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The Significance of Washington State’s LTC Decision for You and Your Clients

A recent groundbreaking legislation passed in Washington state has far-reaching implications for the long-term care insurance landscape. Although you may conduct your business elsewhere, there are undercurrents across the country from the passage of this legislation that will likely impact your business in the near future. Understanding the pros, cons, and pitfalls of these legislative changes is vital for you and your clients. Here’s why it matters:

seattle space needle

Overview of Washington State Cares Fund

In essence, Washington state introduced and approved a 0.58% payroll deduction to establish a public insurance program called WA Cares. This initiative aims to address the escalating costs of long-term care associated with debilitating illnesses that require extended care at home or in a facility.

Key features of the fund include:

  • A 0.58% payroll tax imposed on all Washington state workers
  • Maximum lifetime Long Term Care benefit of $36,000
  • Non-refundable benefits, meaning it follows a “use it or lose it” approach
  • A requirement for workers to contribute to the fund for 10 years to be fully vested and receive the maximum benefit amount
  • Stricter eligibility criteria compared to traditional LTC policies
  • Exclusion of non-working spouses, out-of-state residents, and non-vested individuals

Only workers contributing to the fund can access the benefits. WA Cares is designed specifically for workers, with the tax deducted from their paychecks. Once they fulfill the contribution requirements, they become eligible for benefits should the need for long-term care arise.

a wheel chair and a person in it

Impact on Your Clients

Let’s consider the scenario where the WA Cares concept gains momentum nationwide, as several states are currently contemplating such measures. The most apparent impact of this legislation is the reduction in your client’s paycheck. Highly compensated earners will be obliged to contribute to this program regardless of their preference. At 0.58%, the contribution can be significant. It is important to note that the tax may increase over time, with no safeguards preventing such an increase.

For younger high-earning workers, they may end up contributing more to the program than the maximum benefit payout they would receive if needed in the future. On the other hand, individuals nearing retirement may contribute to a program they will ultimately not be eligible for.

It is crucial to recognize that many individuals will be excluded from this program. Benefits are not portable to other states, meaning those who leave Washington after contributing for many years will not take their contributions with them. Non-working spouses and family members are also not covered. In the case of WA Cares, there was a short opt-out window, requiring workers who wished to avoid the tax to purchase an LTC policy before the deadline. This led to a rush of policy purchases and caused insurers to temporarily halt the sale of LTC policies in the state due to government ambiguity.

a storm over a field

Will these Policies Spread Across the Country?

Numerous states currently have proposals or are drafting legislation similar to what Washington has implemented. States considering such programs include California, Oregon, Hawaii, Michigan, Alaska, Illinois, Minnesota, Missouri, Colorado, New York, North Carolina, and Utah. As you can see, the concept is spreading from west to east. Unless the WA Cares Fund fails significantly, it is a matter of “when” rather than “if” such a program will emerge in your state. So, what can we learn from Washington’s implementation?

Engage in Client Discussions

Take the time to discuss long-term care needs with your clients. It is better to have a policy in place before these programs become mandatory. The price and availability of policies in Washington were dramatically impacted in the months leading up to the opt-out deadline. Having witnessed this process, it is important to prepare clients in advance to avoid the challenges experienced by many individuals in Washington.

Analyze the Financial Implications

Understand the tax consequences for your clients

Depending on their age and salary, there may be valid reasons to opt out and explore alternative approaches to address their long-term care needs. Programs like WA Cares rely on the contributions of many workers. Assuming future legislation will provide opt-out options, familiarizing yourself with the financial implications beforehand will help clients make informed decisions regarding their care and finances.

Let AFG know how we can best help you 

We are committed to helping our agents and advisors find the best Long Term Care options for their clients.  So far, state addressed LTC policies are not enough to truly cover the costs of care.  Let us know how we can help you address your clients’ LTC needs. 

