Secure Act 2.0 Long-Term Care Insurance

Secure Act long-term care insurance

The SECURE Act 2.0 was signed into law on December 29, 2022. The law delivers dozens of retirement-related benefits. One provision benefits those considering the purchase of long-term care insurance. What is now allowed? Who benefits? Will this impact future long-term care insurance sales?

Let me preface everything with the following. It has long been my position that when it comes to long-term care insurance, SOMETHING IS ALWAYS BETTER THAN NOTHING" and the same can be said about the Secure Act provisions. It's great to be included (that's SOMETHING!). And, kudos to those individuals, companies and organizations that worked and continue to work to further these types of efforts. It's a difficult task and they deserve to celebrate every win, even the small ones.

What Is The Secure Act 2.0?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 revised existing rules around retirement saving. The Act was signed into law on December 20, 2019 by President Trump. And, the measure took effect January 1, 2020.

The SECURE Act had several key benefits for aging Americans. It raised the age of required minimum distributions (RMDs) from retirement accounts. It also eliminated age limits for traditional IRA contributions.

Congress followed-up with the SECURE 2.0 Act. President Biden signed 2.0 into law on December. SECURE Act 2.0 builds on the original Act. It addresses additional issues related to retirement and savings that were not part of the original law.

SECURE 2.0 provisions were included in a 4,100-page, $1.7 trillion spending bill that will fund the government through fiscal 2023.

SECURE 2.0 and Long-Term Care Insurance

Section 334 of the Act permits retirement plans to distribute up to $2,500 per year for the payment of premiums for certain specified long term care insurance contracts.

Distributions from plans to pay (qualifying) long-term care insurance premiums are exempt from the additional 10% tax on early distributions.

Two important things to know:

The law specifies that only a policy that provides for “high quality coverage” is eligible for early distribution and waiver of the 10% tax. According to industry experts, the initial intent was to include various LTC products. But, in the end, it's still unclear and likely will only benefit a very small percentage of policies that consumers buy today.

This measure becomes effective 3 years after date of enactment of this Act. Basically, that means 2025.

Will SECURE 2.0 Really Benefit Long-Term Care Insurance

Opinion Statement from Jesse Slome, director of the American Association for Long-Term Care Insurance.

“I hate to say it, but this is truly a rather insignificant and meaningless measure in terms of encouraging more Americans to plan for the real prospect of needing long-term care. Few individuals who can afford and health qualify for protection will willingly tap their retirement plan savings for the purchase of long-term care insurance. And, for those who do, the tax savings is nominal. In fact, it could actually cost most people more.”

Below are a few of the reasons I have taken this stand.

While they point out the reasons I describe this as ‘insignificant and meaningless’ it is important to state that something is better than nothing. And, organizations that have pushed hard for these measures deserve credit for keeping discussions about long-term care insurance alive. There certainly are those who are opposed to the existence of a private sector role as part of the solution.

I recall the days when 750,000 people purchased LTCi (in a year). There's much to be done to get back there. MUCH!

Jesse Slome, Director
American Association for Long-Term Care Insurance

Few Policies Included: Historically the phrase ‘qualifying;’ has been defined as ‘traditional’ long-term care insurance. Roughly 50,000 of those policies are purchased annually. Numbers used to be significantly higher. The number in 2021 was higher due to a 1-time special tax avoidance effort in the State of Washington. There is a likelihood that some hybrid LTC policies will be included if they include certain provisions (such as inflation protection) This could double or triple the number of policies that would be eligible. But that's NOT clear at this time. Will it become clear before 3 years? Will there be a SECURE 3.0?

Few Buyers Benefit. For traditional long-term care insurance buyers, most purchase coverage after age 55 or 60. These individuals will get little or no benefit from the 10% early withdrawal tax waiver. Around 10% of new policy buyers are between ages 50 and 54, when they would at least get a few years of tax benefits.

People With Income & Assets Typically Don’t Tap Retirement Plans To Plan For Future Needs. More than half (52%) of Americans have tapped into their retirement savings early, according to a recent survey from Magnify Money. Nearly a quarter (23%) did so in order to pay off debt. Some 17% to cover a down payment on a home, 11% to pay for college and 9% for medical expenses. Individuals who buy LTC insurance are planners and they generally have income and assets. They are unlikely to see value in diminishing their retirement planning growth.

You Don’t Avoid Income Taxation. The Act waives the 10% early withdawal penalty. But the withdrawals are still subject to income taxation. Assuming someone buying long-term care insurance at age 55 is still working, their $2,500 withdrawal will be subject to taxation at their current bracket(s). If they are not working (say due to health conditions) they will not health qualify for long-term care insurance.

Valuable Resources for Consumers

2022 Long-Term Care Insurance statistics

Long-Term Care Insurance prices ages 55 and 65

Medicare Insurance Statistics

Find A Local Medicare Insurance Agent