Unrealized Reverse Mortgage Income

A new income category for means tests

By Tony Kondaks

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Introduction

This paper proposes a new accounting term: Unrealized Reverse Mortgage Income (URMI).

It is further proposed that URMI be incorporated into means tests employed by city, county, state, and federal agencies in any program designed to benefit low-income individuals and families. The non-government sector can also benefit by including URMI in their means tests.

Particular attention is paid to the Threshold Income Formula, a means-test-like calculation used by the Internal Revenue Service to determine the taxation of Social Security benefits. The URMI credit is also proposed which can be implemented in conjunction with URMI.  Together, they can serve as an incentive for individuals to purchase long term care insurance and thereby lessen the growing funding burden in this area by government.

This paper will define URMI, its related terms, and then demonstrate, through two illustrations, how it can be included in means tests. The two illustrations are:

- URMI in Senior Property Tax Protection programs; and
- URMI and the URMI credit in the Social Security Threshold Income formula.

Adoption of URMI and the URMI credit will achieve public policy goals such as:

- fairer distribution of public and non-public funds to beneficiaries
- fairer taxation
- greater financial self-sufficiency for individuals in the area of long term care
- lowering of dependency by individuals upon federal and state governments to pay for long term care
- decreasing Medicaid and Medicare expenditures by government.

Terms and definitions

Reverse Mortgages

A reverse mortgage (RM) -- formally called a Home Equity Conversion Mortgage -- is a type of loan. Available to U.S. homeowners 62 years of age and older, RMs convert home equity into one or a combination of three types of cash payments:

- lump-sum
- line-of-credit, or
- life annuity

Ownership of the home is still retained by the senior . No payment of either principal or interest is required until the death of the owner, the house is sold, or he moves. The reverse mortgage is a type of non-recourse loan: the borrower or his estate can never be responsible for more than the value of the house, regardless of how much the loan may grow to.

Almost 200,000 HECM loans have been made in the U.S. from the program’s inception in 1989 until 2006. Sales are increasing each year at a dramatic pace as the program gains credibility and popularity; since 2001, HECM loans have grown 881%.

Unrealized income

Unrealized income is an accounting term that is defined as “profit which has been made but not yet realized or collected through a transaction, such as a stock, which has risen in value but is still being held. Also called unrealized gain or unrealized profit or paper gain or book profit.”

URMI

URMI is the annual amount that a homeowner would receive if he took the life annuity option on a reverse mortgage. The annuity is a function of age, amount of mortgage, and prevailing interest rate.

Note that the senior doesn’t actually take out a reverse mortgage in order to determine his URMI; he just has to have home equity and qualify for a reverse mortgage. URMI reflects equity’s potential to be converted to an income stream under the auspices of a reverse mortgage.

Note also that, unlike the term unrealized income which refers only to profit, URMI includes principal as well as profit.

Threshold Income Formula

A calculation designed to determine taxation of Social Security benefits. Appears under the name “Social Security Benefits Worksheet” in IRS forms and publications.

Means test

“The term means test refers to an investigative process undertaken to determine whether or not an individual or family is eligible to receive certain types of benefits from the government. The ‘test’ can consist of quantifying the party's income, or assets, or a combination of both.”

This paper takes liberty by employing the term “means test” to describe the Threshold Income Formula which, in actuality, is used to determine whether the applicant is subject to higher taxation rather than being eligible for benefits which is the more traditional definition of "means test."

Long term care (LTC)

”Long-term care refers to a variety of services which help meet both the medical and non-medical need of people with a chronic illness or disability who cannot care for themselves for long periods of time.

“It is common for long-term care to provide custodial and non-skilled care, such as assisting with normal daily tasks like dressing, bathing, and using the bathroom. Long-term care may also include medical care that most people do for themselves, such as diabetes monitoring. Long-term care can be provided at home, in the community, in assisted living or in nursing homes. Long-term care may be needed by people of any age, even though it is a common need for senior citizens.”

