Forward on reverse--HECM II: Can HECM for long-term care insurance fly? Part twoAtare E. Agbamu, CRMSlong-term care, insurance, reverse mortgages, HECMs
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 two of our conversation.
Atare E. Agbamu: You said insurance carriers have
tightened their underwriting to the point that most average reverse
mortgage borrowers today would not qualify. What is happening in
Barbara Franklin: The difference, Atare, is that now there
are carriers who have been at this for a long time. They have
significant experience with claims, and because of that experience,
they are adjusting their risk management practices. At this stage,
two out of five applications submitted to a long-term care
insurance company are declined or rated. Some medical conditions
that we could cover in the past are completely uninsurable.
Two examples of these are stroke and insulin-dependent diabetes;
they have become very difficult, if not impossible, to insure. In
the past, there were companies that would take applications up to
age 100. Very few companies now will accept applications beyond the
age of 79. So, if we go back again to the average age of a reverse
mortgage borrower, where are these people going to get coverage?
Companies are also significantly tightening up their height and
Nowadays, if you are over the age of 70 and you apply for LTCI
coverage with any major carrier, you are going to have a
face-to-face interview with a nurse or social worker who will be
evaluating your mental abilities. And we are also seeing more and
more medications on the list that can rule out coverage. There are
numerous issues that could prevent a reverse mortgage borrower who
wants to take advantage of the incentive from actually qualifying
for long-term care coverage.
And, to top it off, it is very unlikely that this scenario will
turn around. Carriers are likely to become more conservative and
more restrictive instead of the opposite.
AEA: You cited three instances where reverse mortgage
proceeds were used for LTCI. Why is the demand weak?
BF: In 10 years and after hundreds of reverse mortgages
that we've handled [Editors Note: Barbara's husband, Paul, is
the owner of Charleston, S.C.-based reverse mortgage lender
Franklin Funding], there are only three examples I can think
of where the borrower specifically used part of the proceeds to pay
for LTCI. Those cases are anywhere from five and seven years ago.
I've seen none recently. When I think about these three borrowers,
I doubt that they could have qualified for coverage today. One
couple was 77 and 79 at that time, and we just got them insured by
the skin of their teeth, so to speak. I doubt they would actually
qualify under today's more rigid guidelines. So, times have
changed. And that's only three examples out of hundreds.
You asked, though, why is demand weak? I think it's because the
demand overall for LTCI is weak. It's one of the things that sounds
like everybody should be getting. And theoretically, they should.
But less than 10 percent of people who would be eligible actually
have it. So, I think we have people who are still in denial to some
extent. Long-term care is never going to happen to them.
We also have an economy that is very consumer-oriented as
opposed to savings-oriented. And we still have what I call an
entitlement mentalitypeople who think that the government is going
to be there to take care of them. There is still a degree of that
kind of thinking that gets in the way. So, the demand is just not
what you would think.
AEA: This is consistent with what Stephen Moses of LTC
Financing has been saying for years. We are in denial because the
government is picking up this huge tab. And we're pretending as
though we don't need it, right?
BF: Exactly! That's right. It reminds me of the Health
Insurance Portability and Accountability Act (HIPAA). Those of us
in the LTCI industry in 1997 thought this was going to be a huge
breakthrough. We thought the tax incentive would wake everyone up
to the facts and increase the demand for LTCI, but it didn't
happen. In 2002, when the federal government offered LTCI to their
employees, retirees and family members, we thought, once again,
that this could be a breakthrough. It was the government, in
essence, telling people that they should not depend on federal
programs and making LTCI available. But it didn't happen then
So that, again, explains how I feel about a government incentive
for HECMs and LTCI. I haven't seen anything work the way it should
have in the past, and this program, flawed from the outset, is not
very likely to work either, based on history. But on the other
hand, you have to keep trying. So, I do applaud the basic
motivationif we can just fix some of the technicalities.
AEA: The law for this new HECM use says the two percent
upfront MIP will be waived if all HECM proceeds are used to pay for
LTCI premiums. In your comment to HUD, you said this requirement is
"unrealistic." You also said it will be a "deterrent" to HECM
borrowers. Why did you think so?
BF: I said unrealistic ... because, in my experience, when
I begin working with a couple to design their long-term care
coverage, the starting point is asking, "What do we want this
coverage to do?" What is the objective here? What is the goal? And,
of course, I take into account the individual's financial
circumstances. What this [HECM-LTCI] is asking me to do is take a
certain amount of money and design coverage around it. And that's
not an effective way of building and designing a LTCI program.
That's why it's unrealistic. It's like saying to State Farm or
Nationwide, "Here is my $300; now give me my car insurance." Well,
that may or may not be what's appropriate for you. You're coming at
it backwards; it's a backward approach. I said it was a deterrent
because a person is required to use all of the proceeds of a
reverse mortgage to pay for their premium, the key word here is
"all" of the proceedswhat about the other needs for aging in place?
What about the need for modifying the house? What about other
homecare services not covered by insurance? What about unforeseen
events (a new roof on the house, a car that breaks down or other
things that are going to be necessary to help a person stay there)?
That's what concerns me. A person could be in their home with an
insurance program, but still not be able to stay in their home
because they don't have the money for other things.
