Proposal Would Allow Use of Qualified Money to Pay for Long-Term Care Insurance

As more American families face the challenges of Alzheimer's and other dementia, along with other chronic health and aging issues, the need for long-term health care planning has never been more apparent. 

New federal legislation would allow 401k, IRA, and other qualified money to be used without penalty to pay for Long-Term Care Insurance premiums. Many American families have money in retirement accounts that normally cannot be accessed without penalty before age.

The Internal Revenue Service currently allows penalty-free withdraws from these qualified retirement accounts after age 59 ½. The IRS requires withdrawals (Required Minimum Distributions) from these accounts after a person reaches age 72.

U.S. Senator Pat Toomey (R-PA) is re-introducing a bill to increase the affordability of Long-Term Care Insurance by allowing individuals to pay up to $2,500 each year for a qualified policy by using money from their 401(k), 403(b), and IRAs without a tax penalty.

Senator Toomey's Long-Term Care Affordability Act would give more American families access to money they already have in a retirement account to protect their future retirement income and assets from the costs and burdens of aging. 

Money in Qualified Retirement Accounts Can Be Accessed Without Penalty

"The onset of a chronic illness requiring nursing home or in-home care too often has the potential to financially devastate older Americans," said Senator Toomey. 

"This legislation allows Americans to use existing retirement accounts to pay for Long-Term Care Insurance – a commonsense change to enhance financial security in retirement. I hope my colleagues will join me in supporting this measure," the senator explained.

LTC Insurance is More Affordable When Purchased Younger

Those with excellent health could be qualified for preferred health discounts. While Long-Term Care Insurance premiums vary widely between insurance companies, the American Association for Long-Term Care Insurance indicates that a 55-year-old couple with 'standard' health can obtain a comprehensive policy for around $3000 a year. This amount is well under the $2500 per person allowance offered with this proposal. 

Almost half of all Long-Term Care Insurance is purchased by individuals aged 45 to 59, according to the 2021 Milliman Long-Term Care Insurance Survey published by Broker World Magazine. 

According to the U.S. Census Bureau, 50 percent of individuals who live beyond age 65 will need some long-term care, and more than half of American households contribute to retirement accounts. All of them would be eligible to pay for a Long-Term Care Insurance policy with retirement savings under this legislation.

People require long-term health care due to changes in their health, accidents, or age-related issues like dementia or frailty. The risk increases as a person get older.

Health Insurance and Medicare Won’t Pay for Most Long-Term Care Services

Health insurance, including Medicare and supplements, will not pay for most long-term health care services as they are custodial in nature - in other words, they address people's need for assistance with daily activities or supervision due to cognitive decline.  

Medicaid will pay for long-term care services; however, you must have little or no income and assets to qualify for this benefit. Long-Term Care Insurance is designed to provide guaranteed tax-free benefits for all areas of long-term care, including in-home care, adult day care, assisted living, memory care, and traditional nursing home care. 

The costs of long-term care services can be staggering and adversely impact a family's income, assets, lifestyle, and legacy. The LTC NEWS Cost of Care Calculator indicates the costs do vary depending on where a person lives. Nursing home care is the most expensive, with a national average of over $100,000 a year. Other types of care are less expensive but not cheap. 

Long-Term Health Care is Costly – Getting More Expensive

All long-term health care costs are increasing every year as demand outweighs supply and labor costs are increasing - Cost of Care Calculator - Choose Your State | LTC News. Most experts say as Generation X and Late-Boomers get older - along with the remaining Baby Boomers - demand for care services will continue to increase dramatically in the coming decades.

Senator Toomey has received support from many organizations for his proposal:

· Alzheimer's Association

· Alzheimer's Impact Movement

· America's Health Insurance Plans (AHIP)

· American Seniors Housing Association

· Argentum

· Edward Jones

· National Association of Health Underwriters (NAHU)

· National Association of Insurance and Financial Advisors (NAIFA)

· National Association of Insurance Commissioners

Alzheimer’s and Dementia Devastating to Families

"Alzheimer's is a devastating and fatal disease impacting millions of Americans," said Robert Egge, Alzheimer's Association Chief Public Policy Officer, and Alzheimer's Impact Movement (AIM) Executive Director. 

"One of the most expensive diseases in the nation, for too many American families paying for the costs associated with caring for a loved one is a challenge. We are grateful to Senator Toomey for his leadership in re-introducing the Long-Term Care Affordability Act. This bill could make a meaningful impact for families struggling to pay for care, by making Long-Term Care Insurance more accessible by creating the ability to use retirement plan funds to obtain the insurance," Egge said.

The State of Washington is in the process of encouraging the purchase of Long-Term Care Insurance through the Washington State Long-Term Care Trust Act (now known as the Washington Cares Fund). A new state tax will fund a minimal long-term care benefit unless a person purchases a qualified Long-Term Care Insurance policy. Several other states are looking at similar laws. Washington State has some of the most expensive long-term care costs in the country, with in-home care averaging around $5700 a month (based on a 44-hour workweek) Washington Long-Term Care | LTC News.

America is Getting Older

Argentum, a national trade association representing managed senior living communities in the United States, says that by the end of this decade, each of the 74 million Baby Boomers will have reached 65. They will have a roughly 50% chance of needing long-term care at some point in life. 

"As the need for long-term care increases, this legislation provides a critically important means to help ensure more Americans have the financial ability to meet their care needs," said James Balda, Argentum President and CEO.

You can read a one-pager on the legislation here, and the text of the bill is available here.

LTC Insurance is Medically Underwritten

Long-Term Care Insurance is medically underwritten, so an individual must have reasonably good health to obtain coverage. The underwriting criteria vary depending on the insurance company. The older a person waits to obtain coverage; the more likely pre-existing health can make it either much more expensive or unavailable. Most people are purchasing Long-Term Care Insurance well before retirement - Majority of LTC Insurance Buyers are in Their 50s | LTC News.

Premiums also vary dramatically between insurance companies and are based, in part, on age, health, family history, and the amount of benefits being purchased. LTC Insurance is custom-designed, so the consumer gets to decide the size of their policy. 

Tax Incentives Available with LTC Insurance

Federal law does provide for some tax incentives Long-Term Care Tax Benefits Guide. Some states offer state tax incentives as well. Forty-five states offer Partnership Long-Term Care Insurance plans with dollar-for-dollar asset protection - Compare State's Long-Term Care Details | LTC News.

Aging is part of life, and we all experience changes in our health, body, and mind as we get older. Preparing for the costs and burdens of aging will not only protect income and assets but allow your loved ones the time to be family instead of caregivers.