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May 09, 2005

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 responsibility. 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 Development. 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 premiums. 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 new. 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 incentive? 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 1997. 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 care continuum. 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 optimistic? 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].
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