Extract from. Études et Dossiers No th Geneva Association Health and Ageing Conference

Transcription

1 International Association for the Study of Insurance Economics Études et Dossiers Extract from Études et Dossiers No th Geneva Association Health and Ageing Conference Health and Long-Term Care Insurance in Eastern and Central European Countries November 2009 Warsaw This document is free to download from The Geneva Association website, January 2010 Working Paper Series of The Geneva Association Association Internationale pour l'etude de l'economie de l'assurance The Geneva Association - General Secretariat - 53, route de Malagnou - CH-1208 Geneva Tel.: Fax: secretariat@genevaassociation.org -

2 The Geneva Association Working Paper Series Études et Dossiers appear at irregular intervals about times per year. Distribution is limited. The Études et Dossiers are the working paper series of The Geneva Association. These documents present intermediary or final results of conference proceedings, special reports and research done by The Geneva Association. Where they contain work in progress or summaries of conference presentations, the material must not be cited without the express consent of the author in question. This document is free to download from The Geneva Association website, please visit: Layout & Distribution: Valéria Kozakova The Geneva Association - Association Internationale pour l'etude de l'economie de l'assurance

3 Using Reverse Mortgages to Cover Long-Term Care Risks Colin Murray Agenda Description of reverse mortgages Benefits to planholders Pitfalls for planholders Benefits/risks to providers Uses for long term care Fair deal

4 Reverse Mortgages Reverse mortgage is a payment to an individual in exchange for a charge on their property Individual can stay in the house until death (or in some cases entry to long term care if earlier) Interest rolls up on the property (e.g. No payments made by the individual) On death or entry to LTC, property is sold, mortgage is repaid. Crucially, the value of the mortgage can never be greater than the value of the property 3 Reverse Mortgages Typical vanilla contract House value 500,000 Male aged 65 (last survivor available also) Max Loan to Value 30% (age dependent) Max Initial mortgage 150,000 Interest rate fixed or variable

5 Development of HPI/Reverse Mortgage 5 Variations Protection Top Ups Drawdowns Incomes Fixed repayment Impaired lives

6 Benefits to Planholders Benefit asset rich/income poor individuals Provide additional source of income to fund care at home No repayments required Value of repayments limited to value of house (valuable option) A portion of the house can be protected for heirs Inheritance planning 7 Pitfalls for Planholders Low mortgages compared to value of property Compound interest - mortgage can consume whole property Fixed interest rates relatively expensive Variable rates lead to uncertainty Security of provider (if regular income) Terms and conditions for early move out

7 Benefits/Risks to Providers Benefits New source of profitability Diversification from other mortgage risks Risks House price inflation Longevity Property maintenance Reputational a Political 9 Irish/UK markets Strong sales in recent years Assisted by Ageing population Increasing financial awareness Less state involvement in provision Poor pensions Strong property values (until recently) Reliance on long term care (rather than family) Better contract terms

8 Irish/UK markets Nevertheless sales not reached full potential Possibly due to Perceived poor value Attitude to home ownership/inheritance Difficult to understand Scandals in 1980s/1990s (UK) Previously unregulated market Current sales down due to lack of funding for providers...demand still high 11 Other European Markets Ireland, UK and Spain greatest growth Slower growth in other markets due to Lower home ownership Low house price inflation Cultural Taxation issues Stamp duty Legal issues

9 Long Term Care Remain in house rather than institution Funding for in house care House revert to provider on moving to nursing home (when unable to stay) Provides better cash terms when mortgage is effected Ability to tailor care to needs 13 Benefits for Society Less dependency on state pensions Investing in reverse mortgages is a hedge against longevity (ignoring HPI risk) Provides potentially better investments for pension schemes Brings down the risks of longevity and reduces the costs of pensions and long term care bonds

10 Fair Deal Ireland Nursing Home Support Scheme introduced in 2009 State provide nursing home care in exchange for means assessed contribution Max of 80% of income to contribute to cost of care 5% of assets per annum (including property) up to a maximum of 15% of assets (exemption from first 36k of assets) Asset charge can be deferred until death to avoid sale of property 15 Fair Deal Benefits & Issues Benefits Upper limit to own costs Adult children do not have to contribute Can leave inheritance Issues Costs to state/availability of funds 20% of small income means other costs incurred Only covers bed and board Standard of care vague Definition of assets is net assets (mortgages, liabilities)

11 Summary Reverse mortgages have a value in future post retirement planning Particularly facilitate the provision of care in the home Barriers to take up have mainly been cultural Future post retirement issues may lead them to become more mainstream