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Should you opt out of Washington’s new long-term care insurance program?

Washington is the first state to approve a payroll tax that will raise money to cover long-term care costs for some of its residents. Beginning January 1, 2022, an uncapped tax of 0.58% will apply to earned income. That tax will provide qualifying residents with as much as $36,500 of inflation-adjusted future benefits to pay for long-term care (LTC) costs.

There is a one time opportunity to opt out of the tax by purchasing a private LTC insurance policy before November 1, 2021. For those wishing to opt out however it’s likely a good idea to begin researching policies now as there may be a rush of people trying to buy policies as the deadline nears.

Should you purchase your own policy to opt out? It really depends on whether you think you’ll actually need any long term care insurance and your income. Most people wouldn’t need any long term care until they’re older, at which point they may have enough assets to essentially self-insure. Additionally, high income earners will save money by opting out (not to mention receive much better coverage provided by private plans than the state benefit).

Here’s a look at the potential annual tax paid at different income levels: 


Depending on your age, health, and the type of benefits you select, private insurance premiums can represent significant savings for high income earners. 

Coldstream Wealth came up with the following estimates for premium costs:

At a glance it’s apparent that for most it will be cheaper initially to just pay the tax instead of opting out and purchasing private insurance. However, the coverage provided by the sample plans is a significant upgrade over the state coverage. Additionally, there is nothing in the plan stopping someone from opting out and then dropping their private coverage. Thus one can avoid the tax and continue to go without long term care insurance.  

Beyond just the comparison of initial cost it’s also important to keep in mind the optionality value of opting out. While the initial tax is set at 0.58% of earned income, that tax could always increase in the future. Maybe you expect your income to greatly increase in future years. In that case you may pay more for a private plan currently but could save money in the future as your earnings increase.

Scott Caufield, CFA, CPA