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 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 weight restrictions.
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 either!
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 "talking point."
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 employer.
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 thing!
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]