Senior Property Tax Protection programs

This first of two illustrations demonstrates how URMI can be applied to Senior Property Tax Protection (SPTP) programs. Note that the author first proposed this application in the May 14, 2007 edition of State Tax Notes in the article "Property Tax Protection Programs for Seniors:An Obsolete Entitlement."

Senior Property Tax Protection programs (my own generic term for the various state programs) were designed to shield qualifying seniors from increasing residential property taxes. The plethora of SPTP programs which have popped up over the past decade come in several versions:

- tax deferment;
- tax freeze; or
- tax credit.

Almost all require the applicant to pass a means test in order to qualify: is annual income over or under a cut-off. For example, in Arizona married seniors in 2007 with a total household income from all sources of less than $38,220 can have their home’s valuation frozen for property tax purposes, which would be in effect until they die or move away (with the proviso that they must reapply every three years). According to the Maricopa County Assessor’s office, “if you’re 65 now and you qualify, a program like this could cut your tax bill by over half by the time you reach 80”.

Seniors, income, and home equity

In 2005, more than 80% of seniors aged 65 and over were homeowners.

In 1999, the median household income for the 65-74 year age group was $31,368 and for the 75+ group, $22,259 . The median net worth of Americans 65 years of age and older  was $108,885 in 2000. Of that amount, $85,516 -- or 79% -- was home equity. When net worth figures are divided into income quintiles: even the poorest 1/5th of seniors -- with a median net worth of $44,346 -- had home equity of $40,846. Note that even those home-owning Americans in the bottom income quintile have significant equity holdings.

Distribution of assets upon death

Seniors who qualify for state SPTP programs pay less in property tax than they otherwise would. Many if not all seniors who qualify for SPTP may certainly be cash poor but not necessarily equity poor.

What happens to the money SPTP-qualifying seniors retain from this tax-break after they die? Unless depleted by the time of death, any remaining assets become part of the deceased’s estate, creditors paid, and net assets are then distributed to heirs (usually adult children). In the meantime, non-senior and non-SPTP-qualifying taxpayers -- many of whom may have much smaller net worth’s than the seniors who got the tax-break -- are footing the SPTP-qualifying seniors’ share of municipal and county tax bills.

Is this fair? Property tax in the United States is almost always assessed on the basis of property value. Such a process, by definition, knows no discrimination based upon race, creed, color, or age. The less a house is worth, the less the presumably poorer owner pays. The more valuable a house, the more the presumably richer owner pays. Fairness is already built into the system.

To give seniors a tax-break over and above this already equitable arrangement and, ultimately, transfer these savings to grown adult children through inheritance is unjust.

The solution: URMI

This paper proposes a simple, easy-to-apply, and ethical solution to this inequitable situation: incorporate URMI into the means test used to determine SPTP eligibility.

An example

Let’s take the imaginary 70-year-old couple, Mr. and Mrs. John Smith of Mesa, Arizona. Retired. House is free and clear. Kids are out of the house, married, and on their own. Their two cars are paid off.

The Smith’s net worth:

    House:                            $400,000
    IRA:                                   100,000
    Investments:                     100,000
    Net Worth:                      $600,000

Their annual income before URMI is factored in:

    Social Security                $17,000
    IRA distribution                    5,000
    Investment income              5,000
    Pension                              10,000
    Total annual income:      $37,000

Despite being worth $600,000, the Smiths qualify for Arizona’s property tax freeze, as described earlier, due to their income being lower than the cut-off amount of $38,220.

Now let’s take a look at the Smiths’ revised annual income, after including URMI, according to the proposal made earlier:

    Social Security             $17,000
    IRA distribution                 5,000
    Investment income           5,000
    Pension                           10,000
    URMI                                11,028
    Total annual income:    $48,028

Once $11,028 in URMI is included, the equity-rich Smiths are no longer entitled to the tax-break.

Calculating URMI

Calculating URMI is easy. Software that factors in all the variables according to HECM guidelines is easily accessible and can be performed by even the most mathematically-challenged. All one needs to know is the homeowner’s date of birth and the home’s assessed value (net of any existing liens or mortgages) from the most recent tax bill. Indeed, the calculation can be performed on-line in seconds.

