executive ltc presentation

Executive Long Term CareExecutive Long Term Care

and and

Corporate Financial IncentivesCorporate Financial Incentives

Preserving and Protecting Executives’

Retirement Assets

This information is subject to interpretation of the Health Insurance Portability and Accountability Act of 1996. Consult your tax advisor, accountant or financial advisor on tax issues.

Keeping up with the “New Executive”

Attracting, rewarding and retaining key executives is critical

to the success of any company

Supplemental benefits are KEY management tools

Owners, Executives, and Key Employees need retirement

assets protection


Who’s offering what?

A 2001 survey of Fortune 1000 companies showed which

Supplemental Benefits were offered to key executives:

* Benefit Program % of Companies Offering Benefit

Non-Qualified Deferred Compensation 86%

Supplemental Executive Retirement Plan 75%

Supplemental Death Benefits 47%

Excess Disability Benefits 31%

Long Term Care 17%

*Clark Bardes Consulting, Compensation Resource Group, 2001 Executive Benefit Survey


Preserving and Protecting Retirement Assets

Today’s Americans are living longer and healthier lives thanks to better diets,

better medical care and safer living and working environments.

Advances in medical science, increasing life expectancies, and numerous

societal changes are causing more and more attention to be given to the —

NEED AND COST OF LONG TERM CARENEED AND COST OF LONG TERM CARE

“A study by the U.S. Department of Health and Human Services indicates that

people of age 65 face at least a 40% lifetime risk of entering a nursing home. About

10% will stay there 5 years or longer.”

-HIAA LTC Guide 1996/1997


people of age 65 face at least a 40% lifetime risk of entering a nursing home. About

10% will stay there 5 years or longer.”



As for older workers, the “graying” of the U.S. workforce is

causing many companies – especially large employers – to

change the way they do business.

One third (33%) of all employers – and 51% of those with 25,000 or

more employees – believe that the aging population will have a big

impact on their company.

Currently, 19% of all employers offer products and services

geared specifically to an aging workforce, such as long-

term care referral services, caregiver guides and eldercare

support groups

Aging Work ForceAging Work Force

Source: The MetLife Study of Employee Benefits Trends, November 2004


Consequently, these employers predict that the demand for

certain employee benefits products will rise.

More than one-third (35%) of all employers (and 51% of companies

with 25,000 or more employees) expect worker participation in long-

term care insurance programs to increase over the next 18 months.

One in four (25%) foresees an up-tick in both disability and life

insurance enrollment.

Aging Work ForceAging Work Force

Source: The MetLife Study of Employee Benefits Trends, November 2004


What does Long Term Care mean?

Long Term Care (LTC) is the assistance you need when a serious illness or disability renders you unable – physically or cognitively – to perform one or more of the activities of daily living (ADLs) for a lengthy period of time.

LTC can range from help with day-to-day activities in the home - such as bathing, dressing, preparing meals - to more sophisticated services like skilled nursing care.

Long Term Care can be given in a variety of settings:Nursing Home (NH)Assisted Living Facility (ALF)Adult Day-Care (ADC)Community Care CentersYour Own Home (HHC) or elsewhere


What does Long Term Care mean?

Long Term Care (LTC) is the assistance you need when a serious illness

or disability renders you unable – physically or cognitively – to perform one or

more of the activities of daily living (ADLs) for a lengthy period of time.

LTC can range from help with day-to-day activities in the home - such as

bathing, dressing, preparing meals - to more sophisticated services like skilled

nursing care.

Long Term Care can be given in a variety of settings:Nursing Home (NH)

Assisted Living Facility (ALF)

Adult Day-Care (ADC)

Community Care Centers

Your Own Home (HHC) or elsewhere


Today’s Americans are living longer and healthier lives thanks to better diets,

better medical care and safer living and working environments. Advances in

medical science, increasing life expectancies, and numerous societal changes

are causing more and more attention to be given to the —

NEED AND COST OF LONG TERM CARENEED AND COST OF LONG TERM CARE


people of age 65 face at least a 40% lifetime risk of entering a nursing home.

About 10% will stay there 5 years or longer.”



people of age 65 face at least a 40% lifetime risk of entering a nursing home.

About 10% will stay there 5 years or longer.”


Preserving and Protecting Retirement Assets


Executive Retirement Assets

It does not take a long time for an executive’s retirement fund to

disappear.

Nursing homes can cost as much as $100,000 a year for a private room in a

quality institution, and Home Health Care can also be significant.

In some cases, especially when live-in care is desired, Home Health Care

can exceed the cost of a Nursing Home.

Changes in Federal policy continue to shift the burden of long term care cost from

the Government to the individual, at the same time life expectancy for a healthy

retiree has extended well into the 80’s & 90’s, thus increasing the probability of a

Long Term Care need.


