LTC Bullet: Reverse Mortgages Could Fund LTC Services and LTCI Premiums

Thursday, August 8, 2002


[News section omitted.]


America's welfare-financed, institution-based long-term care "system," is severely dysfunctional and approaching collapse. No one seriously believes government will fund a wider range of better LTC services in the foreseeable future. With the boomer generation approaching retirement and with their senescence and decline inevitable by 2030, the only hope to improve long-term care is to attract more private financing into the system. Private long-term care insurance (LTCI) has a critical role to play, but what about people who can't afford or don't qualify for LTCI?

That's where reverse mortgages have an important role to play. Over 80 percent of seniors own their homes ( ) and 76 percent of these own their homes free and clear ( , Table 3.15) . Over half the net worth of elderly householders lies illiquid in their homes and other real estate ( , Table F). By conservative estimates, more than $1.5 trillion is tied up in seniors' home equity.

Very little of this home-based wealth is used to purchase long-term care or LTCI. Most people don't worry about LTC until after they need care and, then, the path of least resistance is Medicaid, which exempts the home and all contiguous property regardless of value. Thus, many seniors who are not poor (because they possess large home equities), but merely have a cash flow problem, end up in nursing homes on Medicaid. (Most people who qualify medically are eligible for Medicaid nursing home benefits no matter how high their incomes as long as their total medical expenses, including private nursing home care, approximate or exceed their incomes.) If public policy encouraged the use of home equity to pay for long-term care instead of discouraging it, many more people could afford quality LTC in the private market and Medicaid could provide better care across a broader range of services for the truly needy.

Lately, we've been seeing a lot more discussion than heretofore about the use of home equity and other assets to finance LTC services and/or LTC insurance premiums. In its February 2002 issue, Financial Advisor magazine published an article titled "Reverse Mortgages" , side-by-side with one titled "LTC Insurance: How Much Do You Know?" , both by Tracey Longo. According to these articles, financial planners and LTCI producers are taking a keen interest in reverse mortgages. We know of at least one long-term care insurance specialist who has added a specialization in reverse mortgages--Franklin Funding Incorporated, There are others and there will be more.

The National Reverse Mortgage Lenders Association (NRMLA),, offers a wealth of useful information including brochures titled "Using Reverse Mortgages for Health Care: A NRMLA Guide for Consumers," "Just the FAQs: Answers to Common Questions About Reverse Mortgages," and "The NRMLA Consumer Guide to Reverse Mortgages." They'll also send you a complimentary monthly e-mail newsletter that covers business and regulatory trends in the reverse mortgage industry. To subscribe, email Darryl Hicks at or sign up on their "Guest Book" at once its posted on the site. AARP also offers extensive information at including instructions on how to order their brochure "Home Made Money: A Consumer's Guide to Reverse Mortgages."

One of the most interesting articles we've seen on this subject is titled "Reverse Mortgages Offer New Way To Pay for Insurance Products," by Darryl Hicks of the National Reverse Mortgage Lenders Association, You can find the whole article at but we'll provide a few excerpts below.

Finally, and parenthetically as it's not about home equity conversion per se, an innovative service is in the offing. Grannie Mae is a new company that will soon begin offering unsecured bridge loans to qualified borrowers (often baby boomer children of frail elderly parents) to help ease the transition from independent living to senior housing. Visit for more information. We'll provide more details when the operation is fully up and running.

Now, some excerpts from the article on reverse mortgages:

Reverse Mortgages Offer New Way To Pay for Insurance Products

by Darryl Hicks

"Paying for health care, and supplementing retirement income, are two very important issues for older Americans. . . .

"In the United States, reverse mortgages are quickly emerging as a significant financial security tool for senior homeowners because of the broad range of needs these unique loans can satisfy. Seniors of all income levels, and for many different reasons, have obtained a reverse mortgage.

Typically, the proceeds from a reverse mortgage are used to supplement income; pay for home repairs and improvements; cover medical bills and prescription drugs; debt abatement; education; travel; and prevention of foreclosure.

"However, some seniors have used all, or a portion, of their reverse mortgage to purchase an insurance product, [such as an] . . . annuity . . ., or long-term care insurance to cover future medical costs." . . .

"The reverse mortgage is aptly named because the payment stream is 'reversed.' Instead of a borrower making monthly payments to a lender, as with a regular mortgage, the lender makes payments to the borrower. While a reverse mortgage loan is outstanding, the borrower owns the home, holds title to it, and does not make any monthly mortgage payments." . . .

"Recognizing the insurance link, some lenders have formed business relationships with local insurance providers that specialize in selling long-term care insurance and annuities.

"Over the past several years, lenders have devised unique strategies to help borrowers pay for long-term care insurance.

"For instance, some lenders are structuring reverse mortgages so that a borrower can cover future annual long-term care premium payments entirely from the annual growth in the line of credit.

"In a real life example, a 79-year-old single female took out a HECM on her home, valued at $100,000. Of the loan proceeds available, after closing costs were paid, the borrower took out $5,000 as an initial draw. Of this, she spent $3,000 for the first year's long-term care policy premium, leaving the rest of the loan proceeds -- $52,274 - in a line of credit.

"Under this scenario, the line of credit grew to $56,274 by the end of the first year, or an increase of $4,058. This amount, at the time the loan was made in 1999, was more than adequate to pay the second-year premium of $3,000, and subsequent annual premiums.

"Natural Link Between Reverse Mortgages and LTC

"Kim Purnell, a long-term care insurance specialist based in Palm Bay, FL, sees a natural link between reverse mortgages and long-term care insurance. Purnell, who has worked for insurers, such as GoldenCare-Bankers United Long-Term Care Insurance, has spoken on the topic at past conferences hosted by the National Reverse Mortgage Lenders Association (NRMLA), Washington, DC.

While American seniors are living longer and healthier lives, he said, there's always the possibility of a sudden traumatic health-related event that can financially devastate a family or individual.

'Folks take the equity out of their home, so they can have the income to enjoy the lifestyle that they're accustomed to,' added Purnell. 'The biggest threat to that lifestyle is long-term care. All of a sudden the wife becomes ill, or the husband has a stroke, and now the couple's income is being used to pay for healthcare expenses. It doesn't take long at $3,000 to $5,000 a month in medical expenses before a family becomes financially crippled.'

"New Federal Law Promotes LTC, Reverse Mortgage Link

"Shortly before leaving office, President Clinton signed legislation into law that would reduce the cost of getting an FHA HECM in cases where the loan proceeds are used to purchase qualified long-term care insurance.

"Specifically, HUD would agree to waive the up-front mortgage insurance premium charged to borrowers, which translates into a cost savings of several thousand dollars." . . .

(Note: Darryl Hicks is Editor of the Reverse Mortgage Advisor newsletter published quarterly by the National Reverse Mortgage Lenders Association.)