Using a reverse mortgage instead of long-term care insurance
Seniors in certain situations may want to use a reverse mortgage to pay for long-term care if the need arises instead of laying out the costs for long-term care insurance.
There a few reasons why you might consider using a reverse mortgage to pay for long-term care itself instead of using it to buy long-term care insurance. The most obvious are if your health makes it so that you are not eligible for long-term care insurance, or it would be too cost-prohibitive.
On the flip side, some seniors don’t like the idea of buying an expensive policy and then never using it because they never required long-term care. They would rather just pay for care out of pocket it if/when the need arises.
A reverse mortgage can assist seniors in both situations.
One spouse is well; the other is sick
A common use for a reverse mortgage is a scenario in which one spouse is in generally good health, but other is close to needing skilled nursing or assisted living care. The couple can take out a reverse mortgage on their home and use the proceeds to move the unhealthy spouse into a care facility. Since the spouse in care no longer lives in the house, the healthy spouse will be the only borrower on the contract.
The borrower has a few options. He or she can take out a tenure payment option and receive a monthly income that can pay for the care of his or her spouse. The borrower can also obtain a reverse mortgage line of credit, using the funds as needed to pay for care. Any unused portion of the line of credit will increase each month or year.
If the spouse receiving care passes away, the remaining spouse can continue living in the house. He or she still has the monthly payments or the line of credit if needed. But if not, then no additional debt accrues; just the interest on what has already been borrowed.
If the healthy spouse passed away first or also needed to enter into long-term care, the reverse mortgage would become due. In that case, the house would likely have to be sold, with the proceeds going toward paying off the balance of the reverse mortgage loan. Whatever is left over can be used to continue providing care to the surviving spouse.
Line of credit now, care later
A healthy single senior or couple can also potentially use a reverse mortgage to avoid paying for long-term care insurance.
Starting at age 62, a single homeowner or co-borrowers can obtain a reverse mortgage line of credit. If they have 100 percent equity in a home valued at $300,000, they can obtain a reverse mortgage line of credit of around $148,000.
As written above, a feature found on the federally insured Home Equity Conversion Mortgage (HECM) is a growth feature that increases the amount of money available on the credit line the longer you wait to access those funds.
Based on the current rates, the growth rate on the line of credit is projected to be about 4.5 percent annually. So in 10 years, the $148,000 credit line would grow to almost $230,000, provided you did not access the funds.
After the first year, you can access as much of your available line of credit as needed. So in 10 years, you would potentially have $230,000 to use toward long-term care expenses. If you never require long-term care, then you can use the line of credit for other purposes. If you never use the line of credit, the only cost to repay when the reverse mortgage is due are the various fees and closing costs.
Why not just sell the home when a long-term care need arises and pay for it that way? That is a possibility as well, especially if you are a single homeowner. But it may take several months to sell the home. If you have a reverse mortgage line of credit available, you don’t have to wait for the house to sell to access funds for care needs.
On the other hand, a couple would likely benefit more from the line of credit because if only one individual needs care, the other can continue living in the house.
If both spouses are close to needing care, then it probably is advisable to sell the home first rather than obtaining a reverse mortgage because the loan would come due anyway as soon as both borrowers permanently move out.