As “market weary” mortgage brokers look for a place to hang their hat, the Reverse Mortgage Industry seems like a good fit (and it is a good place to be!). The warning shot across the industry has already been fired- the message reads: ‘one bad apple can spoil the whole bunch’. Everyone who enters this highly regulated market needs to stand back and assess their true interest and reasoning for working with seniors, and for good reason. Senior law and senior needs are complicated at best. One wrong move by a well-meaning originator can disqualify a senior from much needed long-term care services down the road. That being said, there is a fantastic synergy between long-term care and the Reverse Mortgage product. It’s all about suitability and appropriate case design strategy.
Each senior and each family has their own set of issues, needs, and expectations for how the senior family member will live out their remaining days. Staying at home is obviously the first choice for most of us. Maintaining our independence and choice is just as important. Involving adult children of aging parents in this type of financial transaction is almost always a good idea- everyone needs to be on the same page.
Reverse Mortgages and Long-Term Care fit together in two ways:
Using Reverse Mortgage proceeds to pay for care that is needed in the home right now. Using Reverse Mortgage proceeds to pay for Long-Term Care Insurance premiums so that when care is needed in the future, the senior has coverage to receive care at home.
It’s important for all of us to understand what the true cost of care is in the U.S. today.
The national average daily rate for a private room in a nursing home is $206, or $75,190 annually. The national average daily rate for a semi-private room in a nursing home is $183, or $66,795 annually. The national average hourly rate for home health aides is $19. For only 5 hours of care 7 days per week, the monthly average cost is $2660 per month or $31,920 annually. The national average hourly rate for homemakers/companions is $17. For only 5 hours of care 7 days per week, the monthly average cost is $2380 per month or $28,560 annually.
Privately paying for long-term care means that a senior would have to find an additional $28,560 to $75,190 per year in their budget for just ONE person to receive care. Most of us, seniors or not, could not afford to privately pay for our own care year after year.
Long-term care insurance will pay for in-home care, assisted living, and nursing home care. This is the most appropriate and needed form of insurance protection available to us today. Long-term care insurance should be termed “lifestyle” insurance (it’s NOT nursing home insurance!).
Reverse mortgages (Home Equity Conversion Mortgages) have become one of the most popular and accepted way of paying for many different expenses, including the cost of long-term care. Reverse mortgages are designed to keep seniors at home longer. A reverse mortgage can pay for in-home care, home repair, home modification, and any other need a senior may have.
Example: The Stephenson Family Story
Jim and Sue Stephenson (ages 72 and 65) have lived in the same home in Des Moines, IA for 30 years. Admittedly, their home is less than senior friendly. Jim’s knee problems make it difficult for him to get up and down the stairs. He does not qualify for Long-Term Care Insurance.
He and his family know he is at a significant risk for falling. Their 2-story home is worth about $150,000 and is paid in full. They do not want to move at this time. Jim and Sue’s children have become increasingly worried about the two of them living at home without assistance.
After a one-hour consultation and some education on the options, the Stephenson’s decided to take action. Home modification and repair were one of their first priorities, but the repairs would be expensive. Jim and Sue decided to take out a reverse mortgage to help them afford the needed maintenance. They were able to receive approximately $71,000 from the equity in their home. They used the cash to install a stair lift for Jim ($2500). They also installed safety bars in all bathrooms and showers and installed a safety rail in the hallway for Jim to hold on to if needed ($800).
They then decided to purchase a personal emergency response system for their home in the event that Jim or Sue need additional assistance ($35/month). Sue and her children could feel comfortable leaving Jim at home for short periods of time – long enough to do the grocery shopping or run other errands. Jim and Sue’s children have peace of mind knowing their parents are safe.
Jim and Sue left the rest of the money from the reverse mortgage in a “line of credit” and will access it as needed for further repairs, maintenance or upgrades.
In this case, the Reverse Mortgage was absolutely an appropriate planning strategy for the Stephenson family.
Today many seniors who are healthy enough to qualify- are taking advantage of reverse mortgages to pay their long-term care insurance premiums.
Example: Affording Long-Term Care Insurance
Mary and Joe Brown live in St. Louis, Missouri and are both 65 years old. They own a home worth $200,000. Both are in good health. They are interested in a 5 year long-term care insurance plan, with compound inflation protection, and a 90-day elimination period (waiting period). They chose $150 per day coverage because they have other income and assets to make up for any shortfall. The average cost for a nursing home bed in 2008 is around $206 per day.
The annual premium total for both to have coverage is $5460.
The Browns are eligible to receive $605 per month for life from the equity in their home (a reverse mortgage), or a lump sum of $99, 657, or any combination of the two.
They can also leave the $99,657 in a line of credit.. This means that if they didn’t need the extra cash for any reason, they could take approximately $6328 annually out of their line of credit to pay for their long-term care insurance premium.
Alternatively, they could pay their monthly premium of $455 with the $605 monthly check that they would receive from the reverse mortgage lender.
Either way they have protected themselves from the catastrophic expense of long-term care without touching a penny of their savings, investments, or current income.
The Browns really wanted to give their children the value of their home as an inheritance. They were concerned that if they took out a reverse mortgage to pay for long-term care insurance, there wouldn’t be anything left over to give their children!
So in addition, the Browns increased the value of their estate for their heirs by purchasing a “2nd to Die” life insurance policy (which pays after both spouses have passed away) for $350,000. This leaves an inheritance of $350,000 for their heirs instead of the $200,000 home value. Plus, that inheritance of $350,000 is all tax free money for their heirs, and avoids probate.
Finally, it is important to remember that although Medicare is not affected by Reverse Mortgage proceeds, Medicaid (Medi-Cal in California) is easily affected without proper planning. None of us know for sure what the future holds with regard to long-term care. However, when working with seniors who have no assets other than their home, and cannot qualify health-wise for long-term care insurance, beware of Medicaid qualifications looming down the road.
Dumping a lump sum of money from a Reverse Mortgage into the checking or savings account of a senior can have serious consequences with regard to Medicaid. They may end up being disqualified until that money is spent down to almost nothing. As stated from the beginning, senior laws and issues are complicated at best. Anyone who works with seniors, especially in the Reverse Mortgage Industry should brush up on some of the facts related to long-term care and Medicaid in their state. Network with senior service providers who deal with the law on a daily basis- including elder law attorneys, geriatric care managers, and long-term care insurance specialists. Those professionals are not only good referral sources but can help you be a better advocate for the seniors and families you serve.