A reverse mortgage is a useful tool for helping senior citizens remain in their homes and maintain their lifestyle.
A reverse mortgage is a ripoff, a scam. Don’t fall for it or you might lose your house!
So which is it, a blessing or a trap? As with most financial products, the answer is, “It depends.” For some clients, it is just the opportunity they need for financial stability, but for others, it can be a danger. No one solution is right for everyone, as we all know.
Most of us in the financial planning field are familiar with the basics of a reverse mortgage. It is a means by which older homeowners (62 or over) can make use of the equity in their home without having to make payments on a loan. The amount a person can access depends on the value of the home, the age of the homeowner and interest rates. The money can be taken as a lump sum, monthly payments, or a line of credit. Nothing needs to be paid back until the home ceases to be the primary residence, either due to death or to the homeowner moving, perhaps to a nursing home.
Along with the age restriction, there are a few other conditions. Besides a single family home, a 2-4 unit building also qualifies, as long as the owner occupies one of the units. The home generally must be owned free and clear, although if there is a low mortgage balance it can be paid off with proceeds from the reverse mortgage. A financial assessment should be done to assure that the homeowner will have the means to keep paying property taxes, insurance, and maintenance.
Most current reverse mortgages are FHA-insured Home Equity Conversion Mortgages (HECM). There is a maximum amount a person can borrow under this program, currently $625,500. The owner of a higher-valued home might consider a proprietary reverse mortgage through a private lender. These are not subject to the HECM loan limits.
Under certain circumstances, a reverse mortgage can be the perfect instrument to address a senior’s needs. A lump sum can be used to make necessary home repairs or adaptations for an elder. A monthly stream of income might be the difference between an active or restricted lifestyle. Perhaps a line of credit can be tapped for a special vacation or a new vehicle.
A reverse mortgage is not the solution for everyone, however. In some cases, the homeowner might be better off downsizing, or moving to an assisted living facility. Some people might take a lump sum, only to squander it and be left with no equity and no cash. Unexpected expenses may deplete resources needed to pay property taxes, insurance, etc. And there may be no value left for heirs. If the heirs don’t have the means to pay back the mortgage themselves, they will have to sell the home. Fortunately, there is usually a “non-recourse” clause in the agreement so that if the value of the home is less than what is owed, the heirs don’t have to make up the difference.
Reverse mortgages come with significant fees and closing costs, so it’s worthwhile to shop around. However, the client must beware of salespeople who try to pressure them into a hurried agreement or sell them other products to invest the proceeds. There are always shady operators out there, and the best course of action for a client is to consult with a financial planner and consider all options before making a decision.
According to recent studies, more than half of all Americans are likely to die without a will. In this event, applicable state laws will dictate what happens to the assets of the estate. The decedent will have no say in the disposition, nor will the surviving family.
In general, state laws will direct the assets to spouse and children, or parents and other family members if the decedent was not married and had no descendants. There is no provision for bequests to friends, benefactors or charities. But even those who have a valid will might not have the distribution go entirely according to their wishes.
When a Valid Will Isn’t Enough
There are several reasons for this disparity. First of all, many assets do not pass through probate and thus are not subject to will provisions. Most people are aware that any insurance proceeds will go to the named beneficiary, but there are also other items to consider. Retirement accounts, annuities, transfer on death (TOD) and joint accounts will pass outside the will, as will any property held in joint tenancy with rights of survivorship.
Another consideration is that a person’s circumstances may have changed. Change is an unavoidable part of life, as we all know. Some of the major changes one might experience include marriage, divorce, the death of a loved one or the birth/adoption of a child or grandchild. Whether planned or unexpected, every change requires some adjustments, but often people overlook the less obvious items. For this reason, clients should be reminded to review their wills on a regular basis and update them as necessary.
How Planners Can Help Clients Manage Their Wills and Related Documents
Just as important, though, is to review the beneficiary designations (both primary and contingent) on all retirement plans, insurance policies, annuities and such. Many a court battle has developed when an individual neglected this important detail. For instance, if a person fails to change the beneficiary after a divorce, insurance proceeds could be paid to an ex-spouse rather than the children or current spouse. Some states have laws that invalidate ex-spouse beneficiary designations after a divorce, but these laws don’t necessarily apply in every case, and can be superseded by any applicable federal statutes.
For retirement accounts covered by ERISA, a spouse automatically has rights to the account unless he or she has signed a waiver. So if, after a divorce, you name your children as beneficiaries of your 401(k) and subsequently remarry, your new spouse will get the assets absent a valid waiver. Any other beneficiary designation will be disregarded.
Every change in circumstance should prompt a review. An unmarried person may have designated parents or a sibling as beneficiary of an insurance policy and then married but never updated the beneficiary. Perhaps the original beneficiary of a plan or policy has passed away, in which case the choice of contingent beneficiaries comes into play. Should they be moved up to primary, or is there reason to make a different choice? Maybe there’s a new child in the family who needs to be provided for, or donating to a charity becomes a better option.
Given the certainty of change, a planner should not only exhort clients to execute their wills, it’s important for the planner to also remind them to review and update all of their documents and designations regularly.
Retirement planning should be an important consideration for all workers, even those who think they’ll never retire, or who intend to work as long as possible. In reality, nobody can predict the future, so no one can say how long ‘possible’ will be. Unexpected events such as layoffs, disability, or the need to care for an ill or dependent family member can bring an end to people’s working years long before they thought it would happen.
Nobody wants to get old or require prolonged healthcare. Unfortunately, that’s the reality of life. And given that an increasing number of people will likely require long-term care in nursing homes that are already crowded, this is an issue that financial advisors need to be able to discuss with their clients. Although it can be a delicate and challenging subject, finding the right way to approach this issue can be one of the best things that trained financial advisors can do for certain clients.
The Current State of Long-Term Care
The issue of long-term care is one that will come to the forefront of national discussions over the next decade. The reason is the increasing number of people who need this care but are unsure how to secure it without completely depleting their funds.
Already, many long-term care insurance holders are receiving notices of insurance premiums spiking as much as 40% or even 60%. For reference, many of these policies were bought ten to fifteen years ago. At that time, the average daily cost for local nursing homes was in the $150-$200 range. That average amount has swelled to over $400 every single day, which means many baby boomers are footing bills for over $12,000 a month.
Starting the Conversation with Clients About Long-Term Care
Far too many people have found themselves in a position where all their plans implode as a result of someone needing care. Since that’s obviously something certified financial planners want to help their clients avoid, the best way to start this conversation is with two questions: “Do you need it?” and “Can you afford it?”
If this conversation leads to a determination that a client does need to plan for long-term care, some form of an insurance policy is generally the best way for clients to get the most value for their money.
An increasingly common strategy is for people to use their investment account to pay for a policy. If an account gets a dividend, it can be used as cash in hand to cover any premium hikes that occur.
Given that more and more people are going to be actively looking for a way to strategically plan for long-term care, this should be a useful area for financial planning professionals to focus their attention and some of their marketing efforts throughout 2016.
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