Is a Reverse Mortgage Right for You?

Under the right circumstances reverse mortgages, also known as a Home Equity Conversion Mortgage (HECM), can be a good means of supporting your retirement. On the other hand, they can also turn out to be an expensive way to borrow money.

To help determine if a reverse mortgage is right for you, let’s take a closer look at what a reverse mortgage is, review some background information, and discuss the pros and cons associated with this financial decision.

What is a Reverse Mortgage?

Simply put, a reverse mortgage is a loan that uses your home as collateral. The funds provided through the reverse mortgage can be used in a variety of ways such as supplementing your income, paying off debt, or making a large purchase.

When you take out a reverse mortgage, it’s important to note your house will remain in your name, and the income you receive is tax-free. Another point to note is that no matter how much you owe on your reverse mortgage, you can’t owe more than the value of your home.

Reverse mortgages can be an attractive option for some because you are not required to make payments as long as you live in your home. On the contrary, once you leave your home for more than twelve months, sell the residence, or pass away, the outstanding balance of the loan must be repaid, typically with interest.

It is worth noting that the first reverse mortgage was done right here in Portland, Maine as a tool to assist a local widow who wanted to stay in her home after her husband’s passing.

Fees Associated with a Reverse Mortgage

While you won’t be required to make payments as long as you live in your home, a reverse mortgage comes with its fair share of fees, and can actually cost more than a conventional mortgage.

Generally speaking, lenders will charge 1) mortgage insurance premiums (initial and annual) 2) third-party charges 3) origination fee 4) interest and 5) servicing fees. These fees can be paid upfront or by financing them over time from the proceeds of the loan.

How Much Can Be Borrowed?

The amount that can be borrowed depends on several factors including your age, the value of your home, and current interest rates. The older you are, and the more equity you have in your home, the more you can borrow – especially if interest rates are low.

Reverse mortgages do have limits on how much you can borrow your first year, and how much of the value of your home you can borrow against.

As of 2022, the HECM FHA mortgage limit is $970,800. So, even if your home is valued at $5 million, the HECM will only let you borrow against $970,800 of its value. You would then be able to borrow anywhere between 35-75 percent of this amount depending on age, equity, and interest rates.

Who is Eligible to Take Out a Reverse Mortgage?

In order to qualify for a reverse mortgage, the individual must be at least 62 years old and own their home outright. Additionally, the home must be the primary residence (i.e. no secondary residence or real estate property), and there must be documentation that the home owner maintains the property, and pays property taxes, insurance, etc.

Who is the Ideal Candidate for a Reverse Mortgage?

As noted in the introduction, a reverse mortgage is not a good fit for everyone. However, if you are over the age of 62, own your own home, and meet any of the following scenarios, you might be a good candidate for a reverse mortgage.

  • Seniors who are encountering significant costs late in life (and may not have Long-Term Care Insurance)
  • People who have depleted most of their savings, but have considerable equity in their primary residences
  • People who don’t have heirs who wish to inherit the home

What are the Potential Benefits of a Reverse Mortgage?

For the right candidate, a reverse mortgage can help you:

  • Strengthen your retirement. A reverse mortgage can allow you to turn an otherwise illiquid asset, your home, into cash that you can use to cover expenses in retirement.
  • Avoid downsizing so you can live in your home longer. Instead of selling your home to liquify your asset, you can keep your primary residence and get cash out of it. This can help you avoid downsizing or getting priced out of your neighborhood if you had to move.
  • Pay off Existing Home Loans. Your home doesn’t have to be paid off in order to take out a reverse mortgage. In fact, you can use the proceeds of a reverse mortgage to pay off an existing home loan. This frees up money to put toward other expenses.
  • Reduce Tax Liabilities. According to the IRS, money you get from a reverse mortgage is considered to be a loan advance rather than income. That means the funds aren’t taxed, unlike other retirement income such as distributions from a 401(k) or IRA.

What are the Potential Downfalls of Taking Out a Reverse Mortgage?

