Reverse Mortgages vs Life Settlements
A reverse mortgage is an opportunity to borrow money against your home if you own it free and clear, while a life settlement is the sale of an existing life insurance policy to a 3rd party investor. Ultimately the reverse mortgage is putting you in a costly contract while the life settlement gets you out of one.
Both are options for seniors who need money for long term care or for general living expenses, but one may suit your needs better than the other. If you're considering a reverse mortgage right now you may want to consider a life settlement instead. In this article we'll explore the basics of both options to help you understand which might be better for you.
Life Insurance is a wonderful way to protect your loved ones, however as seniors age their kids grow up, houses get paid off, and the need for the coverage is no longer there. The idea of leaving a legacy is nice, however the longer people live the more expensive their insurance becomes, and when you can no longer afford it the policy will lapse losing everything you've put into it. You may be better off leaving your home to your loved ones than trying to keep a life insurance policy in-force for years to come.
On the other hand, reverse mortgages are fairly complicated contracts, and while they provide access to cash, there's a number of ways in which you or your family can lose the home. The government actually requires consumers to meet with an independent counselor to make sure they understand what they're getting into before they can sign a contract, if that doesn't raise any red flags right there. For some, perhaps it's their only option.
Seniors who have owned their home for a long time will often consider a reverse mortgage to help get access to cash. If you own your home free and clear, or have most of it paid off, you may be eligible to receive a loan. Chances are your home is worth significantly more now than what you paid for it 30+ years ago, so a reverse mortgage will be based on the present value. This means as an asset, the bank values your home at the current market value instead of what you paid for it way back when, and is willing to loan you a potentially significant amount of money while using the house as collateral. The home must be in good shape (in case they need to sell it) with property taxes and maintenance upkeep current during the lifetime of the loan. If there is any balance on the original mortgage it must be paid off either with the reverse mortgage loan or with savings.
Factoring in the interest rates the bank needs to make the loan profitable for them, the bank can loan you money without requiring you to make monthly payments on it. Because you're not making payments, the loan balance increases each month, and after enough time has passed the balance may exceed the value of the home. Upon death or moving out of the home and selling, you or your heirs may choose to pay off the balance of the loan to regain ownership of the property, or sell the property with some or all of the proceeds going to the bank to pay off the reverse mortgage loan. If the value of the property goes down it's possible the sale may not cover the balance of the loan and may need to foreclose, similar to if your loan balance exceeds the value of the home. If property taxes are not getting paid and the property upkeep is not being maintained, the bank can call the reverse mortgage due, and if the owner can't pay then they will lose the house.
If the wheels are starting to turn in your head about what types of complexities start to come up with a reverse mortgage and how it can go south, you may be realizing they're not always the best option for seniors to find money for long term care or living expenses. A great alternative if you own a life insurance policy is doing a life settlement instead. It's also entirely possible that your home doesn't qualify for a reverse mortgage anyway, so hopefully you own a life insurance policy that is eligible to be sold.
When doing a life settlement, not only are you getting cash now, you are also getting rid of a potentially expensive annual premium to keep the policy in force. When considering life insurance and death benefits, consumers often think only of the death benefit amount and don't take into account how much it costs to get there. This cost (the annual premiums) may already be eating up a lot of your budget and is preventing you from affording the care you need or the lifestyle you want in your golden years. Doing a life settlement will not only put these premiums back in your pocket, but also gives you a lump sum of cash in your savings account now to use for care or personal expenses.
Depending on your age, health, cost of insurance, and death benefit amount, you may be able to get a significant portion of your death benefit in a life settlement. Every case is unique, but as a ballpark range, someone with a $1MM life insurance policy and a 5 year life expectancy might receive anywhere from $500k - $650k in a settlement. That also means they won't be paying the potentially $40k annual premiums for years to come. Someone with a 10 year life expectancy may receive $100k - $200k, and again can put that $40k annual premium right back in their savings account.
Both real estate and life insurance policies are considered personal property which can be bought and sold. Real estate tends to increase in value over time while a life insurance policy tends to be a fixed death benefit that does not increase, and typically has a never ending payment due for as long as the insured is living. My point in bringing this up is that the value of your home may be increasing while you're living in it free and clear. Why take a reverse mortgage that could jeopardize this valuable asset when you could sell your life insurance policy instead. If you're hoping to leave a legacy for your heirs, you may be better off leaving the house to them than keeping the life insurance policy, especially if you're in danger of letting it lapse.
If you're interested in getting offers, my job as a life settlement broker is to educate and represent the seller in the marketplace and negotiate for the highest offer. There a many investors in the marketplace, all with different levels of interest on a case, and the first offer is rarely the highest. There's no cost to apply, and no obligation to accept an offer we bring to you, so let's get started and see if there's some value in your life insurance policy.
Call us at 213.784.1481 for a free appraisal or fill out an appraisal form here.