For the Smiths' example, “12” for “month” and “1937” for “year” were keyed in at the above link for both Mr. and Mrs. Smith (which would, as of this writing, reflect their ages of 70 if they were born in December of 1937). “400,000” in the space for how much their house was worth and “85208” for the zip code were entered.

The software returned the $919 a month figure under “HECM” which would be the monthly annuity amount provided to them for life (note: if the reader tries this themselves, please note that the result you get may be slightly different than the one above as [1] the date the example was performed reflected the Smiths’ age of 70; and [2] the software incorporates changing interest rates from one week to the next). Multiplying $919 by 12 (twelve months in a year), we get the $11,028 for URMI that was included in the means test example above.

A myriad of programs based upon income

URMI can be applied anywhere income-only or principle-residence-excluded means tests are used to determine eligibility for grants, tax breaks, tax credits or financial assistance of any kind; whether in the non-profit or public sector, whether municipal, county, state, or federal programs.

The following is a non-exhaustive list of programs that utilize means tests to determine eligibility and where URMI may find application. These programs were found by googling “eligibility low-income assistance” and are listed to demonstrate the diversity and wide-spread use of such programs. There were, literally, hundreds of programs that came up under the Google search and the following are but a sampling:

- Low-income assistance under the Medicare drug benefit; note: “An applicant’s principal home, car, and life insurance policies (with a face value up to $1,500) do not count toward the resource limit. An additional $1,500/individual and $3,000/couple.”
- Low Income Sewer Relief Program; note “Liquid assets and real estate are less than $3,000, excluding house of residence.”
- (Texas) Low-income assistance programs; a wide-range of programs to assist low-income families such as: energy assistance, weatherization, repair and assistance to meet vehicle emission standards; private and municipal utility assistance; new vehicle purchase.
- Tacoma Power discount rates and assistance for heating bills programs; income-only criteria.
- Montana low-income energy assistance programs; note: “Property/real estate other than the home in which you live and it’s adjoining land.
- (Iowa) Low-income telephone assistance programs
- (California) City of Bellflower low-income assistance program for water rate increases
- (California) Renter assistance program
- (New Jersey) Legal services

Medicaid, Medicare, and long-term care

The cost of and need for LTC is increasing at an ever-expanding rate as the elderly population of America is both living longer and becoming a larger percentage of overall population.

The following statistics and accompanying text were taken verbatim from the Family Caregiver Alliance; National Center on Caregiving:

- “An estimated 10 million Americans needed long-term care in 2000.
- “Most but not all persons in need of long-term care are elderly. Approximately 63% are persons aged 65 and older (6.3 million); the remaining 37% are 64 years of age and younger (3.7 million).
- “The lifetime probability of becoming disabled in at least two activities of daily living (ADL) or of being cognitively impaired is 68% for people age 65 and older.
- “By 2050, the number of individuals using paid long-term care services in any setting (e.g., at home, residential care such as assisted living, or skilled nursing facilities) will likely double from the 13 million using services in 2000, to 27 million people. This estimate is influenced by growth in the population of older people in need of care.
- “Of the older population with long-term care needs in the community, about 30% (1.5 million persons) have substantial long-term care needs (three or more ADL limitations). Of these, about 25% are 85 and older and 70% report they are in fair to poor health.
- “40% of the older population with long-term care needs are poor or near poor (with incomes below 150% of the federal poverty level).”

Each year, government is spending more to pay for LTC. Some facts:

- The average stay in a long-term care facility is 2.4 years.
- In 2007, the average annual cost  to stay in a private room in a long-term care facility was $74,806.
- Over 47% of the $183 billion spent on long-term care services in 2003 was paid by Medicaid, 18% by Medicare. That works out to approximately 2/3rds of all long-term care costs paid by government. It is therefore not surprising that the federal government actively encourages seniors to take advantage of reverse mortgages  in order to shift these costs from public funds to the seniors themselves.

