Thursday I had lunch with one of the ‘Old Lions’ of the life insurance industry here in the Greater Los Angeles area. He’s been selling insurance since before I was in short pants and is still going strong. He knows that long-term care insurance is important and has sold a policy here and there. But he hasn’t quite been able develop the right story that he can integrate into his day-to-day conversations with clients.
Joe (not his real name) was bemoaning the fact that many of his clients had made the move to S-Corporation status and thus he felt that the whole notion of tax deductible premiums is moot. I explained to him that this wasn’t entirely true and that a good portion of the premiums for owners of S-Corps and self-employed are deductible. Joe said ‘well then, show me how much long-term care insurance an S-Corp owner can purchase on himself and his spouse within the deduction limits and I’ll sell-up from there.’ You could call this a money-purchase long-term care insurance plan.
Before I begin, here is a quick review of the deductibility rules for owners of S-Corporations and the self-employed. Long-term care insurance premiums may be treated as a business expense similar to medical insurance premiums. However, the deductible amount is limited to the lesser of the actual premium or the amount specified annually by the Internal Revenue Service. In 2007, the limits are as follow:
40 and younger $290 individual/$580 married couple
41 to 50 $550 individual/$1,100 married couple
51 to 60 $1,110 individual/$2,220 married couple
61 to 70 $2,950 individual/$5,900 married couple
71 and older $3,680 individual/$7,360 married couple
The IRS increases this limits by approximately 5% annually.
First, let’s focus on our 61-year old business owner who hasn’t yet purchased long-term care insurance or may need to purchase more. A husband and wife, both ages 61, could buy a $73,000 per year ($200 per day) policy with a three year benefit period, 5% compounded inflation protection and 90-day elimination period for $5,609 per year, well within the $5,900 allowed for 100% tax deductibility. And, for approximately $900 more per year you could bump this couple’s benefit period(s) to five years each. I’m not giving you a low ball premium just to peak your interest. These premiums are standard rate class with a solid A+ company; the premiums could be less
Two 52-year olds don’t fare quite as well in the tax deductibility game but the numbers still work in their favor. A similar plan design with the same company would cost just under $3,700 (in this scenario I ran one of the insured’s at preferred rate class; they are younger and one or both are likely to qualify). Therefore, when they get their K-1 at year-end they would need to pay taxes on $1,480 (3,700 ‘ 2,220). If they are in the 40% state and Federal tax bracket, their additional tax bill would be $592. Of course, if they had taken the entire $3,700 as income, their tax would be more than twice this amount. So let’s see, $600 out-of-pocket to purchase $438,000 of income and asset protection in current dollars and over $2,000,000 when our two 52-year olds are likely to go on claim in their 80′s seems like a pretty good deal to me. For about $500 more per year this couple could move-up to a five year benefit plan.
Here is something else to think about. The amount of premium allowed for deduction to self-employed individuals and owners of S-Corporations increases each year by about 5%. Long-term care insurance premiums generally don’t go up each year, so over time, the amount of premium eligible for deduction will eventually match the premium that the client has chosen.
What is today’s ‘take-away”
- Don’t dismiss tax deductibility for the self-employed and owners of S-Corporations.
- It is always easier to write a ‘company’ check than a personal check. By focusing on the notion that not all of the premium may be tax deductible makes getting to ‘yes’ with the client that much harder. Zero in on the positive; that all or most of the premium is deductible and the only out-of-pocket is the tax on the excess.
- To avoid LTCi ‘sticker-shock’ long-term care insurance should be ‘sold-up’. In other words, start with a base plan that is affordable and mostly tax deductible and then after the client gets the picture, give them the option to buy-up now or maybe a few years from now. There is no reason why someone can’t have two or three long-term care insurance policies. Something today is better than nothing.
Finally, get your business owner clients to purchase a base policy for at least two more key employees. As pointed out in previous posts, a basic plan can costs the employer as little as $20 to $30 per month per employee. By creating a three-employee plan you can provide an additional 10% employer sponsored discount and will simplify the underwriting process immensely. Also, as I’ve mentioned in previous posts, long-term care insurance is perceived as a very high value benefit by most employees. This makes it a big win for everyone.