AEA: What are the strengths of this new HECM?
BF: As I mentioned earlier, those of us in the long-term
care planning and financing arena will have something new and
important to talk about as a result of this program ... a new
I think that the publicity about this program will most
certainly raise awareness. It will point out again that the
government is looking at the issues of long-term care financing and
sending a subliminal message: It's not going to be business as
usual. We are not going to have government programs that are going
to do what they've done in the past, especially in the economic
situation we find ourselves in today: a war economy with record
national debt. It cannot be business as usual.
If I'm out speaking about long-term care planning and financing,
which I do very frequently, I can certainly point out that the
government is trying to do something about it, and here's what
they've doneone more piece of evidence if you will.
AEA: In less than four years, the first group of baby
boomers will hit 62, how would this new HECM fit into their LTCI
planning and financing?
BF: That's pretty interesting ... and based on some things
we talked about before, I think you might agree that it's not
likely to have much impact! Most baby boomers are not planning
effectively for their retirement; that's pretty well known. If you
are not planning for retirement, it's hard to imagine that
long-term care is even on your radar screen. They are just not
thinking about long-term care yet.
The day may come. As more of them start having experiences with
their parents and with their loved ones, it becomes a bit more
relevant. The fact is, it is beginning to look like the baby
boomers are going to keep working. Very few of them are going to be
able to retire and not work as they had thought. And many of them
are very much in debt. They've already refinanced their homes and
are carrying too much debt. So, the reverse mortgage may not be the
same kind of tool for them. I also think that, as we said earlier,
over time, the expectation is that long-term care will ultimately
be part of a benefit package people receive from their
Again, if they are getting coverage through their employer, the
relationship to HECM won't have any relevance to them; so another
disconnect. I don't really see that being a good fit unless things
change dramatically in all of these different areas.
AEA: What should reverse mortgage brokers and lenders do
from a marketing standpoint to prepare for this new
BF: Well, I think any broker or lender definitely needs to
network with other professionals in their community who are centers
of influence, specifically those working with seniors, and who
could understand when a reverse mortgage may or may not be
appropriate. In terms of this new opportunity, it wouldn't be a bad
idea to team up with LTCI specialists because, even though they
might be rare, there are certainly going to be some opportunities
where the borrower can use the proceeds for LTCI.
I also think that reverse mortgage brokers and lenders should be
teaming up with homecare providers and people like geriatric care
managers, so that they can help with reverse mortgages in those
situations where the money can be used to help pay for care.
AEA: Now, what do you see on the horizon for LTCI and
BF: Well, from our perspective here in South Carolina and
also from a national perspective, it seems for the time being, at
least, that the growth in reverse mortgages is likely to be faster
than LTCI. For one thing, it seems like a lot of the educational
and public relations initiatives related to reverse mortgages are
taking hold. The efforts of the National Reverse Mortgage Lenders
Association (NRMLA), for example, and experts like you who are
writing about the subject are all contributing to this growth.
Also, it's exciting to see in the reverse mortgage field that there
are new products being developed continually.
What we see, on the other hand, in LTCI, is a fairly flat
market. It has been as flat in the last year or two as it's been
any time in the last 15. We're seeing carrier mergers and carrier
acquisitions; in 2003, three carriers dropped out of the industry
altogether. We're seeing companies increase their premiums
dramatically for policyholders, and the press on LTCI has been
somewhat negative. No wonder the public has stayed away! The media
has focused on some of the negative parts of the industry and
hasn't spoken enough, unfortunately, about the billions and
billions of dollars in claims that have been paid and the people
who've actually benefited from LTCI.
There is talk right now about tax credits for long-term care
insurance. Some people think it is going to be on the docket in
this congressional session. It has been talked about before, but
based on experience, I don't think that's going to break the door
wide open, even if we have tax credits. It will be another
incentive, another talking point. I am not so sure that is going to
be the breakthrough we need.
AEA: What do you think is going to do it?
BF: I don't know [chuckling]. I was at a conference with
750 long-term care specialists from across the country, and nobody
knows for sure. There's a whole host of issues, of coursethe level
of the economy, denial on the part of baby boomers, and a
generalized lack of planningnobody can put a finger on just one
On the other hand, there has to be a brighter future because
what other choice is there? What other way is there for people to
pay for long-term care except if they take personal responsibility
and plan ahead?
It's almost like we don't have a choice; it's going to come
around eventually. And then, I think the future is bright because
of the opportunities developing in the workplace. Business owners
are starting to become aware of long-term care insurance, and they
are starting to take advantage of the tax incentives. People are
realizing that if you get it at work, the rates are better. Some of
the group plans have more liberal underwriting or no underwriting
at all, so that could be helpful to people who wouldn't be able to
get coverage any other way.
So, there are some bright spots with both industries, and it is
exciting for us to have a stake in both of them, and at the same
time, be able to make a difference in people's lives every day!
AEA: Do you have any closing comments for our
BF: I appreciate the opportunity to talk about it [HECM
and LTCI] with you and share a unique perspective. And I'm really
confident that this new use for reverse mortgages will raise the
level of awareness and that, with proper input, we can turn it
around so that it can help even more people.
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]