The problem

Medicaid and Medicare expenditures for long-term care are unacceptably high. Federal and state governments are hard-pressed to continue to foot the bill.

The need

Self-sufficiency. Seniors that can afford it should purchase long-term care insurance. Yet in 2005 only 7 million Americans had long-term care insurance policies. The need is to shift more of the burden of paying for long-term care from government to individual Americans.

The solution: URMI and the URMI credit

Proposed: an incentive program that encourages the purchase of long-term care insurance by senior Americans. This goal will be accomplished by implementing the following:

1) the inclusion of URMI in the Social Security Threshold Income Formula; and

2) providing a credit against income in the Threshold Income Formula based upon the purchase of long-term care insurance (with emphasis upon a certain type of insurance).

Taxation of Social Security benefits

The Social Security Act was signed into law in 1935 and the first benefit payments were made in 1940.

Until 1983, Social Security benefits were not subject to taxation. In 1983, Congress determined that up to 50% of benefits became subject to taxation; in 1993, up to 85% of benefits became subject to taxation.

It is estimated that 14.5 million beneficiaries (32%) out of a total 45.4 million beneficiaries paid income taxes on the Social Security benefits that they received in 2000.

How the Threshold Income formula works

The Threshold Income formula determines how much income tax, if any, a taxpayer pays on Social Security benefits. The formula is a mathematical exercise that determines taxation based upon the taxpayer’s includable sources of income and how much comes from each source.

Gail Buckner, CFP, provides the following succinct explanation of how the Formula works (note Ms. Buckner uses the term “base amount“ to describe Threshold Income):

“If you are receiving Social Security benefits, at tax time you have to perform an additional computation to come up with your ‘base amount’ of income. First, figure your adjusted gross income. Then add any municipal bond interest you earned over the past year (you won't pay federal income tax on this, but it still counts toward your ‘base amount‘), plus one-half of the Social Security benefits you received. (If you retired from certain jobs in the railroad industry, you also have to include what's called ‘Tier One Railroad benefits.’)

“If this number exceeds the threshold of $25,000 in the case of a single individual or $32,000 for a couple filing married/joint, then up to 50 percent of your Social Security benefit must be added to your AGI. This entire amount will be subject to income tax.

“If your ‘base amount’ is more than $34,000 (single taxpayer) or $44,000 (married, filing joint), as much as 85 percent of your Social Security benefit is added to your adjusted gross income.”

The actual Threshold Income Formula can be found in the 1040 Instructions booklet published by the IRS under the heading "Social Security Benefits Worksheet -- Lines 20a and 20b.”

The following are examples of which sources of income are included in Threshold Income (for simplicity’s sake, this is a non-exhaustive list):

- Tax-free municipal bonds
- Corporate bonds;
- Treasury bills
- Pensions
- IRA distributions
- CD’s
- Money Market
- Mortgage certificates
- Capital Gains
- Dividends
- Tax-free dividends
- 50% of Social Security benefits

The Threshold Income Formula: an example

Figure 1 is a reproduction of the Threshold Income Formula, called the Social Security Benefits Worksheet by the Internal Revenue Service (IRS), which appears in their publication 1040 Instructions 2007. Once filled in and tabulated by the tax-payer, taxable social security income, if any, is included on line 20b of Form 1040 (this is the main tax form used by taxpayers each year when filing income tax).

Figure 2 is an example of how the fictitious Mr. and Mrs. Smith of Mesa, Arizona would fill out the Threshold Income Formula, utilizing the same income figures from the earlier Senior Property Tax Protection example. Total Threshold Income of $28,500 (line 7) is less than the cut-off of $32,000 for married couples (line 8), triggering the conclusion that none of their social security benefits are taxable (the Xed box in line 9).

Note that line 9 commands the taxpayer to enter “0” on line 20b of page one of Form 1040, which is reproduced, in part, in Figure 3 with the Smiths’ income figures filled in. The Social Security Benefits Worksheet must be performed in conjunction with Form 1040, and vice-versa.