Effect of Long Term Care Cost on Retirement Assets

Assumptions: Number of years of care: 5 Care begins in 20 years Current Cost of care $190 per day Health Care Inflation Rate: 5.5% Current Retirement Asset balance of $1,500,000 Investment Opportunity Rate: 6.5% (after tax) Asset liquidation costs: 15% (income tax, capital

gain tax, market timing) Couple age 55, Spouse lives additional 6 years

LTC Insurance Plan Design: $220 per day Comprehensive Indemnity benefit 90 day deductible with a 5 year benefit period 5% Compound COLA $4,821 annual premium Includes coverage for spouse and waiver of

premium

Over half of all women

and about a third of all

men who live to age 65

will spend some time in a

nursing home 4.

The probability of either

the executive or spouse

needing some form of

care can be as high as

65% after age 65.4 “Long-Term Care Insurance: A special

Guide” Kiplinger’s Retirement Report, June 1999

Over half of all women

and about a third of all

men who live to age 65

will spend some time in a

nursing home 4.

The probability of either

the executive or spouse

needing some form of

care can be as high as

65% after age 65.4 “Long-Term Care Insurance: A special

Guide” Kiplinger’s Retirement Report, June 1999



Year AgeNo insurance & no

LTC eventNo insurance with

LTC eventWith insurance & no

LTC eventWith insurance &

with LTC eventLTC Ins. Cost LTC Benefits LTC Expense

19 73 $4,962,880 $4,962,880 $4,807,418 $4,807,418 $154,632 $193,252 $181,799

20 74 $5,285,468 $5,050,563 $5,115,523 $5,131,740 $202,914 $191,798

21 75 $5,629,023 $5,131,026 $5,443,655 $5,476,712 $213,060 $202,346

22 76 $5,994,909 $5,203,089 $5,793,116 $5,843,601 $223,713 $213,476

23 77 $6,384,579 $5,265,455 $6,165,291 $6,233,746 $234,898 $225,21724 78 $6,799,576 $5,316,705 $6,561,658 $6,648,567 $246,643 $237,604

25 79 $7,241,549 $5,662,291 $6,983,788 $7,080,724

26 80 $7,712,249 $6,030,340 $7,433,358 $7,540,971

27 81 $8,213,546 $6,422,312 $7,912,149 $8,031,134

28 82 $8,747,426 $6,839,762 $8,422,061 $8,553,158

29 83 $9,316,009 $7,284,347 $8,965,118 $9,109,113

30 84 $9,921,549 $7,757,829 $9,543,474 $9,701,206

$9,921,549 $7,757,829 $9,543,474 $9,701,206 $154,632 $1,121,228 $1,070,440

$0 -$2,163,720 -$378,076 -$220,343

0% -21.81% -3.81% -2.22%

LTC Event Begins

LTC Event Ends

Estate Valuations LTC Valuations

Totals

% of Estate

Difference


The effect of long term care costs on retirement assets without an LTC

insurance plan can be significant, even for relatively short-term situations.

Planning involves making decisions based on known facts and unknown

assumptions regarding future events and circumstances.

Factors compounding the effect include:

Lost Investment Opportunity

Asset Liquidation Costs (i.e. taxes and market timing)

Rapidly escalating care cost and demand that could outpace investment returns




More than ever, executives are viewing corporate sponsored LTC

plans as a viable and economically beneficial way to pre-fund this

type of need, and at the same time protect retirement assets and

income from shrinkage.

Many options are available to pre-fund this potential expense through pre-

tax corporate paid or deferral program dollars.

Limited-Pay plans and attractive Benefit Indexing riders are available to

assure growth of benefits well into the future.


HIPAA 1996 & Tax-Qualified LTC Insurance

The Federal Government has provided many tax incentives for the

establishment of these plans.

The one that has had the most impact on these trends is the Health Insurance

Portability and Accounting Act of 1996. This has made providing benefits for long-

term care through insurance much more attractive, especially for business

organizations providing Executive Benefits.

Now is the time for all of us to consider insuring this major risk. Recent incentives for

the private sector to foster long-term care coupled with the evolution of quality

products, Corporate Long Term Care Benefit Plans are fast becoming a desirable

option in today’s workplace.

“Choice has always been a luxury for those who could pay for it.”“Choice has always been a luxury for those who could pay for it.”


Move Pre-Tax Corporate Dollars out of company by purchasing

Qualified LTC policies and deducting those dollars as a Usual

Business Expense

Provide A “Golden Parachute” as a reward for Key Employees or

Executives with Lifetime Protection against the devastating cost of

Long Term Care.

Keep Key Employees from leaving the company with “Golden

Handcuffs”

Pass premium dollars to the Beneficiaries, designated by the company

or your Key Executives!