 

charts illustration

AG 49-B: Yet Another Revision to IUL Illustrations

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The world of indexed universal life (IUL) is experienced significant transformations with the recent revisions to AG 49. AG 49, which was first implemented in 2015, introduced regulations aimed at curbing potentially misleading IUL illustrations. With these changes, the tumult of AG 49 seems to have reached maturity.

While these regulatory modifications do not directly impact the actual performance of IUL products, they do alter what carriers can depict in hypothetical illustrations. It’s important to understand these new limitations and how they can affect the selling point of IUL’s on Volatility Controlled Indices.

Some background: AG-49 and why it was necessary

Since the 1980s, cash-value life insurance has been subject to an ongoing battle between insurance carriers and regulators. Universal life (UL) insurance emerged in the late 1970s, taking advantage of the favorable tax treatment of life insurance. By 1983, this strategy had been adopted by most major carriers. However, regulators intervened with IRS Section 7702, which established clear guidelines for the taxation of life insurance policies.

Working in conjunction with the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Section 7702 provided definitions for life insurance and modified endowment contracts (MECs). However, when IUL entered the scene in the late 1990s, both carriers and regulators needed more time to fully understand the unique nature of this product.

AG 49 was introduced to even the playing field

AG 49 aimed to cap the amount of illustrated returns on IULs at under 7%. This meant that if one company has an IUL with a 0% floor and a 12% cap and another company offered a product with a 0% floor and a 10% cap, both would have to illustrate a 7% return.

The inherent problem with AG 49 is obvious in the above example. The 2 products are clearly not equal, but would illustrate as such. This led to the creation of bonuses and multipliers around 2015 in response to AG 49. With these new tools, carriers could differentiate their value on the illustrations without violating AG 49.

Well, this quickly got out of hand. Stepping in once more, the NAIC revised AG 49 (known now as AG 49-A) to bring IULs under uniformity once more. AG 49-A essentially reduced the difference of the illustrated interest credited between products. One would think that this revision would put the issue of discrepancy between competing IUL products to bed once and for all. Well…surprise! It didn’t.

bull statue near the new york stock exchange

The Rise of Volatility Control Indices

What the NAIC had not considered was how IULs would respond to lower interest rates. As interest rates continued to fall after 2008 and remained historically low for the next 14 years, carriers turned to Volatility Control Indices to entice consumers back toward IULs.

A Volatility Control Index is different from your standard market index such as the S&P 500. A VCI can contain commodities, equities, bonds, cash, and other asset classes. These assets are monitored constantly and when a certain level of volatility is reached, funds can be transferred to different assets in the index to bring volatility back to a reasonable, pre-determined level. This helps create maximum upside potential for the IUL.

A new revision to AG 49-A: Uniformity to IULs in VCIs

Not to be outdone by AG 49-A and moving away from indices such as the S&P 500, carriers allocated IUL funds into VCIs to strengthen guarantees on bonuses and multipliers. In a VCI, however, there is a lot more room for carriers to play with bonuses and multipliers through manipulation of the level of volatility. Moreover, unlike the S&P 500, these VCI’s multiple commodity classes are more difficult to track. Once again, illustrations between competing IUL products began to vary wildly.

The NAIC needed to step in once more to bring uniformity back to IUL illustrations. They introduced AG 49-B in May of this past year. To achieve this, they are now forcing illustrations for IULs in Volatility Controlled Indices to use the same leverage as the benchmark index, such as the S&P 500.

Additionally, bonus rates will be based on the difference between a carrier’s yearly net investment earnings rate and the percentage of their hedge budget.  The result brings IULs in VCI’s in line with benchmark-indexed IULs. 

a compass

The end…for now

The days of illustrated leverage discrepancy seem to be over. Whether or not this game of cat and mouse between the NAIC and carriers continues will not be known in the immediate future. But if history is our judge, then we shouldn’t be shocked to see carriers find new ways to boost the performance of their illustrations. Only time will tell.