Secure 2.0 May Stabilize the Long-Term Care Toolbox: Howard Sharfman

What You Need to Know

Sharfman expects Secure 2.0 Section 334 to help some clients find the cash to fund LTC planning arrangements.
He says one challenge will be client education.
He notes that new tax bills will be just part of the cost of using Section 334 distributions.

A new federal law could add stability to the long-term care insurance market, according to a top wealth planner.

Howard Sharfman, senior managing director of NFP Insurance Solutions, said Thursday that the law, part of the Secure 2.0 Act, will give the insurers still in the LTCI market a reason to stay.

“I believe the press associated with Secure 2.0 will increase the awareness of client’s need for LTC coverage,” Sharfman said in an email interview. “I do not believe that additional carriers will enter the market. However, the current carriers will continue to support their products and market the new benefits.”

What It Means

The odds that the clients who take long-term care risk seriously will have sturdy tools for doing that might be improving.

The Law

Congress put the long-term care insurance payment provision in Section 334 of Secure 2.0 — the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022.

Section 334 will let a client use up to $2,500 in individual retirement account or 401(k) plan account assets per year to pay for stand-alone long-term care insurance.

A client can also use the distributions to pay for life insurance policies or annuity contracts that provide what the law classifies as high-quality sources of long-term care benefits.

A client who uses the provision will have to include the distributions in taxable income but will not have to pay the extra 10% tax on early retirement asset withdrawals.

The History

From the late 1980s through around 2000, the LTCI market boomed.

Sharfman’s Views

Sharfman predicted that the new Section 334 law will help some clients find the cash to pay for long-term care planning arrangements.

But he said agents and advisors will have to make sure that clients understand that increased income tax bills will be just part of the cost of using cash already in an IRA or 401(k) plan account for LTC planning.

“In addition, the future value of the retirement account can be significantly affected by the early withdrawals,” Sharfman warned. “For example, if a client withdraws $2,500 annually from their IRA from age 40 to age 70, and earns an annual rate of return of 7%, their IRA will be negatively affected by over $236,000. On the other hand, the client will have very valuable long-term care coverage.”

One solution is for advisors to talk about the value of adding overfunded life policies and income annuities to a client’s portfolio, to create other mechanisms for paying for long-term care services and funding LTC planning arrangements, he said.