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    Long Term Care BooksFind books provided by the National Care Planning Council written to help the public plan for Long Term Care. Learn More...

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    Eldercare ArticlesThe NCPC publishes periodic articles under the title "Planning for Eldercare". Each article is written to help families recognize the need for long term care planning and to help implement that planning. All elderly people, regardless of current health, should have a long term care plan. Learn More...

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Guide to LTC Planning

    Guide to Long Term Care PlanningFrom its inception, the goal of the National Care Planning Council has been to educate the public on the importance of planning for long term care. With that goal in mind, we have created the largest and most comprehensive source of long term care planning material available anywhere. This material -- "Guide to Long Term Care Planning" -- is free to the public for downloading and printing on all of our web sites. Learn More...

Understanding Reverse Mortgage Planning Strategies

Understanding Reverse Mortgage Planning Strategies

Reverse Mortgage Life Insurance Strategy

Some older people don't like the idea of doing a reverse mortgage because they feel they are robbing their heirs of an inheritance or there is something inherently wrong in using up the equity in the home.

A useful strategy that typically appeals to these people is to take part of the reverse mortgage proceeds and buy a life insurance policy that has a death benefit equal to the amount of equity taken out by the reverse mortgage. A couple in their 70s could possibly buy an insurance policy for $50,000 that would pay $150,000 at the last death. This strategy actually allows the borrower to replace more than reverse mortgage amount and give to the heirs.

The reverse mortgage produces $150,000 in available funds. After buying the insurance, there is $100,000 in funds still available. But when the couple dies the family inherits $150,000 tax-free to replace the loss in equity to the reverse mortgage. The biggest disadvantage to this strategy is that the person in his or her 70s might have health conditions which would make life insurance too expensive or impossible to get. It typically only works with healthy seniors.

Reverse Mortgage Long Term Care Insurance Strategy

Using the same reverse mortgage example above, the couple could leave the money from the reverse mortgage in a line of credit and draw out enough every year to buy long term care insurance. As with life insurance, this strategy only works with healthy seniors. Any type of adverse health conditions will preclude the ability to obtain this kind of insurance.

The Risk of Serious Illness and Reverse Mortgages

Seniors have worked hard all their lives to create a financial estate from which they plan to live their retirement years to the fullest. Many also wish to leave a significant legacy to their beneficiaries. Among the primary issues threatening this goal for senior homeowners are the costs and management of a serious illness and the way it may affect their current lives and future plans.

For a married couple, the anxiety surrounding the incapacity of one spouse and the sudden dependence on the other can be disquieting and often overwhelming.

For all seniors, the hope of living longer combined with the fear of outliving their finances will become a startling reality as expenses continue to rise and savings rates remain historically low. Senior homeowners may face any of the following circumstances regarding the costs of long-term health and medical care should serious illness befall them:

  • the possibility of losing their home
  • the choice between a nursing home vs. preferred in-home care
  • the rapid depletion of their financial security
  • the inability to leave a legacy to those they love

A reverse mortgage is the one financial instrument that can help address many of these uncertainties. Through the withdrawal of some of the equity in a senior homeowner's primary residence and the proper utilization of those funds, a number of factors are changed which significantly improve the state of affairs regarding the potential risks of a serious illness.

Estate Planning and Reverse Mortgages

While a home may hold a great deal of emotional value for a family, the reality is that, in most cases, the property is sold after the owner's death and the assets are liquidated. The heirs are often forced to sell the property under "less than ideal" conditions. After the sale, which may drag on due to the state of the real estate market, heirs may be faced with state inheritance and/or capital gains taxes on the proceeds. In the end, the net proceeds are often far less than the actual or perceived value of the home. A reverse mortgage, and the use of some of the proceeds to purchase life insurance, can greatly alleviate many of these issues.

The full value of a home owned outright (mortgage free) is subject to inheritance tax for certain states, but a reverse mortgage lien against the property reduces its value - thus effectively lowering the taxes. A reverse mortgage must be repaid when the borrower permanently leaves the property. At death, the full value of the property would not be included in the estate valuation for tax purposes because the accumulated debt of the reverse mortgage would not yet have been repaid thereby reducing the property value, which should lower any applicable taxation.

In addition, accrued interest in the reverse mortgage may be available as a tax deduction upon repayment of the loan (just as forward-mortgage interest is deductible against income).

[NOTE - it is recommended the borrower consult their tax advisor]