Most consumers think of long term care insurance (LTCi) only in terms of insurance against future nursing home care. However, comprehensive long term care insurance will include benefits for home care, assisted living and nursing home care. According to Neil Granger, a life agent with two decades of experience in LTCi sales and plaintiffs' expert witness (http://ngrangerconsulting.com/about.html), the typical policy premiums are between $3,000 and $5,000 per year and, when used pays $100 per day for two to three years of in-home or assisted living care ($36,500 per year). Long term care insurance policies can be a life-saver for those who would otherwise have no options but nursing home care.

Great caution should be taken against using a reverse mortgage to fund LTCi policies. Due the high costs of a reverse mortgage’s compounding interest, origination fees, service fees, insurance, etc., the longer an individual pays for LTCi premiums through a reverse mortgage, the less likely the transaction would be suitable. Brokers should be prepared to show potential borrowers illustrations of the compounding costs of the reverse mortgage alongside of the LTCi policy’s projected policy payouts (minus the annual LTCi premium costs).

This article addresses the suitability of long term care insurance – specifically nursing home insurance – for those with limited income and assets. It also addresses the suitability of using a reverse mortgage as a means to pay for long term care insurance – a strategy that can often have costly consequences for seniors and, for those who do end up in out-of-home care, a strategy that can cause them to lose their homes.

Contrary to the statistics included in typical long term care insurance marketing material, the average length of stay in nursing homes is much shorter than the two and a half years usually quoted. According to U.S. Department of Health Services’ Centers for Disease Control and Prevention and California’s Office of Statewide Health Planning and Development (OSHPD)], between 40 – 45% of seniors will go into a nursing home at some stage of their lives. Of those who enter a nursing home, 70% will be discharged within ninety days, i.e., go home, go to an assisted living facility, or die. At 120 days, 80% will be discharged. Less than 12% of those entering a nursing home will be there for one year, and less than 6% for two or more years.

The primary questions for anyone considering long-term care insurance are do they need it and if they have it, what will be covered if they end up in a nursing home? Long-term care insurance is expensive, and any individual interested in obtaining a long-term care policy should be certain that they need to purchase this type of insurance before making that financial commitment. Not everyone needs long-term care insurance. In some instances, individuals will automatically qualify for the government’s long-term care benefits program, Medicaid (Medi-Cal in California) and therefore never need LTCi.

In a case that is currently under review at our office, a woman called because her mother went into a nursing home with a long-term care insurance policy that pays $108 per day, but the facility required $185. The mother’s income was $800 per month. In order for the mother to stay in the nursing home, the daughter had to make up for the shortfall. Because the mother was low wealth and didn’t have any non-exempt assets, she applied for and immediately qualified for long-term care Medi-Cal (Medicaid) benefits. This raises the issue as to whether or not the long-term care policy was a suitable product for the mother and, if it wasn’t suitable, can she sue for damages?

In this instance, there was no reverse mortgage involved. Had a reverse mortgage had been used to finance the purchase, the out of pocket cost for any plaintiff would be substantially higher due to the high cost of the loan being used to finance the purchase. Whether or not the reverse mortgage broker would share in the liability, should a purchase prove unsuitable, remains to be seen.

Who qualifies for LTC Medi-Cal (Medicaid)? Between 60 and 65% of the individuals currently in California nursing homes are on the Medi-Cal program. Medi-Cal is a needs based program. In California, an individual can qualify for Medi-Cal so long as he or she doesn’t have any non-exempt assets. Currently, exempt assets are such things as houses (regardless of value), cars of any value, IRAs, Pensions, 401ks, all personal property and $2,000 cash. If the individual is married, the at-home spouse can retain up to $109,560 in cash. For purposes of this discussion, those who qualify for Medi-Cal should be considered non-candidates for long-term care insurance. These individuals have no need for long term care insurance.

Who needs long-term care insurance? Individuals who do not qualify for Medi-Cal are required to pay privately for their nursing home care. Long-term care insurance is a way to help an individual who does not qualify for government benefits to offset the expenses due to the facility. Currently, between 22 to 27% of individuals in facilities are self pay or self pay plus insurance. The Medicare program, which maxes out after 100 days in a facility, is covering the costs for 6 to 8% of the residents in the facilities.

Generally speaking, an insurance policy pays an amount to the facility that is below the rate that the facility requires. Most long-term care insurance policies are paying approximately 70% of the monthly nursing home’s required rate. Nursing home care is considered “custodial care”. By law, Medi-Cal cannot pay a facility a rate that is higher then the private pay rate. Consequently, nursing homes prefer accepting private pay residents to those who are use the Medicaid program. In certain states (such as California) family members may pay the facility the difference between its private pay rate and what Medicaid pays and get a private room or other amenities their relative.

It is generally a bad idea for low-wealth seniors who qualify for Medi-Cal to use a reverse mortgage to finance long-term care insurance (nursing home) policies. Medi-Cal rule of thumb: The home is exempt and cash is counted. Seniors with houses qualify for Medi-Cal. Cash received from a house that has been sold will not be exempt for purposes of qualifying for Medi-Cal. If all that a low-wealth senior has is a home, then he or she (more likely than not) will qualify for Medi-Cal, which covers the cost of their nursing home care. If the senior qualifies for Medi-Cal without needing a LTC insurance policy, then there is an argument about suitability. Seniors with reverse mortgages who would otherwise qualify for Medi-Cal without having long-term care policies can actually end up disqualifying themselves from Medi-Cal twelve months down the road. After being out of the home for twelve months, the RM is due. Once the RM comes due the house will be sold to pay back the loan. Although a house is exempt, cash isn’t and with the remaining proceeds after the house is sold to pay off the RM, the individual will likely be over the allowable asset limit and will not qualify for Medi-Cal.