Including URMI in Threshold Income

Figure 4 incorporates URMI into the Threshold Income formula. Using the same online software to generate the Smiths’ URMI in the earlier Senior Property Tax Protection example, the amount of $11,028 is entered on line 4 of the Social Security Benefits Worksheet. Line 4 has been modified by rewording the text. It now instructs the taxpayer to get this figure from the total of lines 8b and 8C of a modified Form 1040, seen in Figure 5.

Note that Line 8b is, as can be seen in Figure 3's Form 1040, Tax-exempt interest which usually comes from investment instruments such as a tax-free municipal bond. Tax-exempt interest, as the name implies, is interest income that is not included as part of a taxpayer’s taxable income but is included as income for the purposes of the Threshold Income Formula. URMI, too, will not be included as part of taxable income but will be for the purposes of the Threshold Income Formula. Because of this similarity, it is proposed that Tax-exempt interest and URMI share the same line on Form 1040.The modified Form 1040 now includes a separate entry for “URMI” as 8c and has been placed next to 8b. It is here that the amount of $11, 028 would be entered by the taxpayer and it is from here that the taxpayer, when filling out a Social Security Benefits Worksheet that now incorporated URMI, as shown in Figure 4, would find the $11,028 figure.

Note that, as a result of the inclusion of URMI, the calculations of Figure 4 create taxable social security benefits in the amount of $3,764 (line 18) which the taxpayer is instructed to include on line 20b of modified Form 1040 in Figure 5. This is $3,764 in taxable income that has resulted only by virtue of the inclusion of URMI as part of Threshold Income.

The URMI credit for long-term care insurance

Figure 6 is the Social Security Benefits Worksheet modified yet again and is designed to include a formulation that will provide a credit against taxable Threshold Income if the taxpayer has purchased long-term care insurance. This is where the URMI credit is found which will serve as the incentive to purchase the LTC insurance.

Note lines 4 and 4a through 4d in Figure 6.

Line 4 is the original line 4 from Figure 1 and is presented separate from URMI as it reflects tax-exempt interest and will not be part of the formulation to provide a credit for owning long-term care insurance.

Line 4a enables the taxpayer to enter URMI from line 8c of the modified Form 1040 so that calculations can be performed on it.

Line 4b provides for entry of the value of one-pay long-term care insurance or its equivalency. The value of one-pay insurance is important and deserves its own heading. It will be explained in greater detail below.

Line 4c provides for the value entered on line 4b to be multiplied by “.065“. This enables the one-pay amount to be converted to an amount that approximates the URMI value so that it can be negated. “.065” is a variable and can be changed, of course, by policy-makers. The value of “.065” has been chosen so that it gives a result that will be slightly more than the URMI amount and when it is subtracted from the URMI amount (line 4d) it will therefore create a negative result.

The result entered on line 4c is the URMI credit. By then including the negative figure (line 4d) that results from deducting line 4c from line 4a as part of threshold income (line 5), there can even be a slight reduction of that income. Both the negation of URMI and the potential to have a negative value entered on line 4d will serve as an incentive to the purchase of long-term care insurance and is the purpose of the inclusion of the URMI credit.

Line 9 shows the results of the long-term care credit: it has resulted in taxable social security benefits being reduced to zero. Note how this differs from the results in Figure 4 when URMI was included but without any credit. Line 9 now instructs us to enter this zero result on line 20b of Form 1040, as shown in Figure 7.

One-pay equivalency worksheet

What if the taxpayer has responsibly purchased long-term care insurance that is not a one-pay policy but, rather, is of the periodic premium payment variety (which happens to be, overwhelmingly, the most common form of long-term care insurance)? Should he not also benefit from the URMI credit?

Of course. It would be unfair and prejudicial if he wasn’t able to.

Figure 8 proposes a long-term care equivalency worksheet for periodic-premium-paying LTC policy-holders that will enable them to convert the value of their insurance to an URMI credit equivalency.

