2023 EP0722 | Financial Updates | Don't Have Long Term Care Insurance? The Government May Tax You!

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Peter, good to see you. A really important topic today. If you don't have long-term care insurance, the government may tax you. We've discussed before that the right time to buy long-term care insurance is before you need it, but now you may not have much of an option. Thirteen states are now considering taxing those without a long-term care insurance policy. In Washington, the mandate has already passed. Residents who don't have a policy will face a payroll tax of 58 cents on every 100 they earn with no cap. So do you see more states adopting this mandate?

I do. And the part about Washington is that they also now offer a little bit of a stipend for long-term care expenses on the other side of this. I think that that is something that's going to be a trend setting type of approach is that these other 13 states are considering taxing those that don't have the long-term care in place because states are underwater. They're drowning in the costs of Medicaid. And one of the big portions of that is that they are on the hook to help to fund and pay for those people who enter into long-term care or assisted living or nursing home care that have not taken the steps to plan for this on their own. So in order to offset some of that potential expense, some of that real expense, what they are doing is that they are proposing to tax people during their working and healthy years so that if they encounter that event later on down the road, there is a pool that helps them to offset that expense.

And it certainly is not the first instance in which the government has taken such proactive steps. I'm glad you brought that up because the government is clearly concerned about the increasing cost of nursing homes, which is expected to rise from $12,000 a month up to $23,000 a month by 2050. There's also speculation that this may become federally mandated. So how should we prepare for the eventuality that we will one day be mandated to buy long-term care insurance? Yeah, well, the costs of long-term care insurance are increasing and inflating faster than almost any other category.

And again, the government has taken proactive steps to mandate that we cover potential future expenses in a couple other instances. Social Security was enacted in 1935. They have been forcing us to buy insurance since that time to cover old age and disability impoverishment. Social Security is specifically an insurance against disability or old age impoverishment, and it provides a baseline income in those categories. And we look at it as a retirement benefit, and it is, but it is an insurance program, a mandated insurance purchase during your working career. And then the Affordable Care Act for health care, same kind of thing is that they have essentially mandated that we purchase a type of insurance and that we put some skin in the game. Well, this is the same thing is that we are considering or the states in question and possibly federally are considering that we mandate that people purchase their own long-term care insurance, basically shifting that burden from the government funding 100% of all of those costs to us as people individually funding the potential of those costs when we are young and working and healthy. So it's shifting the burden and hopefully, you know, this is something that people are waking up to, paying attention, aware of and being proactive on. And something that you brought to my attention following the recent passage of the SECURE Act is that there is now a provision that you can buy long-term care insurance directly from your 401k.

Can you explain this, please? Yeah, so if you are looking for long-term care insurance of which there's really slim pickings now, I mean, there used to be a plethora of companies that offered this and there's now less than a handful that offered traditional long-term care insurance. Federal government themselves actually got out of the market earlier this year, the Office of Personnel Management announced that they are no longer offering new employees the option for the long-term care insurance that they once offered. But what they are saying with the passage of the SECURE Act 2.0 is that you can withdraw up to $2,500 per year right from your 401k without the 10% penalty regardless of age and use it to purchase long-term care insurance.

So with the potential of this tax on the horizon, this may be a good thing to go ahead and get a jump on and if you've got a reasonable balance built up in that 401k or you're making ongoing contributions, it would be a way to reposition dollars and potentially avoid this tax. Go ahead and secure that long-term care insurance now ahead of time. And again, you know, there is a real limited market on traditional long-term care insurance. So the industry has moved more toward accelerated benefits from life insurance. If you've purchased life insurance, the death benefit is there, but if you need it for long-term care costs during your lifetime, you could advance yourself that death benefit or what's called a linked benefit with an annuity that has a guaranteed baseline of income. But that that income increases if you have or encounter long-term care costs and the alternatives are that you are self-insured. And, you know, I could take $500,000 and put it in the bank for my $500,000 home and say, well, I'm self-insured.

I no longer need homeowners insurance. But is that really the best way to do it? It's probably not the most efficient way to do it. And the government's basically forcing our hand that that's not the optimal way. And then the final approach is to plan on being dependent. If we've taken no other proactive steps, that is your default plan. The government's saying that if that is your default plan, you're planning on being dependent on Medicaid.

No, no, no, not so fast. We're taking these steps now to address people who are not planning to protect themselves from these expenses in the future. Which, by the way, the Department of Health and Human Services statistics state that about 7 in 10 of us, 69.8%, need some amount of assistance before the end of our lives. But only like 1 in 10 people have actually addressed it and have any form of of that long term care insurance in place. So this provision in the SECURE Act that allows you to utilize your 401K funds to address it probably is going to be a method in which we see a lot of people taking those steps. And if it becomes a federal mandate, I would assume that we also see that that option becomes available right within the 401K.

Haven't haven't encountered that yet, but that would be my assumption. As you and I were talking it through, though, I bristled a little bit at the fact that as a 20 year old, you have to be buying long term care insurance. I don't have any long term care insurance, Peter. It feels like it's not even relevant to me right now. Right.

Yeah. And we've heard for decades that the right time to buy long term care insurance is somewhere between like 60 and 65, maybe, because then you're not paying into it forever and ever without a high probability of needing it. And you get it at a young enough age where those health issues that come up aren't prohibitive. But the government doesn't care about that. They have forced us to pay into Social Security from dollar one that we earn to prevent disability and to protect against poverty in old age. And I would assume that this system, when when we see it come to fruition, is very much the same, that each and every dollar that we earn from the very first ones we earn are subject to protecting our future selves and the government and and others against these potential costs falling on everyone's shoulders. So do you see, then, the benefit of pulling money from that 401K? Is it a tax benefit or is it just still better to go buy your own policy by yourself? Well, I think in essence, you are buying the policy by yourself. You're just using it with dollars that had some limitations in accessing them. So rather than doing it out of new cash flow moving forward, if you've got that balance there, maybe you can do so off just a portion of the growth that those dollars would hopefully achieve over the course of a year. So it's it's kind of six and one half dozen in the other there.

But if we've already got a pot of money over there, it just may feel easier than doing it out of our after tax payroll new income. Interesting. I'm glad we were able to talk about this today, Peter, because it's certainly very relevant to everyone. Yeah, I think it's new on the horizon. Not a lot of people have heard about this yet.

But it is a proposal in place in 13 states. We will be hearing a lot more about it, I'm sure. Peter, how can somebody get a hold of you with questions? If you would like to be in touch, if you have any questions about your financial investment retirement planning, you'd like to get that optimized retirement plan put together. Just give us a call at Roshan planning 919-300-5886, 919-358-86, or you can visit online Roshan planning.com.

It looks like rich on planning.com. It's my last name, Peter Roshan at Roshan planning. And we look forward to helping anyone who wants to further their financial and retirement planning progress. All right, Peter, thank you. Always a pleasure.

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