As the retirement of the baby boom generation approaches, policy makers are considering ways to better prepare seniors for their retirement and long-term care needs. One idea that has received recent attention is linking reverse mortgages to the purchase of private long-term care insurance. Regulations to implement legislation passed in 2000 encouraging this linkage are expected to be released in the spring of 2004. This issue brief explains the fundamentals of reverse mortgages and long-term care insurance and outlines the opportunities and challenges with the linkage.
Large and Often Unanticipated Cost of Long-Term Care. One of the major, unaddressed threats to retirement security is the cost of long-term care (LTC). It is estimated that at least 40 percent of the elderly will have a nursing home stay, and that 10 million people have become disabled enough to need nursing care in the home or at a nursing facility. Long-term care in nursing homes costs around $150 a day on average. For people staying a year in a nursing home (the average stay is 2.6 years), the annual cost of care is greater than $50,000, and those costs are expected to increase over time at a rate greater than inflation. Nursing services provided in the home can be equally costly. Unlike other health services, individuals—not public or private insurance—are primarily responsible for paying for these costs.
Fragmented System. Despite the estimated cost of paying for LTC services and the strain it puts on retirement savings, very few people in or approaching retirement have private resources or sufficient public benefits to protect them from long-term care costs. Most people who need long-term care pay for it on their own, or rely on family members to act as informal caregivers. Approximately 25 percent of formal LTC is funded out-of-pocket, and nearly one in four families in this country provides informal care in the home. For those who exhaust their savings and continue to need medical care, and for those with limited incomes and assets, Medicaid may pay for their care. Medicaid, by default, has become a major financer of LTC, paying for nearly half of all nursing home care. It also pays for a limited home- and community-based care benefit. Thirty-five percent, or roughly $75 billion, of Medicaid benefits expenditures in 2002 were attributable to LTC. Since states pay for roughly 43 percent of Medicaid costs ($110 billion in 2002) (with the rest funded by the federal government), long-term care now represents a significant, growing and probably unsustainable portion of their budgets. Medicare, the other major public insurer, has very limited LTC benefits.12 With the recent addition of a drug benefit, Medicare is unlikely to expand its LTC coverage in the near future.
A Limited Private Insurance Market. Private LTC insurance is a small but growing source of coverage for nursing home and home-based care costs. LTC insurance shields policyholders from much of the catastrophic costs of LTC, provides them with more care options than Medicaid would, and possibly reduces reliance on Medicaid. However, as of 2001, there were only 5.8 million policies in force. Lack of awareness of the risk of needing LTC, and concerns about the quality and cost of the products are typically named as the reasons for the low take-up of LTC insurance. To promote the purchase of LTC insurance, Congress has enacted several initiatives such as a limited tax deduction for premiums similar to the deduction for medical insurance premiums purchased by individuals; the Federal Long Term Care Insurance Program for federal employees; and a consumer education campaign on LTC and Medicare through the Centers for Medicare and Medicaid Services (CMS). The impact of these activities may increase over time, but the number of people purchasing LTC insurance remains small.
New Policy: LTC Insurance-Reverse Mortgage Link. A new policy is on the horizon to promote the purchase of private LTC insurance. Regulations will likely be issued in 2004 by the Department of Housing and Urban Development (HUD) to implement a 2000 law (The American Homeownership and Economic Opportunity Act of 2000) providing an incentive to finance LTC insurance through reverse mortgages. A reverse mortgage provides access to the equity in the home while allowing the homeowner to remain in place and not have to repay the loan until the home is sold. Currently, the proceeds from a reverse mortgage can be used to pay for LTC insurance, or for any other purpose. However, with the new law, a government-backed reverse mortgage program (the Home Equity Conversion Mortgage (HECM) program) will provide a financial incentive to homeowners who use their entire loan payout to purchase a qualified LTC insurance policy. The rationale behind the LTC insurance-reverse mortgage link is that it allows seniors to tap into the value in their homes while protecting their retirement income and other assets from the potentially catastrophic costs of long-term care. To the extent that people purchase LTC insurance, thus reducing the number of people who “spend down” to Medicaid, this proposal could help relieve the strain on state and federal budgets. However, this policy also raises questions such as whether limiting the use of reverse mortgage to LTC insurance is too restrictive, whether there are adequate consumer information and protections for both of these products, and how the policy will be implemented.
This issue brief describes reverse mortgages and LTC insurance, the new policy, and issues and opportunities associated with the linkage. It is intended to serve as a resource for those tracking LTC and retirement security policy generally as well as for those reviewing the plan for implementing the LTC insurance/reverse mortgage link, which should emerge in the coming months. This report is one of a series of activities conducted by the Retirement Security Project to bolster the financial security of America’s aging population by raising retirement savings and improving long-term care insurance products.