Note that this equivalency is performed on the basis of the value of the benefits of the coverage: the watermark used is a maximum daily coverage and a maximum number of days of coverage. “204.95” is used as the maximum daily coverage because this is deemed as the average cost of long-term care in the U.S. for 2007. “1,095” days is used as the maximum days of coverage because 1,095 is the number of days in three years, which is both an ideal time period of coverage (as noted previously, the average LTC stay is 2.4 years) and is the coverage period of the one-pay policy discussed below.

Why one-pay insurance serves as the benchmark for the URMI credit

Why does this paper emphasize and encourage the one-pay type of long-term care insurance? The main reason is that the acceptance criteria is markedly less stringent than that of the traditional periodic premium form of LTC insurance, resulting in a greater number of applicants able to procure coverage.

Like all health-based forms of insurance, offering LTC insurance for sale contains inherent risk for the underwriting insurance company. As one would expect, not all who apply are accepted: those deemed not healthy enough are either declined for coverage or rated (i.e., accepted for coverage but required to pay a higher premium to reflect the greater risk). And, as one would expect, the older an applicant, the greater the possibility of being “declined.”

Table 1 shows results of a study that indicates what percentage of those who apply for LTC insurance, based upon age group. are “declined” for coverage:

Table 1: Percentage of long-term care insurance applicants declined

Over age 80, more than 57% of applicants are declined; ages 70-79, 43%. Although younger ages have lower decline rates, their percentages are nevertheless significant.

Although financial status can sometimes be a reason why an applicant is declined for coverage, we can safely assume that those being declined are not rating well from a health perspective and are therefore most likely those in the greatest need of coverage.

And this is where the one-pay concept can play such an important role and why it should serve as the model for the URMI credit proposal.

Almost universal acceptance

This author has not done an exhaustive search of all one-pay LTC policies offered in the United States. However, of those he is familiar with, one stands out for careful examination and serves as the ideal for the one-pay model. To gain a perspective on what is available on the market as well as for comparison purposes, here are the particulars of three one-pay policies:

United of Omaha Life Insurance Company’s Living Care Annuity. $50,000 minimum, $300,000 maximum initial premium. Beneficiary can receive up to 3 times the value of the annuity for long-term care for as much as 6 years of care. However, he must first spend down the value of the annuity until the benefits will be paid. 12 health questions limit the number of applicants who will be accepted for coverage. Benefits are available in Year 3 of the contract and after a 90-day elimination period.

Great American Life Insurance Company’s Long-term Care Annuity. $36,500 minimum, $273,750 maximum. Several different programs are available: beneficiary can receive 2 to 3 times the value of the annuity for long-term care for 2 to 6 years of care. Like United of Omaha’s program, he must first spend down the value of the annuity until the benefits will be paid. Numerous health questions also limit who will be accepted. Benefits are available after 3 or 5 years.

Washington National Insurance Company’s RewardMark Indexed Annuity With Enhanced Care Rider. $50,000 minimum, $200,000 maximum initial premium. Beneficiary can receive a monthly benefit for long-term care that is a percentage of the account value. This benefit is available for up to 36 months. The percentage value depends upon application age: 40-55: 3%; 56-65: 2%; 66-75: 1%. The health questions are very limited and ensure that almost all applicants are accepted. Benefits are available in Year 6 after a 45-day elimination period.

It is the latter product -- the RewardMark -- that serves as the ideal for the one-pay model for one very important reason: No underwriting is required and only a few limited-in-scope health questions must be satisfied for acceptance.

It is individuals who cannot get accepted for LTC insurance that have the most need to be insured. The structure of the RewardMark one-pay program has the greatest likelihood of providing that coverage.

The following is an excerpt from the “Q&A” section of page 4 of Washington National's brochure Enhanced Care Rider: Preserving your Financial Independence (CNS155-0207):

“Will I have to answer questions about my medical history?
“No underwriting is required, so no invasive medical questions are asked and no medical tests are necessary. At the time you complete the annuity application, you will be asked only to verify that the designated annuitant has not been confined to a nursing home or assisted living facility or received care serves in the last 12 months.”

