Should I consider a life settlement or a reverse mortgage?
Seniors who have non-liquid assets but need income or an influx of cash have a few options. Two of the more common are reverse mortgages and life settlements.
A reverse mortgage is a kind of home equity loan that enables senior homeowners to convert their home equity into cash. It differs from a conventional home equity loan in the homeowner doesn’t make monthly payments to repay the loan. Instead, a reverse mortgage loan is repaid, with interest, when the homeowner moves out of the house, or when the property is sold, refinanced. Reverse mortgages are set up so that you never possess more than the house’s value at the time.
A life settlement involves selling an in-force life insurance policy to a third party. The buyer takes over the premium payments, then collects the death benefit when the policy insured passes away. The buyer will offer an amount that will help it earn a profit based on the policy’s death benefit minus the lump sum paid to the seller plus the premium payments it will pay for as long as the insured lives.
One of the key advantages of a life settlement is that there’s nothing to repay. It’s not a loan like a reverse mortgage; instead, you are simply selling an “asset” to a third party.
An advantage of a reverse mortgage is that it provides more payment options than a life settlement. Whereas the latter is only available in a lump sum, a reverse mortgage can be paid out as a lump sum, a line of credit or a series of monthly payments that can last for as long as you live in your home.
Are you eligible?
You may only have one option depending on your age, health, and the value of your home or life insurance policy.
Reverse mortgages are available to homeowners age 62 and over. The property being loaned against must be the borrower’s primary residence. It’s not required to own your home free and clear before applying for a reverse mortgage, but any mortgage balance you have should be a small percentage of the home’s value. That’s because you cannot maintain a conventional mortgage and a reverse mortgage simultaneously. You are allowed to use some of the proceeds of the reverse mortgage to pay the full balance on your conventional mortgage.
The property must meet FHA standards to be eligible. Reverse mortgages are typically limited to single-family homes.
Although there are no eligibility requirements related to your health, experts suggest that people who are in poor health not obtain a reverse mortgage. That’s because these loans have significant upfront costs, which you don’t necessarily want to pay if the loan will end in a few years because of your health.
Qualifications for life settlements differ by little settlement company. The company will assess the insured’s health and life expectancy, the amount of premium owed, and the policy’s death benefit.
While you can obtain a reverse mortgage at age 62, you likely will not qualify for a life settlement at that age unless you have a terminal condition. Even if you are in your 70s, you may need some type of chronic health condition that lower yours life expectancy to qualify, depending on the company’s requirements.
You will also need a life insurance policy that is favorable to a buyer. That means the contract allows you to transfer policy ownership, and has a high enough death benefit and premiums that are low enough that the buyer can still turn a profit after the insured passes away.
If both options are available to you, the following questions may help you make a decision as to the better choice.
Which one will net you the most money?
With a reverse mortgage, the amount you can borrow depends on your age, your home’s value, and the loan interest rate. In general, the older you are, the more you can borrow. As the home appreciates and the borrower grows older, they may qualify for more money, and the reverse mortgage may be refinanced to borrow more against the increased equity.
The amount you can receive from a life settlement will typically be higher than its cash surrender value and lower than its death benefit. The buyer will also factor your life expectancy and the amount of premiums they will have to pay based on that life expectancy.
The more your premiums and the longer your life expectancy, the less you will receive from a life settlement. Conversely, if you have a shorter life expectancy and pay less in premiums, the more you can expect from a life settlement.
What do you want to pass on to survivors?
In general, if you are trying to decide between a reverse mortgage and a life settlement and have a surviving spouse or children, part of your decision will be based on whether you want to pass along your home or the proceeds from your life insurance policy.
In this situation, a reverse mortgage may be the way to go because your beneficiaries can use the life insurance death benefit to repay the reverse mortgage after your passing. Therefore, they wouldn’t have to sell the property to pay back the loan.