The ethical dilemma for the broker is this, what do you do when a friend, who is an insurance agent, brings in an eager elder who wants a reverse mortgage in order to pay for a long-term care insurance policy when you know that the elder’s only asset is a house and would qualify for Medi-Cal (Medicaid), e.g., the insurance policy is unsuitable? In California, since the passage of AB 260, reverse mortgage brokers are considered to have a fiduciary duty towards a borrower. With the passage of AB 329, California brokers have to furnish borrowers with a suitability checklist. Within the suitability checklist is the following admonition: “Whether the prospective borrower intends to use the proceeds of the reverse mortgage to purchase an annuity or other insurance products and the consequences of doing so.”

These are new laws haven’t been tested therefore. Therefore it is not clear whether or not a broker can be held liable for the actions or activity of an insurance agent who sells an insurance product that turns out to be unsuitable. Brokers should seek a legal opinion from their counsel to be certain of the extent of their duties to their clients. Counsel should also be asked to give their opinions on the meaning of CA.WIC § 15610.30(a)(2) that creates liability under the civil financial elder abuse statute for individuals who “assist” in any wrongful taking of the property of an elder and whether or not providing a loan could be considered “assisting” in instances where, but for the existence of the loan, the elder would not have been able to purchase the product. Brokers who operate in other states should seek counsel from lawyers who are familiar with their state’s elder statues.

Long-term care insurance is not for everyone and would most likely not be suitable for low-wealth seniors who would otherwise qualify for Medi-Cal. Low-wealth seniors who qualify for Medi-Cal and who purchase long-term care insurance and use reverse mortgages to finance long-term care insurance are unnecessarily diminishing their estates. Brokers who know that their clients intend to purchase long-term care need to investigate the extent of their fiduciary obligations towards their clients, to make sure that no attributable or vicarious liability attaches to them. If their client is using a reverse mortgage to finance an insurance product that is found to be unsuitable, trouble may lie ahead.

Our industry is loaded with positive literature on LTCi which is deserved. However, legislation has been formulating especially here in California on the need for the lender to enter into the suitability issue. If we have to be a party to such issues, it is important to hear the other side.

I apologize if you find this exercise offensive; that is not intended. Personally I find it somewhat irrational that the provider of a HECM would be required to enter into a discussion in which there is little if any expertise or even competence. So we in California need to become familiar with not only the pros but also the cons regarding senior acquistions of LTCi with HECM proceeds. Mr. Cole will be helpful in filling in the latter. Obviously, I am not representing RMD in this request; Mr. Cole is aware of that.

Please read Ms. Hanson's reply, above.
Why would you want a biased article (Cole is a Financial Abuse Litigation attorney), on this subject? You can do better, or just drop it.

While I believe that LTCi can be a very effective product when acquired through a judicious, deliberate, and prudent evaluation of various products and features, I also believe that it can be wasteful. There have been stellar presentations of its glories even for low income purchasers but they were anecdotal.

Many of us who are not familiar with its implications especially for the low income senior need your insight. We would greatly appreciate a compelling presentation on why low income seniors should be skeptical about using their home to finance LTCi acquisitions. Be prepared for a strong reaction.

For those who sell LTCi, I am no expert on anything other than the financial consequences of such decisions. Well matched LTCi does provide a plethora of benefits to many beneficiaries so I do not want anyone to be misled that this is a request for a biased and overly opinionated presentation against LTCi. Just like some seniors should never get a HECM, some seniors could be wasting significant assets by purchasing inappropriate LTCi.

If you look at the size of my article, the least amount of space was dedicated to LTCi, while the greatest to ILITs. The volume of reactions was just the opposite. This industry is loaded with those who promote LTCi yet there are some very rational reasons not to acquire or acquire limited benefits. The latter reasons need a voice. You, sir, seemed most equipped to voice them.

While I believe that LTCi can be a very effective product when acquired through a judicious, deliberate, and prudent evaluation of various products and features, I also believe that it can be wasteful. There have been stellar presentations of its glories even for low income purchasers but they were anecdotal.

Many of us who are not familiar with its implications especially for the low income senior need your insight. We would greatly appreciate a compelling presentation on why low income seniors should be skeptical about using their home to finance LTCi acquisitions. Be prepared for a strong reaction.

I am no expert on anything other than the financial consequences of LTCi decisions. Well matched LTCi does provide a plethora of benefits to many beneficiaries so I do not want anyone to be misled that this is a request for a biased and overly opinionated presentation against LTCi. Just like some seniors should never get a HECM, some seniors could be wasting significant assets by purchasing inappropriate LTCi.

If you look at the size of my article, the least amount of space was dedicated to LTCi, while the greatest to ILITs. The volume of reactions was just the opposite. This industry is loaded with those who promote LTCi yet there are some very rational reasons not to acquire or acquire limited benefits. The latter reasons need a voice. You, sir, seemed most equipped to voice them.

Please see my reply to Mr. Cole below.