The measure, which would eliminate income tax and the 10% early
withdrawal penalty, could boost the pool of Americans seeking private insurance
A bill currently being discussed in Congress
would allow retirement savers to tap assets held in 401(k) plans and individual
retirement accounts tax-free to buy long-term care insurance, with
the aim of making the insurance more affordable and potentially driving down
premiums for customers.
Sen. Patrick Toomey, R-Pa., plans to introduce
a bill in the
coming weeks or months that would amend the federal tax code to allow the withdrawal
of up to $2,000 of retirement assets annually to pay long-term care insurance
premiums and other policy charges. The withdrawals wouldn't be subject to
income tax, and the $2,000 cap would be indexed for inflation.
And if savers younger than 59½ withdrew assets
for this purpose, they would not be assessed the typical 10% penalty for early
withdrawals.
Mr. Toomey is currently distributing a discussion draft of
the legislation and soliciting input from other members of Congress and the
general public, said Steve Kelly, his communications director. The bill's final
form could change.
The bill comes as increasing longevity boosts
the number of Americans who need some form of long-term care during their
lifetime. Health and Human Services estimates 52% of Americans turning 65 today
will develop a disability serious enough to require long-term care services,
such as a nursing-home stay or a home health aide.
And those services can be expensive. The median U.S. cost for
a month's stay in a private room in a nursing home is $8,517, according to
insurer Genworth Inc. The median monthly cost for an assisted living facility
is $4,051, and $4,385 for a home health aide.
While most Americans will only require
assistance for two years or less, one in seven will need care for more than
five years, according to the Department of Health and Human Services.
Paying out of pocket and using government
funding through Medicaid are the most popular ways to pay for
long-term care, at 52% and 34%, respectively. Only 2.7% paid for claims with
private insurance, according to HHS.
"The market for long-term care insurance
is rather narrow and defined," said Jesse Slome, executive director of the
American Association for Long-Term Care Insurance. "But this [bill] is a
great thing because it will help encourage the expansion of people who buy
it."
As drafted, the bill would encourage Americans
ages 50 to 59 to consider buying long-term care insurance, especially as a
result of the removal of a 10% early withdrawal penalty for retirement
accounts.
It can be beneficial for individuals to buy
the insurance in their 50s or early 60s because it's often easier to qualify
for the insurance at younger ages, when people are typically healthier, Mr.
Slome said. The list of medical issues for which insurers can deny coverage to
applicants has grown, and the chances of incurring these health conditions
increases the older people get, he added.
A single 55-year-old male paid an
average $2,050 in annual long-term care insurance premiums in 2019, according
to AALTCI. A 55-year-old female paid an average $2,700.
Sales of traditional long-term care insurance
policies have fallen more than tenfold over
the past two decades, to roughly 58,000 policies sold last year. That's partly
a reflection of negative consumer sentiment in the marketplace after many
insurers raised premiums for existing policy holders.
Some financial advisers have shown a preference
for so-called hybrid policies that bundle life insurance and long-term care
benefits.
The Toomey bill would allow savers to use
retirement assets toward a qualified long-term care insurance policy as defined
in Section 7702B(c) of
the tax code.
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