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Financing Long Term Care: What’s Really Happening

With baby boomers knocking at the retirement door, we all need to get a handle on how we are going to care for our aging parents and ultimately, ourselves. The insurance industry is blazing the marketing trail with a variety of feature-rich, long term care insurance (LTCI) policies, as there are more than 75 million Americans who potentially need this product. The cost of taking care of an aging boomer population has even prompted state governments to encourage the sale of long term care policies. They are hoping the sale of these policies will relieve the drain on Medicaid reserves. Therefore, the incentive is strong for both insurance companies and state governments to get folks to buy their own long term care.

The target audience
Americans older than 50 years of age are being aggressively targeted as potential new customers and, every year, this number increases by 4 million.

The players
Insurance carriers
Today’s policies have been oversold, under-priced, poorly underwritten and the number of in-force LTCI policyholders has increased by 21 percent annually, to a total of 8 million.

Carriers who low-balled the market with cheap premiums to attract and gain market share have succeeded. These same carriers are losing their claim shirts as their over-generous policy language and cheap pricing is costing them a fortune. Our current economy isn’t helping with investment income down due to low interest rates.

Unfortunately, the carriers can’t change the economy, interest rates or Wall Street expectations, so they are beating down the doors of the Departments of Insurance across the country to get premium rate increases, while turning their claim departments into profit centers. Rate increases result in lapsed policies on seniors living off fixed incomes. Duping seniors into buying great policies with bargain-basement pricing then raising rates just when they need the benefits most is wrong. These seniors are the same Americans that fought for us in World War II and in Korea, and deserve our vigilant protection.

State governments

California and 14 other state governments recently embarked on a huge marketing campaign to lure seniors into purchasing long term care policies to help satisfy their states’ financial woes. In fact, total Medicaid expenditures for seniors’ nursing-facility and other long term care bills last year topped $100 billion. That’s why more states are encouraging your grandparents to buy private insurance. Along with California, 14 other states are now promoting long term care policies under marketing partnerships with the insurance industry. More than a dozen other states are hopping on the marketing bandwagon.

In fact, the Wall Street Journal article published in February, 2008, “States Draw Fire for Pitching Citizens On Private Long Term Care Insurance,” touched on this issue. In this article, Jesse Slome, executive director of the American Association of Long Term Care Insurance (AALTCI) said, “The state endorsements are the single best thing that has happened to the long term care industry. Total premiums collected for LTCI policies were $10 billion in 2007, up 21 percent from $8.2 billion in 2004.”

Enter the reverse mortgage
What this means to agents is that state governments are now going to help you get more LTCI policies sold. Enter the reverse mortgage as a hot, viable solution — and a closing tool. Seniors are listening; this can be a good selling opportunity, but there are limits.

Getting your older clientele to bet their house on an insurance policy can backfire so, help them do their homework. Don’t let them run off to any lender. Refer them to www.hud.gov/buying/rvrsmort.cfm or tell them to call the Department of Housing and Urban Development (HUD), for free information. Scam artists try to sell the same information, so being forthcoming with the facts should enrich your relationship with your client and build trust.

Help your client understand the protections in place, offered by HUD. Remember: These folks are someone’s parents and doing your diligence today could lead to decades of recurring revenue from family members who are happy with how you helped their parents in the autumn of their lives.

The HUD, which insures reverse mortgages through its Federal Housing Administration (FHA), works like this:

•· Homeowners aged 62 and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD’s reverse mortgage program. The program allows homeowners to borrow against the equity in their homes.

•· Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. Homeowners whose circumstances change can restructure their payment options.

•· Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Lenders recover their principal, plus interest, when the home is sold. The remaining value of the home goes to the homeowner or to his or her survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The FHA, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.

•· The size of reverse mortgage loans is determined by the borrower’s age, the interest rate and the home’s value. The older a borrower, the larger the percentage of the home’s value that can be borrowed. For example, based on a loan at today’s interest rates of approximately 9 percent, a 65-year-old American could borrow up to 26 percent of the home’s value, a 75-year-old could borrow up to 39 percent of the home’s value and an 85-year-old could borrow up to 56 percent of the home’s value.

•· There are no asset or income limitations on borrowers receiving HUD’s reverse mortgages.

•· There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $81,548 to $160,950, depending on local housing costs. As a result, owners of higher-priced homes can’t borrow any more than owners of homes valued at the FHA limit.

•· HUD’s reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home’s value as an up-front payment plus one-half percent on the loan balance each year. These amounts are usually paid by the lender and charged to the borrower’s principal balance.

•· FHA’s reverse mortgage insurance makes HUD’s program less expensive to borrowers than the smaller reverse mortgage programs run by private lenders without FHA insurance.

The dangers
Think about your senior clients as if they were your own parents. Would you want them to get a value on their house and agree to receive a monthly payment for 10 years, only to outlive the 10 years and use up the allowance?

If clients don’t get their reverse mortgage through HUD, they could end up with no house, no money, no where to live and nothing to leave to their heirs. This can happen, even with payments as little as $200 per month.

Lenders promise, “No payments as long as you occupy the home.” But your clients should understand what that means. Additionally, when lenders say “tax free,” be sure your client knows they may not pay taxes for selling the house, but still must pay Social Security, Medicare and property taxes.

The reverse mortgage is based on age and value of the home. Clients retain the title until the contract expires, then they may lose their home. Some policies say that borrower’s heirs retain 100 percent of the unused equity. Often, heirs may have to come up with the money used while living to receive any equity at all.

Every year, Generation X, baby boomers and senior boomers pay billions of dollars in insurance premiums. Help your clients make good, sound decisions before they sign on the line. This should help you write clean policies and grow your business, while offering a viable independent living alternative to seniors.

DarrasLaw is Americas' most honored and decorated disability litigation firm in the country. Mr. Darras has seen more, evaluated more, litigated more, and resolved more individual and group long term disability and long-term care cases than any other lawyer in the United States.

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