are much happier with the end results.  Many administrators or human resource professionals do not give their older employees enough credit.  For the most part, every employee will have internet access, email addresses, and basic computer skills.  The only one of these required when an employee is doing an online enrollment on their own is the basic computer skills.

But, even those who have zero computer skills should not worry.  Your broker should bring in their team of enrollers to help every employee walk through the enrollment process.  The enrollment process typically only takes 5-10 minutes depending on the plan designs and the employee’s decision making capabilities.

Once the enrollment is complete the employees will now have online and mobile access to all their selected plans which should include their ID numbers, virtual cards, summary of benefits, etc.  The broker should also make sure employees receive physical cards and booklets, this stuff is still appreciated by the old-school employees.

Happy Medium

Occasionally, groups do a complete 180 from no-tech to high-tech.  I would suggest a slower approach.  Maybe start with online enrollments and then gradually add other tech pieces.  For example, some groups move over to 100% online resources.  Groups will submit proposals online and have very little interaction with their broker.  When issues occur calling an 800 number or searching an FAQ page can be a real pain.  Even 24 hour chat or message boards can get frustrating.  I find that most plan administrators want and need to speak to their broker directly.  Someone who knows everything there is to know about the specifics of their clients without needing a refresher from the employer.

It is nice to use the best of both worlds.  Use the technology side for your insurance benefits to make information more accessible, and enrollments easier.  Use the human broker to help your group out with any billing issues, client specific problems, or when a new quote is needed.

Tech Bonus Items

Not all programs offer more than online enrollments, but some do.  Check with your broker to find out what extras are included in their software program.  For example, we offer at no-charge a ton of online HR resources like help with employee on-boarding.  With our system, if employers choose to use this feature, new employees will register to the platform we build for the employer.   Once logged in the employee will be prompted to complete their W-4, I-9, etc.  The system will allow HR or the employer to upload employee handbooks, employment contracts, and other documents.  We will even customize each document to pdf format, and add-in any required e-signatures or e-initials.  Employees can upload any certificates, training hours, ID’s, etc. if needed or wanted.

Additionally, employers can use our platform to send out surveys, memos, enrollment reminders, etc.

Still Debating the Switch

From my experience, employers do not like to rock the boat or change the status quo.  Of all the changes an organization can make, upgrading their medical benefits technology should be very easy and modest.  “Should” is the key-word.  Make sure your broker has experience in making switch.  A lot of brokers are also stuck in their ways and do not want to accept these changes to enhanced technology as the new norm.  What they need to remember is that upgrading their benefits platform will reduce the number of common mistakes, and will create more time for the broker to find out what is truly most important for to their clients.  9 times out of 10 employers want their broker to be more accessible and respond to inquiries quicker.

Now, I bit the bullet and pay for all these services for my clients.  Not all brokers and firms will do this and many times try to pass off the costs to the employers/clients.  What these brokers are failing to see is that the investment in their clients will allow them to be more accessible and more responsive.  These will in-turn create a better, longer lasting relationship and may even create referral opportunities.

Written by:

Bijan Noori is the Principal of Baypoint Insurance Services based in Long Beach, CA.  Bijan provides insurance benefit plans for groups ranging from 2 to 500 employees.

bnoori@baypointgroupllc.com

www.baypointgroupllc.com

Dir. 562.216.7846

Mob. 949.306.6746