March 26, 2001
Tax Cut Could Boost Long-Term-Care Policies
By Jim McTague
Now that the Internet has crashed and taken Wall Street down with it, entrepreneurs will have to get rich quick the old-fashioned way – by selling insurance.
Sales of long-term-care insurance are expected to increase dramatically if Congress approves a tax cut this year. Proposals in both the House and the Senate would provide policyholders tax deductions. Congress wrote similar language into tax bills that it passed in both 1999 and 2000. Former President Bill Clinton vetoed both bills. Prospects look better this year with President George W. Bush's strong push to cut taxes, the case for which appears more convincing given the flagging economy. The measure also has powerful allies in Congress. Senate Finance Committee Chairman Charles Grassley, for one, is an ardent supporter of the deduction for long-term-care policies.
Long-term-care insurance covers nursing-home expenses in the event the holder becomes pixilated or physically incapacitated during the twilight years. Federal Medicaid coverage for nursing-home care is available to poor people and to persons who become impoverished as a result of exhausting their savings on nursing-home care.
Currently, long-term-care policies in force total $4 billion and cover about three million people. GE Capital, a unit of General Electric , is the largest player in this market. Its wholly owned subsidiary, GE Financial Insurance, has over $1 billion in coverage in force for over 650,000 persons, according to spokesman Mike Kacel. Other players include MetLife , Aetna , John Hancock, Unam , Conseco , and Prudential. Sen. Grassley will hold a full committee hearing Tuesday on a bill creating tax deductions for long-term-care insurance premiums that he is co-sponsoring with Democrat Sen. Bob Graham of Florida. Republican Rep. Nancy Johnson of Connecticut and Democrat Rep. Karen Thurman of Florida introduced a similar bill in the House on March 1.
The tax deductions would result in a surge of business, predicts Dan Ouellette, John Hancock's vice president of long-term-care product management. According to the American Council of Life Insurers, a trade group, the median age of policy purchasers at the current time is 67. With a tax cut, the median age of purchasers would migrate downward, perhaps to as low as 43 years of age -- the current median age of purchasers whose companies offer the insurance in benefit plans.
Congress is in favor of the tax deduction because increased sales of the private insurance would reduce pressure on Medicaid. The insurance industry favors the plan because the potential market among Baby Boomers is huge. The industry estimates that in the year 2030, when the youngest Baby Boomers hit 65 and the oldest ones are in their 80s, there will be a total of 70 million seniors in the U.S., double the current number.
Not only do Boomers face the challenge of living longer, says the industry, they also must face the fact that they have fewer children to fall back on for support in a pinch, necessitating a "Plan B," like insurance. Divorced parents are in as precarious a position as those without kids, according to a study by the ACLI. It turns out that their adult children are less inclined to fund their parents' assisted living expenses than are the children of widows and widowers. If these apparently angry offspring are insurance agents, perhaps then they might sell their parents a policy. The first-year commission runs from 30% to 50%, enough to make a stockbroker blush!
You say that sales is not your bag? You might consider becoming a squealer for the Internal Revenue Service. Your tip could be worth 10%-15% of delinquent taxes and penalties collected by the IRS, up to $2 million, depending on the accuracy of your information. Simply fill out an IRS form 211 (Application for a Reward for Original Information) and mail it into the Criminal Investigation Division.
In fiscal 1999, according to the latest IRS data, 517 of the 7,096 people who squealed hit pay dirt. As a result of these tips, the IRS recovered $167,529,731 in delinquent taxes and paid record rewards totaling $7,963,594. The previous record for rewards was in 1993, when the IRS paid 829 persons $5,256,407 on recoveries of $172,072,960.
In fiscal 1998, a total of 6,687 people squealed and 737 of them split $6,662,793 in reward money. The IRS recovered $83,871,049.
The IRS needs all of the help it can get in catching cheaters. Audits, it claims, are down 50%, to 618,000 last year, owing to manpower shortages. The IRS had to shift 758 of its 14,252 auditors into customer-service slots to fulfill a pledge to Congress to answer telephone inquiries from taxpayers in a timely manner.
Self-employed persons, especially those who operate on a cash-only basis, are shortchanging the IRS by about $195 billion a year, according to a guess that the IRS bases on 1988 data. And tax attorneys representing disputants have the advantage of better software than the IRS, because the service's desktop computers are so old, they don't have enough memory for the latest programs.
The IRS will request a total budget of $8.992 billion from Congress for fiscal 2002, up 6%. This number includes about $97 million to upgrade the personal computers. As far as we know, no bids have yet been awarded. The IRS also wants more money to hire more auditors.
This latter request might be a tough sell. Sen. Grassley last week accused the IRS of doing some cheating itself. He says the IRS is understating the audit rate to get more money out of Congress. Grassley cites a recent article in the specialty publication Tax Notes, which said that the IRS is not counting its computer-based reviews of tax returns. There were 3.6 million of these reviews in 1999, he says. Grassley also complains that only 606 of the 3,858 new hires at the IRS approved by Congress last year will be added to the auditing staff.
The IRS says the computer reviews are not audits by definition. They can detect math errors and also flag a discrepancy in income reported by the taxpayer when it is at odds with income reported by a third party for that taxpayer on a Form 1099. These are the forms used by banks and brokerage firms to report your dividends and interest. But these electronic reviews cannot ferret out other kinds of errors or omissions.
Disputing the notion that these electronic reviews are as effective as audits, an IRS spokesman told us, "You can count all of the apples and all of the oranges and come up with more fruit. But you don't have any more apples."
The U. S. Postal Service has begun campaigning for partial privatization, which could spell trouble for the private-sector package crowd. In a March 2 letter to President Bush, the Postal Service predicted that it would lose over $2 billion in fiscal 2001. The letter is signed by each of the nine members of the Postal Service's Board of Governors.
The financial crisis cannot be averted by better management alone, says the letter. "We have achieved record productivity and service levels over the last several years, but first-class mail volume growth is in decline. Costs driven by our antiquated statutory scheme are growing faster than revenues, and margins are shrinking." The Postal Service has curtailed nonessential activities, reduced its capital budget by $1 billion, and is taking steps for a rate hike, which sources tell us could raise the cost of first-class postage by four cents. "These actions will assist in the short term. Long-range solutions, however, require substantial changes to our regulatory framework."
One change sought by the Postal Service would allow it to set rates itself. Hikes now must be approved by the Postal Rate Commission. The letter warns that the Postal Service's ability to deliver the mail every day to every
address is at serious risk. Republican Rep. Dan Burton, who chairs the House Committee on Government Reform, has seen the letter and is alarmed. He will hold a hearing on the plight of Postal Service on April 4.