The Perfect Storm

long-term care insurance crisis retirement reverse mortgage



The Perfect Storm: Long Term Care premiums skyrocket while fewer qualify

Long-term-care premiums are skyrocketing and many who apply are turned down. Where can older Americans turn to secure their future?

“Right now, if you’re in your mid-50s and healthy, a typical individual long-term care policy would cost around $3,000 a year. Even without premium increases, that would be close to $100,000 over 30 years”. Those are the words of columnist Howard Gold in his September 16th MarketWatch column.

Countless middle-aged workers decided to protect their financial future against costly long-term care in their elder years by purchasing a long-term care insurance policy. A move many financial advisors actively encouraged. Today these policyholders are seeing huge premium increases as payouts for care increased and individuals kept the policies longer than anticipated. Some of the 8 million-plus Americans who have such a policy are facing a financial Sofie’s Choice having to absorb the cost of continued premium hikes or cancel their policies losing the future benefit that years of payments were to secure- all at a significant financial loss. Those wishing to apply for coverage will find getting approved more difficult. “According to the American Association for Long-Term Care Insurance, 44% to 51.5% of people over 70 who apply for a long-term care policy are declined by insurers”, writes Gold. The percentage of those declined coverage drops to about 20% for those in their 50’s. Read More

1 comment

James E. Veale, CPA, MBT September 21, 2020 at 3:22 pm

While it is true that a reverse mortgage that the borrower does not pay down by any significant amount does reduce the amount of equity that a home might otherwise enjoy, that does not mean that the home equity is less than it was the month before. Yet with a 30 year fully amortized fixed rate forward mortgage, the monthly payment reduces cash reserves (and perhaps personal equity), each and every month.

The widow of a close friend who recently passed away, originated a monthly adjusting CMT HECM in late 2004 when the margin was 1.5% and the ongoing MIP was just 0.5% as it is today. Sixteen years later she still has that HECM. While she has not seen the growth in her line of credit that so many talk about, her UPB has not risen much either. While the UPB has risen over $120,000 in that time, the value of her home is now up by about $250,000 more than what it was 16 years ago. So the fact is her home equity rose by 32% in that 16 year period while her home value rose by 42%. In summary, her home value increased and her home equity increased as well but by a lower amount and lower percentage. What did not happen in that 16 year period of time was her home equity dropped from what it was late 2004.

The example is not the norm. Yet by increasing her effective interest rate by 2% (i.e., from 3% to 5%), the increase in the value in the home is still 8.6% greater than the increase in the UPB. This HECM was originated in the era when the expected interest rate floor was about 5.5% and the initial rate was significantly lower than that but higher than they are today. Late 2004 was also within 24 plus months of the mortgage bust of 2007 and 2008 when home values took a tremendous loss.

How you word things makes a huge difference in how prospects perceive the value of a HECM. Saying that a reverse mortgage will reduce home equity might be true but it is best to say that if the UPB is allowed to grow without paydowns, home equity will not be as high as it might otherwise be.

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