Alternatives to Long Term Care Insurance: Using a Reverse Mortgage and Other Methods to Pay for Long-term Care Costs
Because long-term care insurance requires you to be in good health, this planning option is not available to everyone, especially older applicants for whom the premiums may also be prohibitive. If you are at least 62 years of age and you own your home, you could use a reverse mortgage to pay for care at home or for a long-term care insurance policy that otherwise may be unaffordable.
A reverse mortgage is a means of borrowing money from the amount you have already paid for your house. You are freeing up money that would otherwise only be available to you if you sold the house. You can stay in the house until you die, without making monthly payments. The loan is repaid when the borrower dies or sells the home. The balance of the equity in the home will go to the homeowner's estate.
Payments can be received monthly, in a lump sum or the money can be used as a line of credit. The funds received from a reverse mortgage are tax-free.
While the eligibility age is 62, it is best to wait until your early 70's or later. The older the borrower, the larger the amount of equity available. There are maximum limits set by the federal government each year as to how much of the equity can be borrowed. Usually only about 50% of the value of the home is made available in the form of a reverse mortgage.
You can use the funds from a reverse mortgage to cover the cost of home-health care. Because the loan must be repaid if you cease to live in the home, long-term care outside the home can't be paid for with a reverse equity mortgage unless a co-owner of the property who qualifies continues to live in the home.
Use Your Home to Stay at Home Program
The National Council on the Aging, with the support of both the Centers for Medicare and Medicaid Services (CMS) and the Robert Wood Johnson Foundation, is laying the groundwork for a powerful public-private partnership to increase the use of reverse mortgages to help pay for long-term care. The ultimate goal of the Use Your Home to Stay at Home(TM) program is to increase the appropriate use of reverse mortgages so that millions of homeowners can tap home equity to pay for long-term care services or insurance.
Reverse Mortgages Can Help with Long-Term Care Expenses, Study Says
A new study by The National Council on the Aging (NCOA) shows that using reverse mortgages to pay for long-term care at home has real potential in addressing what remains a serious problem for many older Americans and their families.
In 2000, the nation spent $123 billion a year on long-term care for those age 65 and older, with the amount likely to double in the next 30 years. Nearly half of those expenses are paid out of pocket by individuals and only 3 percent are paid for by private insurance; government health programs pay the rest.
According to the study, of the 13.2 million who are candidates for reverse mortgages, about 5.2 million are either already receiving Medicaid or are at financial risk of needing Medicaid if they were faced with paying the high cost of long-term care at home. This economically vulnerable segment of the nation's older population would be able to get $309 billion in total from reverse mortgages that could help pay for long-term care. These results are based on data from the 2000 University of Michigan Health and Retirement Study.
"There's been a lot of speculation whether reverse mortgages could be part of the solution to the nation's long-term care financing dilemma," said NCOA President and CEO James Firman. "It's clear that reverse mortgages have significant potential to help many seniors to pay for long term care services at home."
According to the study, out of the nearly 28 million households age 62 and older, some 13.2 million are good candidates for reverse mortgages.
"We've found that seniors who are good candidates for a reverse mortgage could get, on average, $72,128. These funds could be used to pay for a wide range of direct services to help seniors age in place, including home care, respite care or for retrofitting their homes," said Project Manager Barbara Stucki, Ph.D. "Using reverse mortgages for many can mean the difference between staying at home or going to a nursing home."
Seniors can choose to take the cash from a reverse mortgage as a lump sum, in a line of credit or in monthly payments. If they choose a lump sum, for example, they could pay to retrofit their home to make kitchens and bathrooms safer and more accessible - especially important to those who are becoming frail and in danger of falling. If they choose a line of credit or monthly payments, an average reverse mortgage candidate could use the funds to pay for nearly three years of daily home health care, over six years of adult day care five days a week, or to help family caregivers with out-of-pocket expenses and weekly respite care for 14 years. They could also use it to purchase long-term care insurance if they qualify.
"Up until now, though, most of these seniors have not tapped the equity in their homes -- estimated at some $1.9 trillion -- to pay for either preventive maintenance or for services at home," noted Peter Bell, executive director of the National Reverse Mortgage Lenders Association. Noting that the average income of men aged 65 and over is $28,000 and $15,000 for women, he added, "This study shows that unlocking these resources can help millions of 'house rich, cash poor' seniors purchase the long-term care services they feel best suit their needs."
What is it about Reverse Mortgages that instills apprehension in some Older Americans?
Fears persist despite the enthusiastic endorsement of groups such as AARP and the National Council on Aging.
A major reason is likely to be the fact that a lot of misinformation has been circulating about this very attractive financial tool for those that qualify. Older Americans often consult friends and relatives who are likely to be misinformed themselves.