Long Term Care is considered Health Insurance (IRC 7702 B(a)(2))

Company establishes criteria for plan participants

Purchases LTC Insurance on Key Employees/Executives

Premium Is Deductible To Company (IRC 162)

Premiums Paid for LTC is not Taxable to Executive (IRC 106(a))

Benefits are Tax Free (up to $250/day in 2006) (IRC 7702B d (4))

Executive’s estate is protected from high cost of Long Term Care

Estate or Corporation gets a “Refund of Premium” upon the death of insured(s)

(IRC 7702 B (b)(2)(c))



Questions & Answers: Tax-Qualified LTC

Can I select who will or will not get this benefit?

Yes, the IRS has determined that Long Term Care as defined by HIPAA

1996 is to be treated as health insurance and does not have to follow

ERISA guidelines. This means there is flexibility when creating these plans

and deciding who will participate.

Can Plan design be flexible?

Yes, the plans can be structured to meet the desired outcome of the

corporation and employees. Some examples of available riders are:

Paid up Options (Single, Five, Ten and To Age 65 payment options are available)

Return Of Premium option (Returns 100% of Premiums at insured’s death)

Indemnity (Changes Benefits from a reimbursement to indemnity mode)

Daily Limits (Daily limits range from $40 to $500 per diem)


Are premiums Taxable to the employee?

Premiums for Qualified LTC policies paid by an employer on behalf of an

employee will not be treated as income to that employee. Employers can

provide any benefit amount for employees as long as premiums are

“reasonable compensation” under Section 162 of the Internal Revenue

Code, even though the plan is discriminatory.

The premium may be higher than premiums associated with personally

purchased plans



Qualified LTC policies have tax advantaged status that allows for

deduction of premiums to varying degrees. C-Corporations allow

maximum deduction, while the individual has the least

deductibility.

Following is a brief explanation of deductible amounts.

C Corporation – Can deduct 100% of premiums for employees

Sub S, LLC and Partnership –

> 2% Shareholders: deductibility subject to “eligible premiums” guidelines

Employees: premiums fully deductible

Sole Proprietors – Deductibility subject to “eligible premiums” guidelines

Individuals/Couples – Can deduct up to 100% of “eligible premium” to the extent it

exceeds 7.5% of AGI (Un-reimbursed Medical Expense Deduction)



Are premiums paid for an LTC policy taxable to the employee?

No. The amount of premium paid for Qualified LTC policies is not taxable to

the employee.

Any LTC policy payments paid by reason of death of insured under IRC

Sec 101(g) and exceed the per diem limit is taxable.



What do you mean by a “Golden Parachute”?

The executive receives a “Paid Up” LTC policy that is generally designed to

cover the cost of care in a top quality facility. The benefits can be structured

to pay regardless of actual expenses incurred for the life of the insured.

Benefits can be inflated by a cost of living factor and can be received for

care in a wide variety of settings.

Are benefits received under an LTC policy taxable to the employee?

No, but there are limitations. The amount of reimbursement not taxable is

the greater of the actual cost or $250/day in 2006. (IRC Sec. 7702B (d)(2))

The per diem rate is adjusted annually for inflation.

Any LTC policy payments paid by reason of death of insured under IRC

Sec 101(g) and exceed the per diem limit is taxable.



What do you mean by “Golden Handcuffs”?

Once paid up, the policy would cover the Long Term Care needs whether

the employee was still with your company, retired, or went with a new

company.

Policies can be structured to control the “return of premium” or

“nonforfiture” rider. Through policy ownership and beneficiary designations,

your company could negotiate the value of the return of premium rider as

part of any termination settlement.

If an executive has met the criteria set forth by the organization, a “Return of

Premium” is paid to the executive’s beneficiary. If the employee chose to

leave prematurely, he/she would potentially forfeit this significant asset.



Return Of Premium

What is the “Return of Premium” Rider?

The “Return of Premium” rider is exactly that, a rider. As such is not part

actual Long Term Care policy. Upon the death of the insured, it returns the

value of the premiums paid to the designated beneficiary.

Because the law will not allow cash value to accumulate, the maximum

amount that can pass through to the beneficiary is the amount paid for the

premium.

It should be noted if the LTC policy covers both the employee and his/her

spouse, both the employee and spouse must die before the “Return of

Premium” can be given to the beneficiary.


Advantages for Key Executives

Corporate paid LTC premiums are not included or taxed as

income

LTC Benefits are received tax-free

Policy is portable

Using “paid up options” (where approved) could pre-pay

premiums for post retirement protection

Cutting Edge Benefit

Promotes productivity

Reduces stress


Advantages for your firm

Corporate premiums deductible and plan is discriminatory –

Deduction also applies to the cost of coverage for spouse and dependents

of employee

Opportunity to provide cutting-edge benefits that can be:

employer-paid for owners, executives and key employees

employee-paid for the rank and file

Key tool to attract, retain, reward

Easy to adopt

executive ltc presentation

Documents

cost of long term care

long term care need

home health care

livein care

long term care ltcis

long term care mean

skilled nursing care

burden of long term