While a reverse mortgage might seem to have many benefits, there are also some very serious risks to consider which include:

  • Losing your home to foreclosure. To qualify for a reverse mortgage, you have to maintain the payment of your property taxes, homeowners insurance, HOA fees and any other expenses associated with owning your home. The home must also serve as your primary residence for most of the year. If at any point during the loan period you become delinquent on these expenses, or spend the majority of the year living outside the property, you could default on the reverse mortgage and lose your home to foreclosure.
  • Compromising other retirement benefits. While income generated from a reverse mortgage may have certain tax benefits, taking out this loan could impact your ability to qualify for other need-based government programs such as Medicaid or Supplemental Security Income (SSI). You should discuss this with a benefits specialist to ensure your eligibility in these programs won’t be compromised.
  • Limiting, or even eliminating the opportunity to leave a legacy to your heirs.  A reverse mortgage requires that the full balance be paid when you die. It also eats away at your home’s equity over time. This combination  usually results in your heirs having to sell the home in order to repay the debt. As a result they are left with little to no inheritance.
  • Paying high upfront fees. With loan origination fees up to $6,000, upfront mortgage insurance premiums worth 2% of your home’s value, and other closing costs, reverse mortgages are more expensive than other home loan types. In short, a reverse mortgage can be an expensive way to borrow money.

So, Is a Reverse Mortgage Right for You?

The answer is never an easy yes or no. Like any big financial decision, you should consult your financial advisor or a trusted expert to help you evaluate the pros and cons of applying for a reverse mortgage.There are many cases when an individual should avoid applying for a reverse mortgage. Be sure you fully understand reverse mortgage pros and cons before taking one on.

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Long-Term Care Insurance: When & Why It Can Be a Good Investment Idea

It’s a fact. People around the world, including the United States, are living longer. According to the United Nations, the number of seniors aged 60 or older is projected to reach 1.4 billion by 2030 and swell to 2.1 billion by 2050.

As the elderly population increases, the cost for long-term care support services offered through adult day care, nursing home, and assisted living residence is also on the rise. If not accounted for, these long-term care costs can easily wipe out a lifetime of savings.

One option to mitigate the risk of depleting your nest egg is to invest in long-term care (LTC) insurance. Under the right circumstances, LTC insurance can help protect you and your loved ones while helping you navigate your long-term care needs. 

But, is LTC insurance a good option for you?

In the following article, we’ll take a closer look at what LTC insurance is, what it covers, and discuss when and why it can be a good tool that rounds out your financial plan.

What is Long-Term Care Insurance?

Long-term care insurance helps cover the costs associated with long-term care needs, which are services that are not typically covered under regular health insurance. These services may include assistance with daily activities like bathing, dressing, and transportation.

A LTC insurance policy is designed to help individuals cover the costs of care when they have a chronic medical condition, a disability, or a disorder like Alzheimer’s disease. Most policies will reimburse the policyholder for care received in a variety of places, such as:

  • Your home.
  • A nursing home.
  • An assisted living facility.
  • An adult day care center.

The Difference Between Traditional & Hybrid LTC Insurance

There are two types of LTC coverage. The first is traditional, also known as standalone LTC insurance, and the second is hybrid LTC insurance. 

Traditional LTC insurance policies require you to pay a monthly premium for the coverage, which you may or may not actually end up needing. 

Hybrid LTC insurance policies combine coverage for long-term care with whole (permanent) life insurance. If you end up needing long-term care, those costs will come out of your death benefit (the payout to your loved ones under your life insurance policy). If you don’t need long-term care, your death benefit will stay intact. 

While traditional LTC insurance follows a use-it-or-lose-it model, hybrid LTC insurance allows you to retain at least some of what you paid. However, hybrid LTC insurance tends to be more expensive.

What Does LTC Insurance Cover?

It bears repeating that LTC insurance is designed to help offset costs associated with services that are not covered under regular health insurance, Medicare, or Medicaid. Therefore, different policies may limit what conditions are covered. 

For example, it’s not unusual for substance abuse or a war injury to be exempt from coverage. And while they might not stop you from getting coverage, pre-existing conditions such as heart disease or a past cancer diagnosis may not be covered under the policy. 

