Expert Interview: Long Term Care Insurance
November 10, 2020
Expert Interview: Long Term Care Insurance
November 10, 2020
Marc Glickman: Hi and welcome to this episode of The Insurance Experts. It’s my pleasure to have my good friend long-term care specialist and tax attorney Trey Fairman on the line. Trey, thanks for joining us today.
Trey Fairman: Thanks for having me, Marc.
Marc: So not everybody obviously gets their background in tax law and then becomes a long-term care specialist - can you tell me about the journey to having that happen?
Trey: Yeah sure so as you mentioned I’m a tax attorney by training I have my master’s in tax law and since what 1997 I guess I’ve been partnering with most of the major wall street firms and private banks helping them do more sophisticated high net worth estate tax planning that involved life insurance products. So that’s sort of where my background has been and as we all know that whole insurance marketplace has evolved and changed dramatically. So, my first exposure to long-term care insurance was probably in the late 90s when a lot of those carriers were looking to have those wall street firms and their advisors sell the long-term care products to their firm’s clients.
Marc: I gotcha and then what were you finding to be the most popular strategies back then and also now in terms of tax planning related to long-term care strategies?
Trey: Yeah so I think you know back in the late 90s early 2000s right we were the long-term care market so this is a two-part answer I guess. First, the long-term care market was kind of coming out of that period that the products were mispriced premiums were going up carriers were failing and second, they were entering into the wall street community which is more of an asset based conversation. So you know where it started originally for me was with the lump sum hybrids – the money back products - and kind of then evolving from there. So that’s where it started.Those products have obviously changed as well. We couldn’t do a whole lot of tax planning with those because they were life insurance chassis but then as the tax world changed obviously we now have more traditional long-term care products structured like the hybrids where we can short pay them and for business owner clients which I work a lot with these days you know those products provide exceptional tax benefits for them.
Marc: Yeah it’s very interesting and I think a lot of this evolution of the market we see like traditional being popular hybrids becoming more popular now we’re seeing a trend back towards traditional again it all kind of evolves around what the carriers are doing with their pricing how the underwriting is working and then the tax advantages and now we even see I think both traditional and hybrids have the ability to deduct it for a business owner. So I think we wanted to talk a little bit about that strategy today what are your thoughts about doing you know business owner long-term care planning where is the value proposition for clients and for advisors out there today?
Trey: Yeah well I think you know first and foremost any planning you know needs to stand on its own before the tax benefits of that planning so long-term care insurance planning you know this is a math exercise right so once that conversation starts and we’re gravitating towards a product and/or solution that then fits what the then tax part of that says well okay if this is a good financial transaction on its own if we then use business funds to pay that premium depending on if you’re a pass through entity like a S-Corp or a C-Corp.You can deduct 40-60 of the premium if you’re a S-Corp and if you're a C-Corp the money is completely tax free so the C-Corp pays no tax on the premium and the insured owner pays no tax on the premium. Then of course we’ve leveraged that premium to create the much larger pool of funds to pay for long-term care that comes out income tax free as well so the money’s never taxed so again on its own done properly planned for properly long-term care insurance works great and when you couple that with the tax benefits of paying the premium with business money it’s unbelievable frankly.
Marc: Yeah and you know it’s funny because I think a lot of people don’t realize it exists you know in the life insurance or disability world it works differently but because long-term care is like health insurance you get to take the deduction like a business expense like you would for a health insurance policy now I know you worked with financial planners and you had somebody in mind that you had worked with recently that this was kind of an eye-opening experience with so much so that she kind of looked at getting her own plan right can you tell us a little about that partner that you worked with?
Trey: Yeah sure so you know much like I brought up earlier you know my world's changed right so as tax laws changed you've got high net worth clients that had estate tax problems now if your net worth is under $22 million you have no estate taxes so a lot of the estate planning world has become income tax driven and within that conversation a lot of it is what I’d call elder law driven right so a lot of state tax attorneys that I’ve known for 15 20 25 years are now elder law attorneys working with clients helping them plan for long-term care events so one of the attorneys that I’ve known for geez 20 some odd years has a lot of clients of that age they’re doing a lot of elder law planning she reached out to me and said hey you know I’ve seen a couple of these I’m in my mid 50s her husband was about five years older you know you walk me through this show me how it works tell me what the good is and the bad is and you know kind of outline for me how this all fits together.
Marc: I see and then kind of what was the appeal from her perspective obviously she was in that range where she wanted to get a long-term care plan it sounds like for herself but what was the kind of the eye-opening part of the funding and the business owner piece of that?Yeah so I think you know much like a lot of business owners you know I would say a lot of business owners kind of are at the age now or reach a point where they have what I call a runway right which is they in their mind have about 10 years left and they’re structuring their business to sell it to retire to pass it on to their kids so that’s about where she was she had about 10 years left in her mind and what was great about the planning is we walked through long-term care insurance how we fund it what the benefit pools are what the leverage factors are on that which is great and then we could say look if we structure this for 10 premium payments so it’s paid up after 10 years but the coverage is there for a lifetime we can write off again she’s a pass-through entity so she I think her number was about 64 percent of the premium but she was able to budget that and structure that so over the next 10 years a portion of her what would normally be taxable income to her she was allocating to fund a long-term care plan and writing off about 64 percent of that so that was a win-win you know not only did we take money and leverage it to create a much larger tax-free pool to pay for long-term care but at a cost that was 64% of it she didn’t have to pay taxes on so that was great. I won’t call it a government subsidy but clearly the government wants to encourage people toget their long-term care plan so this is a nice extra value there that they provide.
Marc: So Trey thanks for being on the show today and for sharing your knowledge I'm sure we’re going to do more both webinars as well as videos with you to learn more about these topics and the clients you’re working with so I hope to have you on future episodes.
Trey: Great love to do it thanks.
This transcript has been edited for length and clarity and all statements were general innature. Laws have changed since the recording date, so please consult a qualified advisorregarding your specific situation.