A new bill being finalized in the Senate would eliminate income tax and the 10% early withdrawal penalty for consumers age 50-59 who tap their retirement plans to purchase a long-term-care insurance policy.

Sen. Patrick Toomey, R-Pa., plans to introduce the bill, which 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.

Less than 4% of nursing home stays due to dementia and Alzheimer's are currently paid for by insurance, the American Association for Long-Term Care Insurance (AALTCI) said.

The $2,000 annual tax- and penalty-free withdrawal from 401(k) plans and IRAs could offset a significant portion of annual LTCI premiums. On average, a single 55-year-old male paid $2,050 in annual long-term-care insurance premiums in 2019, That annual premium rose to $2,700 for 55-year-old females, due to women’s greater longevity, the AALTCI said.

Roughly half of Americans turning 65 today will require long-term care. “There is clearly a large gap in the market, which long-term-care insurance can fill,” National Association of Insurance Financial Advisors CEO Kevin Mayeux and American Council of Life Insurers President and CEO Susan Neely wrote in a joint statement to Toomey, who chairs the U.S. Senate Finance Committee on Health Care.

LTCI policies, including hybrid and combination life insurance or annuity products which many advisors prefer, can offset the financial risk associated with long-term care events.

The bill would encourage consumers younger than 59½ to purchase LTCI using qualified retirement assessments by waiving the typical 10% penalty for early withdrawals. That change should potentially work in consumers’ favor, since they would be purchasing LTC insurance policies before illness makes them uninsurable or makes policies pricier or even unaffordable.

But the industry will have to meet consumers and lawmakers half way. Sales of traditional long-term care insurance policies have tumbled in the past 20 years, a direct result of the fact that many insurers raised premiums significantly for existing policy holders.

As life expectancy continues to rise and the cost of care creeps up, the risk of a consumer needing long-term health care is significant, according to study published in the Journal Health Affairs, which projects that 27 million Americans will require long-term care by 2050.

Currently 34% of Americans pay for nursing home care out of pocket. Only 2.7% paid for claims with private insurance, according to Health and Human Services. While the average stay in a nursing home is approximately two years or less, that can cost a senior $8,500 per month, if they don’t have private insurance or do not qualify for Medicaid.

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