Since the Reverse Mortgage can be a beneficial and safe alternative for Older Americans, it's important to correct the major misconceptions associated with them and allow older homeowners to make an informed decision about whether a Reverse Mortgage makes sense for them.
Probably the most common misconception is " If I obtain a reverse mortgage I might lose my home". I frequently hear this when I'm advising elders about planning options related to long-term care. The fact is that the federal government requires that the home must stay in the name of the borrowers only. Since the Reverse Mortgage is a mortgage, a lien is placed on the property like all other mortgages. This assures that the lender will eventually be repaid but for only the amount owed which is principle, interests, and closing costs, just like any other mortgage.
The great advantage of this type of mortgage is that -unlike traditional mortgages-there are no monthly payments. Not having to worry about monthly bills has to be one of the greatest gifts one could wish for in retirement.
More than ninety-five (95) percent of Reverse Mortgages approved are the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) loans. These loans are guaranteed the full protection of the United States Government through use of a two (2) percent insurance fee paid on all FHA Reverse mortgages.
Another misconception is that Reverse Mortgages are costlier than other mortgages. The truth is that closing costs average only about one (1) percent more than a traditional FHA mortgage would be on the same property. The Reverse Mortgage may even be lower in cost due to the fact that conventional mortgages can charge more than the two (2) percent origination fee allowed on all Reverse Mortgages.
Another cost factor is of course, the interest rate. The FHA Reverse Mortgage interest rate is based on the one (1) year United States Treasury note instead of the prime rate, which most conventional mortgages use as their base. This gives the FHA Reverse Mortgage an interest rate LOWER than most adjustable conventional mortgages.
Another myth about reverse mortgages is that the home goes to the lender after the loan becomes due at death or when the last survivor permanently leaves the home. In my experience, the loan amount of approved is generally about half of the appraised value of the home. (The older the homeowner, the greater the amount available for borrowing because it's assumed that the funds will be available for a shorter period.
All of the equity left after payment to the lender, goes to the estate or heirs of the borrower. This is exactly the same procedure followed with regular conventional mortgages.
Since the Reverse Mortgage is a "non-recourse" loan the most the estate will be required to pay to the lender is the value of the home at the time of repayment. This is true even if the home value decreased or the borrower lived to an unusually old age.
Another attractive feature of this financing tool is that the requirements for getting a Reverse Mortgage are not nearly as restrictive as other loans. Since no re-payment is made as long as one (1) surviving borrower remains in the home, there are NO income or credit requirements. Another requirement is that both spouses must be sixty-two (62) or older with no upper age restriction. The only other requirement is that the borrowers alone must own the home with no others on the deed. The home may also be in a revocable trust as long as the eligible borrowers are the only trustees.
All property types are Reverse Mortgage eligible except manufactured (mobile) homes built before June 15, 1976 and co-operatives (Co-ops). Co-ops are expected to be eligible in the future when FHA issues final approval. Homes with existing mortgages that can be paid from the equity can obtain Reverse Mortgages.
Still another misconception is that a Reverse Mortgage is taxable and affects Social Security and Medicare. That is NOT the case. Reverse Mortgage proceeds are not taxable because they are not considered income but is, in fact, a loan.
It should be noted that Supplemental Security Income (SSI) and Medicaid might be affected if you exceed certain liquid asset amounts. We can show you how to structure the loan so that a Reverse Mortgage will not affect these benefits.
Now that the myths of Reverse Mortgage have been removed, a qualified homeowner may ask, how can I get more comprehensive information? Is your local bank the answer? Only a few lenders have been approved for participation by the federal department of Housing and Urban Development, which oversees the program. Most local and regional banks do not offer Reverse Mortgages.
AARP, the Federal National Mortgage Association, American Bar Association (ABA) and the National Council On Aging provide consumer information about reverse mortgages. The ABA passed a resolution supporting Reverse Mortgages in August of 1995.
If you would like to get specific information on a Reverse Mortgage for yourself or a family member, contact Bob O'Toole at 1-800-375-0595 or send me an e-mail to bob@elderlifeplanning.com
Bob O'Toole, President of Informed Eldercare Decisions, Inc. is a nationally known elder and disability care specialist. He currently serves on the board of directors of the National Association of Professional Geriatric Care Managers, and is a former editor of the Geriatric Care Management Journal.
Prior to founding Informed Eldercare Decisions, Inc, Bob worked for 10 years as a senior administrator in the Massachusetts Home Care System and for one of the leading private long term care consulting firms.
A frequent public speaker on aging issues, Bob has contributed chapters to two books on elder care and geriatric care management issues and has written numerous articles on the delivery of elder care in the private marketplace. His articles have appeared in Geriatric Care Management Journal, Health Insurance Underwriter, Inside Case Management, Journal of Compensation and Benefits and Workspan magazine.
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