“When am I eligible to receive monthly benefits?
“You are eligible to receive benefits for up to 36 months after: (1) six years have passed since establishment of the annuity, (2) a request for rider benefits has been approved, and (3) a 45-day elimination period has passed. If the designated annuitant’s care is interrupted and then resumed, no additional elimination period is required.”

RewardMark features serve as the model for the URMI credit

$200,000 was chosen as the benchmark for the LTC account value in Figure 6’s modified Social Security Benefits Worksheet for no other reason than it is the maximum premium allowed under the RewardMark policy and, for those who applied and obtained their policies within the ages of 40-55, provides a 3% monthly benefit for a maximum of 36 months. Note that at an account value of $200,000, the 3% monthly benefit works out to $6,000 a month, or $72,000 a year, an amount that approximates the current national annual average cost of LTC coverage. 36 months (3 years) of coverage is about 8 months more than the average stay in a LTC facility.

However, $200,000 is a variable value -- in addition to others -- and can be changed depending upon policy-maker’s objectives. There are several variables in the URMI and URMI credit proposals above and are identified in the following section.

URMI credit variables

Maximum one-pay account value, found on line 4b of the modified Social Security Benefits Worksheet in Figure 6 and on line 4 of the One-pay LTC account value and LTC equivalency worksheet in Figure 8. The filled-in figure in the illustration is 200,000, which is also the recommended maximum value. Policy-makers will most likely modify this maximum value upwards each year based upon cost-of-living increases, just as IRS decision-makers adjust items such as personal exemptions and standard deductions upwards each year for the same reason. Other reasons for adjusting the maximum one-pay account value may be: rising average daily LTC costs, rising LTC insurance account values, desire to increase the incentive to purchase larger LTC insurance one-pay policies.

The URMI credit multiplier, found on line 4c of the modified Social Security Benefits Worksheet in Figure 6. The illustration’s value is .065. The higher the multiplier, the greater the URMI credit; the lower the multiplier, the smaller the URMI credit. The amount of the multiplier will be a function of how much of an incentive policy-makers want to create for potential LTC insurance purchasers. It may also be changed if policy-makers want to increase or decrease the tax they collect as there is an inverse relation to the size of the URMI credit and the amount of tax revenue generated.

Maximum daily coverage amount provided by periodic premium type LTC insurance policies, found on line 1 of the One-pay LTC account value and LTC equivalency worksheet in Figure 8. The illustration’s value is $204.95. Policy-makers will likely want to revise this figure upwards each year as statistics provide new national average figures in this area.

Maximum number of days of coverage provided by periodic premium type LTC insurance policies, found on line 2 of the One-pay LTC account value and LTC equivalency worksheet in Figure 8. The illustration’s value is 1,095. If statistics over time reveal that Americans’ stay in LTC increases as medical technologies increase our ability to live longer in nursing homes or wherever LTC services are provided, policy-makers may want to revise this figure upwards.

The 1993 Omnibus Budget Reconciliation Act

In the United States, if someone requires LTC services but cannot afford to pay, no one is thrown out onto the streets; Medicaid will pick up the tab as long as the patient qualifies. However, a qualifying applicant must first “spend down” his assets until a bare minimum of assets are all that is left in his possession. Although the rules differ from state to state, generally speaking, that bare minimum is a few thousand dollars in the bank, a car, home furnishings, and a home; everything else must be first be liquidated and spent on the LTC services before Medicaid kicks in.

However, under the 1993 Omnibus Budget Reconciliation Act, states must try and get back from a deceased Medicaid beneficiary’s estate the amount in benefits (plus interest) the state paid for the LTC services the deceased received during the time he was alive. This means that if the family home was not subject to seizure or liquidation during the Medicaid recipient’s lifetime, it will not be protected after death and the state will have a priority claim over the heirs.

