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Retirement Planning/Pay for longterm insurance from 401K?

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QUESTION: My husband and I live in Washington state and are considering buying longterm-care insurance. Our only assets are our house and our 401Ks, and we are in our mid-50s. The insurance is fairly expensive -- around $200/month for coverage that includes an automatic inflation adjustment. The insurance broker has suggested that we arrange to have the premium taken out of our 401K once a year -- she says we can do this for five years with no penalty, then we'll be past the 59 1/2-year penalty age.

I haven't seen anywhere else that this is possible, but assuming she knows what she's talking about, do you think it's a good idea to pay for longterm-care insurance from a 401K? Hate to chip away at the nest egg, but on the other hand, paying for longterm care in a medical crisis would be financially devastating, too.

Thanks!

ANSWER: Hi Beth,
I have never heard that you could pay long term care premiums from a 401k without penalty. Even if you could, you would still be taxed as ordinary income on any amount you withdrew. So to take out $2400 after tax you would need to withdraw $3000-$3500 depending upon your tax bracket and state taxes where you live. Doesn't sound like a good idea to me, and you would lose future growth on all the funds you withdrew. The only time I would recommend doing that were if someone were over age 70 1/2 and needed to take required minimum distributions but didn't need the money to live on. In that situation, it would be appropriate to buy LTC or life insurance using 401k or IRA funds.

$2400 sounds awfully cheap for LTC insurance for both of you. LTC policies are built according to the clients needs so you can pick and choose what features you want. It would make no sense to buy LTCI if it were not going to meet your needs when needed. You also really want to go with an insurance company that is very sound financially. There have been folks who've experienced problems doing otherwise. I would recommend you find an agent or broker who is an expert in LTC and works with the best companies. One should not be selling LTCI if you don't know the ins and outs of it. With what this agent said about taking money from your 401k, I would run away from her.

Currently you can deduct LTC premiums from your taxes wither all or partially. This would help with the cost greatly! Her's a link to some info about that:

http://www.bankrate.com/finance/taxes/tax-advantages-long-term-care-insurance-1.

Of course, we do not know how these laws could change in the near future.

I hope this helps. Best of luck!

Dave
diannopollo@twcny.r.com

---------- FOLLOW-UP ----------

QUESTION: You mention that it's important to go with a good company. What do you think of MedAmerica or John Hancock? Also, you stressed the importance of having enough coverage. How many years' worth of longterm care would you recommend having coverage for? Would 3 years be adequate?

Thanks so much!

Beth

Answer
Hi Beth,

I am not familiar with MedAmerica but John Hancock is a strong player in The LTC field. The big mutually owned insurance companies are generally good as well. They do not have stockholders and are very strong financially. These would include MassMutual, NY Life and Northwestern Mutual. The reason why you need a strong company is that many of the less financially sound companies have found that their claims were much higher than anticipated because LTCI is a relatively new product. Many companies are getting out of the LTCI business as well.

How much you need is hard to say and would be determined on a case by case basis. LTCI pays a daily rate so you would need to determine the average daily cost for your state. Here is a link to some info on that: https://www.genworth.com/dam/Americas/US/PDFs/Consumer/corporate/Washington_gnw.pdf

You would need to pick the appropriate daily rate on your policy. You may have to take into consideration what you want vs. what you can afford. So you may like a $250 daily rate but the possibility exists that it is out of your price range which I do not know. The compound increase rider would be advisable because you can be pretty much certain that the costs will be much higher in the future. The same can be said for the number of years of coverage. How many years of coverage can you afford? It makes no sense to insure the future if it is putting a big burden on you in the present! I hope this helps, Beth!

Dave
diannopollo@twcny.rr.com

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David M Iannopollo

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