Forward on reverse: HECM II--Can HECM for long-term care insurance fly? Part oneAtare E. Agbamu, CRMSreverse mortgages, long-term care, retirement, financing
If you are in reverse country or want to be, pay very close
attention to long-term care and long-term care insurance (LTCI)
matters. Uncle Sam has seen the future of long-term care for the
teeming and graying baby boom generation: It is fiscally scary ...
very, very scary indeed. And the government trying to do something
about this huge financial threat: encourage personal
One aspect of the government's plan to head off the
potential financial meltdown is to nudge reverse mortgage borrowers
to buy LTCI policies with the proceeds of a reverse mortgage. The
incentive plan states that if a reverse borrower uses all proceeds
of a reverse mortgage to pay for LTCI premiums, FHA would eat the
two percent insurance premium it charges for its home equity
conversion mortgage (HECM) loan. The operating rules are still
being written at the U.S. Department of Housing and Urban
Potentially, this HECM/LTCI linkage could mean tsunami-size
demand for reverse mortgages, but reverse mortgage and LTCI experts
see some serious challenges with Uncle Sam's HECM/LTCI plan,
especially the highly flawed, congressionally mandated requirement
to use all of the proceeds of HECM II to pay LTCI
To help us understand the long-term care/HECM connection,
opportunities and challenges, I consulted Barbara Franklin, LTCP,
an authority on long-term-care insurance with a strong and long
connection to reverse mortgages.
Barbara Franklin, LTCP (Long-Term Care Professional) is the
owner of Franklin & Associates Inc., a Charleston, S.C.-based
firm specializing in long-term-care planning and financing. A
native of Pittsburgh and a graduate of the University of
Pittsburgh, Ms. Franklin has worked exclusively in the LTCI
industry for more than 14 years and founded Franklin &
Associates Inc. in 1995.
An engaging and energetic industry leader and speaker, Ms.
Franklin serves on the board of the American Association for
Long-Term Care Insurance. At the Long-Term Care Insurance Summit in
San Francisco in November 2004, she was recognized as one of the
top 100 long-term care specialists in the nation. The following is
part one of our conversation.
Atare E. Agbamu: A "new" use for HECM proceeds is
coming. It is called HECM LTCI or HECM for long-term care
insurance. What is this new twist on HECM all about?
Barbara Franklin: It is interesting that you asked the
question that way. This is really not so new at all. It turns
outwhen you really analyze itthat reverse mortgage borrowers have
had the opportunity all along to purchase LTCI. That part isn't
The one new twist here is that Congress has put out an incentive
designed to encourage the use of reverse mortgages to pay for LTCI.
I think everybody would agree that there are quite a few
technicalities that have to be worked out with this program. It's
the incentive of eliminating the mortgage insurance premium when an
individual uses the proceeds of a reverse mortgage to pay for LTCI
that we haven't seen before.
AEA: Why do you think Congress created this
BF: The motivation for this is a very good thing. We are
reaching the point where it has become very clear that government
programs will not be able to pay for long-term care for everybody.
We are already stretched very thin. In South Carolina, for example,
70 percent of people in nursing homes are receiving Medicaid
benefits. We just can't stretch that any farther. So, it's
important to stress more and more the importance of personal
responsibility for long-term care planning. In 2002, the federal
government offered LTCI as a voluntary benefit to their employees,
retirees and their family members, some 20 million people. So,
along those same lines, what can the government do to stem the
entitlement mentality that says the government is going to be there
to take care of all of us? So, I think that's what is really behind
it, and that's the good thing about it. It is part of the overall
personal responsibility movement.
AEA: To carry out the HECM for LTCI law, HUD recently
asked for comments from the public [Advanced Notice of Proposed
Rulemaking]. You were the first LTCI or reverse mortgage expert in
the nation to comment on the proposed HECM LTCI rule-making. How
important is this new use for HECM?
BF: I didn't strike out there to be the first; it just
caught my attention. I think that I'm in a very unique position,
having hands-on experience with both of these elements for many
years. I've helped thousands of individuals, couples and families
with LTCI since I started in 1990. And we [Editor's Note: Barbara's
husband, Paul, is owner of Franklin Funding, a reverse mortgage
lender in Charleston, S.C.] did our first reverse mortgage in 1995.
So, that's 15 years with LTCI and 10 years with reverse mortgages.
We refer to our practice as long-term care planning and financing,
which intentionally brings together LTCI, reverse mortgages and
other alternatives. I just felt it would be remiss for someone in
my circumstances not to comment. And I think I am bringing a fairly
unique perspective that someone who has only been involved with
LTCI or just reverse mortgages may not really see.
