A Practical Solution for Funding Longevity and Managing Long-Term-Care Risk
Thanks to advances in medical care, Americans are living longer than ever before. Unfortunately, longevity comes at a cost—and for many, it could be a significant one. The numbers paint a sobering picture: According to the U.S. Department of Health and Human Services, about 70 percent of people over age 65 will require at least some type of long-term care services, and the cost will be hundreds of thousands of dollars1.
Without adequate advance financial planning, the simple truth is that unexpected health care needs can derail the best-laid plans. So what’s a family to do?
For many, Long-Term Care Insurance (LTCI) is the first logical option. It can be a good choice for some, but as with all options, it has advantages and disadvantages. It works best when you purchase LTCI at a younger age, ideally in your mid-50s. Premiums increase with age, and people who are over age 60 may have missed the window to purchase affordable long-term care insurance. In addition, each year after age 60 it becomes less likely that you will qualify medically.
According to data published by the American Association for Long-Term Care Insurance, rates for a 60-year-old couple with a standard health rating average more than $3,000 per year combined2. The initial policy benefit for each is $164,000, based on a daily benefit of $150 and a three-year benefit period. It’s clear that this coverage may not be adequate to cover all needed care. With the average nursing home stay estimated at nine months for discharged patients and 2.44 years for current residents—at a median annual cost of $73,000 per year—a long-term care event can be catastrophic3.
Fortunately, another practical solution for managing long-term care risk has emerged: the “standby” line-of-credit option for a Home Equity Conversion Mortgage (or HECM, commonly known as a reverse mortgage). When used in addition to, or in place of, LTCI, it can be an effective way to support a client’s long-term care protection plan, particularly if you are self-insured.
In fact, home equity is increasingly becoming a critical component of older adults’ retirement plans. And a Federal Housing Administration (FHA)-insured* reverse mortgage is one way for them to access this equity as a retirement asset. Because there are no health qualifications to meet, a reverse mortgage line of credit is a logical LTCI alternative for older adults who have existing health issues.
A reverse mortgage standby line of credit can be used on an as-needed basis to pay for medical bills, in-home care, home modifications, and more. It can help make it easier for clients to afford the healthcare they need to continue living in their own homes, without having to draw down on productive invested assets—helping their portfolios last longer.
Furthermore, with a married couple, the line can be used to pay for any care that’s required outside of the home, be it temporary or permanent, as long as one spouse lives in the home as their primary residence. This means the “healthier” spouse can remain in their home while drawing on an additional resource—the reverse mortgage line of credit—as they navigate through this challenging circumstance.
Since the healthcare needs of older adults often come in the form of a sudden, unexpected event such as a fall, stroke, or heart attack, setting up the standby line of credit in advance—so funding is ready when needed—can be a sound strategy. And the earlier the better, because of the current low-rate environment and the product’s attractive growth feature: The unused portion of a reverse mortgage credit line grows at a rate of 0.5 percent plus the current interest rate of the loan—independent of home value.** So as the borrowers age, they can gain access to significantly more funds. Several academic studies at research universities such as Texas Tech have supported this approach, as have nationally recognized financial thought leaders such as Harold Evensky, CFP, AIF; Wade D. Pfau, Ph.D., CFA; and John Salter, CFP, AIFA, Ph.D.
So how does it work? The FHA’s HECM program was created specifically for homeowners age 62 and older. A HECM is a home-secured reverse mortgage loan that allows borrowers to access a portion of their home equity as income tax-free funds†, as long as at least one of the borrowers lives in the home as their primary residence. Funds may be taken as a line of credit, monthly tenure or term payments, a lump sum, or in any combination.‡
For most homeowners, the best part of a reverse mortgage loan is that there are no monthly principal and interest payments required—though if the borrower wants to make payments, they certainly may. Repayment is deferred until the last borrower (or protected non-borrowing spouse) sells the home, moves out, or passes away. So for example, the loan becomes due if all surviving borrowers move permanently into a nursing home or assisted-living facility, or leave the home for a year (or 6 months, if for non-medical reasons). As mentioned earlier, it can be an outstanding option for a borrower who remains in the home, to help pay for their spouse’s long-term nursing home care. And the line of credit is still in force if one borrowing spouse pre-deceases the other.
As with any mortgage, the borrower must meet their loan obligations: keeping current with property taxes, homeowners insurance, upkeep, and any homeowners association fees. As a non-recourse loan, neither the borrowers nor their heirs are responsible for any amount of the loan balance that exceeds the home’s value when the loan is repaid.
This gives a reverse mortgage several advantages as compared to most traditional Home Equity Lines of Credit (HELOCs). In addition to the growth feature and no monthly principal and interest payments, a reverse mortgage line of credit cannot be reduced or revoked by the lender, as long as borrowers meet their previously mentioned loan obligations. So the funds will be there if and when you need them. If you’re a homeowner age 62+ who can’t afford or don’t qualify for long-term care insurance, it could be the solution you’re looking for.
In addition, recent changes to the HECM program have strengthened borrower safeguards. Limitations on how much of your funds you can take in the first 12 months are designed to help preserve your home equity for a longer period of time. Underwriting requirements ensure that borrowers have the willingness and ability to meet their ongoing financial obligations, and there is added protection for non-borrowing spouses. Mandatory mortgage insurance provides additional protection.
So as we’ve seen, the vast majority of older adults will require long-term care in their lifetime—and a well-designed funding plan to help you absorb its impact. No single financial tool can meet the needs of everyone, but for homeowners age 62 and older, a reverse mortgage line of credit is worth considering.
As the importance of home equity for older adults continues to grow, a reverse mortgage line of credit from a trusted lender such as Reverse Mortgage Funding LLC can become another valuable tool at their disposal. To learn more, contact RMF at (888) 277-1567 to speak to a licensed reverse mortgage specialist.
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If you have equity in your home and believe you meet the eligibility requirements, a HECM may be the option that could help you retire smart.
1 U.S. Department of Health and Human Services, September 2008, cited in Genworth Financial, “Statistics”.
2American Association for Long-Term Care Insurance Website, accessed 2015.
3“40 Must-Know Statistics About Long-Term Care,” Christine Benz, 2012.
4Nielsen Survey, research conducted 2014.
*This material has not been reviewed, approved or issues by HUD, FHA or any government agency. The company is not affiliated with or acting on behalf of or at the direction of HUD/FHA or any other government agency.
**If part of your loan is held in a line of credit upon which you may draw, then the unused portion of the line of credit will grow in size each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan.”
†Not tax advice. Consult a tax professional.
‡Borrowers who elect a fixed rate loan will receive a single disbursement lump sum payment. Other payment options are available only for adjustable rate mortgages.