It is a cruel paradox: As the cost of long-term care rises and the number of people needing it grows, traditional options for paying for these supports and services are narrowing.
Traditional private long-term care insurance is largely disappearing from the marketplace. Reverse mortgages, already something of a niche product, are likely to become harder to get– especially for those facing severe economic hardship. Medicaid, the insurer of last resort for those who impoverish themselves, faces growing financial pressures. And personal savings are falling behind the costs of retirement.
The inevitable result: Those who need care and their families will be increasingly squeezed between those rising costs and their ability to pay. Let’s look at what’s happening.
Long-term care insurance
Marc Cohen, a long-term care insurance expert at the consulting firm Lifeplans Inc. estimates that sales of individual policies have dropped by two-thirds since they peaked a decade ago. Group coverage, once thought to be the “next big thing” has nearly dried up. Only about a dozen firms now sell LTC insurance, compared to over 100 carriers 10 years ago.
Those that remain are tightening underwriting standards and reducing benefits for new policies even as they raise premiums for all coverage. Officials at Genworth, by far the biggest player in the LTC market, have said they plan to offer new products that will offer lower daily benefits and shorter benefit periods, a model CNO Bankers Life has adopted as well.
RMs allow homeowners 62 or older to borrow against their home equity and get cash or a line of credit without having to make monthly interest payments. When they die or leave their home (for, say, a residential care facility), the loan and interest are payable. Borrowers can use the money to pay for long-term care services while still at home.
But RMs have problems. Upfront fees have been high, especially for those who stayed in their home for just a few years after getting an RM. And because during the Great Recession many people were using RMs to pay for normal living expenses, they didn’t have enough left to pay property taxes and insurance. As a result, many defaulted and the Federal Housing Administration was left holding the bag.
As a result, FHA is raising fees and reducing borrowing amounts. Now, it is likely that loan standards will be tightened again and the amount of money available from an RM could be reduced even further. Tara Siegel Bernard described the future for The New York Times last week.
A new survey of state officials finds the grim news of the past few years is continuing. While Medicaid pays for as much as 60 percent of all long-term care costs, the program remains under severe financial pressure.
The report, by AARP, the National Association of States United for Aging and Disabilities (NASUAD), and the consulting firm Health Management Associates reaches two major conclusions.
1) “Rising demand for aging and disability services, coupled with reduced or flat funding, means that states are striving to do more with less.”
2) States are implementing cost controls and fundamentally transforming the way they finance and deliver long-term supports and services, often through creation of managed care programs.
As the economy crawls out of the recession, personal savings is rebounding. But Americans remain wildly unprepared for their health and long-term care costs in old age.
In 2011, the median net worth of households 65 and older was about $170,000, according to the Census Bureau. Excluding home equity it was just $27,000. Yet, a typical 65-year-old couple can expect to spend more than $200,000 in out-of-pocket medical costs over their remaining lifetime. And each 65-year-old will need to put aside an average of about $60,000 to pay long-term care costs.
Don’t read this this quick, grim tour of the state of long-term care financing today to mean there is no hope. It does mean that some mix of markets and government will have to find creative new ways to address this pressing need. Individuals who are able will have to take more financial responsibility for their own old age, including medical and long-term care costs. And communities will have to find new ways to step in and fill the gaps.
The bad news is obvious. The good news is this is a great time for new thinking about long-term care financing. Already, creative people are seeking new ways to tap home equity, redesign private LTC insurance, and integrate medical and long-term care into health insurance products. We don’t know if they will work, but we have to try something new.
As happens every Fall, FHA is looking at the viability of the Reverse Mortgage program to determine how to keep this a safe product for future years.
While they are talking about some changes, FHA has not issued specific new guidelines. We expect that there will be a new income guidelines showing that the homeowner will be able to pay their property taxes and insurance while they have the Reverse. They appear to remain on the fence about whether or not to reduce the Benefit amount – we’ll have to wait and see.
That being said, the Reverse Mortgage is still an important tool for leveraging health costs by providing funds for long term care insurance. The newer SAVER program has a significantly reduced FHA cost and lender’s fees have also declined from years past. The idea of using a growing line of credit to afford LTC premiums is suitable to most homeowners as equity is used much slower while receiving the LTC benefit.
I encourage homeowners to consult with a reputable, local reverse mortgage specialist to investigate the various options available. Like most loans in the lending industry, this is an ever-changing option and one-on-one discussion for suitability is prudent.
Aside from the payment options mentioned above, I think hybrid policies can also be a great alternative. Instead of purchasing the traditional long term care insurance, people these days can purchase combination products such as life insurance and long term care insurance. It works this way, you invest in the life insurance and then you purchase a rider that will determine your long term care benefits. You also have other options like accelerated death benefits, life settlements and viatical settlements to pay for long term care.