It is interesting too ... that we've seen similar situations
where the government has introduced incentives. It happened in the
LTCI industry in 1997 with legislation that we now refer to as
HIPAA, the Health Insurance Portability and Accountability Act. At
that time, part of the legislation impacted LTCI and said that
premiums for LTCI could be tax deductible under certain
circumstances and the benefits would be non-taxable. It was
intended as an incentive to encourage the purchase of LTCI. Much
like the incentive to link the HECM with LTCI, there were pros and
cons. There were good parts about it, but there were also some
technicalities that hadn't been addressed. So, there's almost a
déjà vu quality with something that I lived through in
AEA: In your comment, you stated that HUD shouldn't
bother linking LTCI with reverse mortgages (HECM). That's a very
strong statement. Why did you say that?
BF: I didn't realize until you pointed it outit is a
strong statement, but I stand behind it, mainly because it comes
from real-life experience. When you look at the bigger picture of
long-term care planning and financing, reverse mortgages and LTCI
are really very different solutions.
It sounds good on paper to link them, but the reality is quite
different. In my practice, we think of LTCI as a tool for planning
ahead for long-term care. And a reverse mortgage tends to be a
long-term care financing solution for people who haven't
necessarily planned, who need the money to pay for care. So, in our
practice, they've tended to be at opposite ends of the long-term
There are a number of real problems with this linkage. For
instance, the average age of a reverse mortgage applicant is about
74 now, whereas the average age of applicants for LTCI individual
policies is 60 or 61. So, you can see right there the wide variance
in ages. And it turns out ... the real direction that LTCI is
expected to take is a worksite benefit. People are going to get
coverage as part of their benefit package through their employer or
through a professional association. And the average age of people
getting this in the workplace is 43, even farther outside the realm
of applicability for the reverse mortgage.
The second problem area is underwriting. The companies have
really tightened up the underwriting, and by the time a person
reaches the age of 74, they are very likely to have problems that
would either totally disqualify them for coverage or cause them to
pay considerably more.
Another problem is that the premiums for long-term care coverage
have risen so dramatically that comprehensive coverage is most
affordable to people at the age of 61 or younger. And if they are
getting a reverse mortgage at 62, there is probably not enough
proceeds to even cover it.
I think the overriding problem is the requirement to use all of
the reverse mortgage proceeds to pay for LTCI. The reason I think
that is such a significant issue is because we've been an advocate
during our practice all of these years of co-insuring. In other
words, very few people insure themselves for the total benefit that
they might need for long-term care. We always make the assumption
that they would have some resources, whether it is pension, Social
Security or other resources to bring to the table. So, they are not
insuring themselves for the total costs; some do, of course, but
most people take a more conservative approach and co-insure. So,
the requirement to use all of the reverse mortgage proceeds seems
to fly in the face of the way we typically design coverage.
That being said, I think the real problem here is the linkage of
reverse mortgages to pay for LTCI premiums. I think it could work
much better if the incentive could be for the use of reverse
mortgages to pay for home healthcare services. We all know that a
large percentage of people desire to remain in their homes, to stay
independent and age in place. So, the better solution might be to
use that incentivethe elimination of the mortgage insurance
premiumto help people use reverse mortgage proceeds to pay for
those various homecare services.
It would certainly take the pressure off Medicaid and other
government programs, and it would be a win-win situation for the
government and borrower.
AEA: You said the trend you see in LTCI is toward
work-based coverage. Given the fact that most American workers
don't have primary healthcare coverage, isn't that too
BF: Well, what you are saying is true. Keep in mind,
though, that LTCI is not a "cafeteria plan" benefit. As a result,
it can be offered in some unique ways, for example, as a tax
deductible "executive carve-out." At conferences I have attended,
the workshops on LTCI worksite marketing are packed with agents
trying to figure out how to make this work.
Even though sales in the LTCI industry were down by about 30
percent overall last year, the highest percentage of growth was in
the worksite market.
Atare E. Agbamu, CRMS is a reverse mortgage consultant with
Credo Mortgage, located in the Twin Cities of Minnesota. Atare is
regarded as an emerging authority on reverse mortgages, and is
frequently consulted by financial professionals and families across
America. His reverse mortgage interviews have been Webcast on
MortgageMag Live! Atare serves on the board of Little
BrothersFriends of the Elderly in the Twin Cities, and he is a
trustee of The Little Brothers Foundation. He can be reached by
phone at (651) 389-1105 or e-mail [email protected]