Secure 2.0 rule allows early 401(k) withdrawals for LTC insurance

Workers may have a new way to help them prepare for largely unpredictable health-related expenses in their golden years.

Under a new rule now in effect, 401(k) plans are allowed to allow participants to make limited penalty-free withdrawals for long-term care insurance, which covers the cost of assistance with activities of daily living such as bathing, dressing and eating, and is often needed later in life. The new rule has been included in the 2022 pension legislation. Safe Law 2.0and had a delayed effective date of three years or December 29.

But it comes with limitations. Experts say it’s important to consider whether it makes sense to use retirement money for long-term care insurance or whether you should purchase a policy.

” [rule] “It’s there for people, but it may not be practical to use it,” said Carolyn McClanahan, a physician and certified financial planner based in Jacksonville, Florida. He is a member of CNBC’s Council of Financial Advisors.

Typically, withdrawals before age 59½ are subject to a 10% penalty in addition to regular taxes. already exists Some exceptions where the penalty is not appliedThat includes qualified birth or adoption, certain non-reimbursable medical expenses, and what’s called the 55 rule, which applies if you leave the company on or after the year you turn 55.

By the time you reach your 65th birthday, there is about a 70% chance that you will need some type of long-term care services and support. 2020 forecast US Department of Health and Human Services. On average, women who need care take longer to receive care; While this period is 2.2 years for men, this period is 3.7 years. While one-third of 65-year-olds will never need long-term care, 20 percent will need care for more than five years.

But Medicare, which is the health insurance that most people have starting at age 65, usually doesn’t cover this care. While unpaid family members often serve as caregivers for long periods of time, more formal arrangements may become necessary and these paid options can be expensive.

For example, according to the 2024 Cost of Care survey conducted by Genworth Financial, the cost of a home health aide reached an average of $77,792 annually last year; This is up 3% from 2023. The national annual average cost of a semi-private room in a nursing home increased 7% from 2023 to $111,325. The average annual cost for a private room increased 9% to $127,750.

Options for covering these unforeseen costs range from self-insurance—you’re wealthy enough to pay out of pocket for these expenses if and when they arise—to qualifying for Medicaid, which covers some types of long-term care for individuals with little or no financial resources.

McClanahan, founder of Life Planning Partners, said some form of insurance is more common for people who fall in between. But he said the claims process can be cumbersome for traditional long-term care policies, and good insurance premiums tend to be expensive.

For a pure long-term care policy, a 55-year-old man with $165,000 in coverage and 3% annual inflation protection, meaning the benefit increases annually by that amount, would pay an average annual premium of $2,200. According to the American Long Term Care Insurance Association. A policy with a 5% annual benefit increase would cost $3,710 annually.

Women, who tend to live longer, face higher pricing. A 55-year-old woman pays an average of $3,750 per year for $165,000 in coverage and 3% annual growth. For a 5 percent benefit increase, the policy would cost $6,400 annually, according to the association.

Insurers can increase premiums from year to year.

Many people purchase a hybrid policy, McClanahan said. This is usually a life insurance contract with a long-term care provider. In other words, some of the care costs are covered, but there is also money transferred to the beneficiary if you do not use any or all of the long-term care benefits.

In contrast, pure long-term care policies do not come with any guaranteed payouts; If you die without using any or all of the insurance’s benefits, the money you paid into the insurance through premiums is effectively lost.

“Traditional policies cost a lot of money and people don’t want to get into them because when you die they go away,” McClanahan said. “A hybrid policy’s coverage is not as rich as a straight long-term care policy, but it is still some money within reach for long-term care.”