If governments, ultimately, end up with the equity from a principle residence, would it not be better to put the value of the home to work during the senior’s life instead of afterwards? Certainly, it would be better to use a reverse mortgage or other assets to purchase LTC insurance while the senior is alive and can benefit from being covered through an insurance company instead of relying on the state, its bureaucracy, and its limited funds.

Using the lump-sum option of the reverse mortgage to purchase a one-pay LTC insurance policy creates the possibility of a double benefit to the senior and is, therefore, a double incentive:

- there would be no URMI amount to enter on line 4a of Figure 6’s worksheet because the equity in the house would be nil as the homeowner has converted that equity to cash through taking the lump-sum reverse mortgage; and

- the taxpayer could also enter the amount of the one-pay LTC insurance account value on line 4b, calculate an entry for line 4c, and thereby end up with a hefty negative amount for line 4d which would negate in equal measures any existing taxable Social Security taxable income irrespective of URMI.

Conclusion

URMI is a question of fairness.

It is intrinsically unfair when low-income programs mete out financial benefits to the non-needy. A net-worth of $600,000 is not an acceptable financial profile for someone applying for any program designed to help the truly needy, be it a property tax freeze, a subsidy for heating oil, or aid for sewer repair. Because means tests do not take URMI into consideration they quite often create such unfair outcomes. When one considers that, in many cases, it isn’t the senior who ultimately benefits from the largesse but his heirs the unfairness is even more pronounced.

Due to the emergence of the reverse mortgage, a senior’s home can no longer be viewed as just a mere asset that provides shelter but, instead, as a source of potential income and/or cash; not a static asset but one in flux, capable of generating income during the senior’s lifetime.  It is also, as we have seen, used to pay off debts owed to government after death for health services rendered before death.

This modified definition of the home-as-asset requires a corresponding approach to a senior’s financial relationship to long-term care, his eligibility for programs such as Medicaid, and his responsibility to look after his own medical care needs. Seniors may not have cash for long-term care, but they certainly have enough equity to pay for it. As governments’ burden in paying for long-term care increases every year, it is incumbent upon us to find ways to transfer this responsibility to those that not only can afford to pay for this coverage but who very well may,  after death, pay for it anyway. If the family home is going to end up in the coffers of some government agency, better that the problem be dealt with before death than after.

Making URMI and the URMI credit part of the Social Security Threshold Income formula can help shift this burden from an over-extended government to individuals and the marketplace. The private sector is often touted as the more efficient, less expensive alternative to government intervention. Implementing the proposals found in this paper can serve as the little push that enables the insurance industry and the marketplace the opportunity to demonstrate whether this is true.

URMI has another benefit when it becomes part of means tests: it will isolate and spotlight genuine need so that greater attention can be given where it is deserved. Including URMI will increase the income of applicants -- at least as far as means tests are concerned -- who are home owners with significant equity  and will, most certainly, make it harder to qualify for the program to which they are applying. However, if income under this more vigorous test will still be found to be under the cut-off, this will serve to highlight a legitimate instance of the need for relief. In doing so, this will enable the argument that benefits should be increased...something unlikely to occur under a means test in which the truly needy are buried amongst those many others not in need but who nevertheless qualify.

Let's separate the wheat from the chaff so that taxpayers can be assured that it is the truly needy who are being provided for and not those who aren't.

Although this paper has focused exclusively on programs in the United States, other nations can also benefit from the proposals contained here. Certainly, Canada, European nations, and other countries utilize means tests to determine eligibility for low-income programs and in those cases in which home equity is not taken into account, URMI offers a simple and effective way to do so. The URMI credit can also benefit any nation in which long-term care is part of the national health system. The particulars may differ from one nation’s programs to the next but the principles are very much the same and can be adapted where and as necessary.

There are, presumably, many different and as yet undiscovered means tests in which URMI can be applied and this paper by no means provides an exhaustive list of all the possibilities. The URMI credit, too, can be adapted to different situations.

Whether calculating the eligibility for property tax breaks, the taxation of social security benefits, or any of a myriad of programs that utilize means tests, this paper has established the need to take the value of one’s home into account.

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