As a rule of thumb, the policy holder becomes eligible for benefits when they can no longer perform two daily living activities such as bathing, dressing, eating, using the toilet, getting in and out of bed, and managing incontinence — or become cognitively impaired. At that point, premiums typically are waived while you receive benefits.

When Should You Consider Buying Long-Term Care Insurance?

Like any investment, timing counts when deciding to buy LTC insurance. If you purchase LTC insurance when you are too young, you run the risk of paying premiums for a very long time. On the other hand, if you wait too long to buy LTC insurance, you run the risk of either being turned down or paying astronomical premiums that make this type of investment impractical.

That said, most people who buy long-term care insurance do so in their fifties and sixties. In some cases people are now looking to purchase insurance in their late forties.

Keep in mind that the rates you pay for LTC insurance are determined by several factors such as your age, health history, gender, marital status, and the amount of coverage you wish to purchase. 

Also, please keep in mind that prices for the same amount of coverage will vary among insurance companies. That’s why it’s important to compare quotes from different carriers.

Are There Any Tax Benefits to Buying Long-Term Care Insurance?

The short answer is yes. Long-term care insurance can have some tax benefits if you itemize deductions, especially as you age. Federal and some state tax codes let you count part or all long-term care insurance premiums as medical expenses, which are tax deductible if they meet a certain threshold. The limits for premiums you can deduct increase with your age. Check with your tax professional first to be positive of your situation.

 

 

2021 Federal Tax Deductible Limits for
Long-Term Care Insurance

Age at the End of the Year
Maximum Deductible Premium
40 and Under
$450
41 to 50
$850
51 to 60
$1,690
61 to 70
$4,520
71 and Over
$5,640

Please Note: Only premiums for tax-qualified long-term care insurance policies count as medical expenses. Such policies must meet certain federal standards and be labeled as tax qualified. Ask your insurance company whether a policy is tax-qualified if you’re not sure.

Things to Consider Before Investing in LTC Insurance

Ultimately, the decision to buy LTC insurance comes down to your risk tolerance, and your comfort level with this type of insurance policy. Like any investment, you should discuss the pros and cons of buying LTC insurance with your financial advisor or accountant.

If you do decide to purchase LTC insurance, you should consider the following:

  • Your overall financial situation.
    While weighing out the cost benefit of purchasing LTC insurance, you will first need to consider your overall financial situation to see if the long-term benefits are a good match. Some people would prefer to sell their second home, or downsize their existing home to help cover the cost associated with growing old. Others may set up a longevity fund to cover not only long-term care, but also all the costs that come from living longer than average. One advantage of self-funding: total flexibility in how you spend your care dollars.  The downside is that it is difficult to accomplish for most people.  You would also purchase LTC insurance as a method of protecting your assets.  If you don’t have a lot of assets, you may want to consider other options.

     

  • Your ultimate financial goals.
    Understanding your overall financial goals is also an important consideration when weighing out whether or not you should buy LTC insurance. If you put a high value on leaving money behind for loved ones, then purchasing a policy may make sense. If you are content without leaving a legacy, then you might be able to forego this purchase.

     

  • Your age and health history.
    As discussed earlier, what you pay for a policy is directly tied to your age, health history, gender, marital status, among other factors. The older you are when you buy LTC insurance, the more it will cost. In some cases, some insurers will require that you take a physical exam, or require that they review your medical records, and conduct a telephone interview. In general, traditional policies have more stringent health requirements than hybrid ones, so keep that in mind as you are comparing your options.

  • Insurance companies and coverage.
    When comparing LTC insurance policies, it’s important to compare different carriers and coverage policies. It can also be very helpful to speak with a financial adviser who can put your options in the context of your overall financial plan.

  • Understand the tax implications and know how you are going to pay for the policy.
    In certain situations, you may be able to cover premiums, tax-free, using money from a health care savings account. You can also explore the tax advantages associated with exchanging an existing life insurance policy or annuity for a long-term care policy.  This can be complicated, so speak to your tax professional before making a choice for yourself.

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