Not too long ago, the concept of long-term care Insurance (or LTC) was a no-no in the repertoire of financial advisors and wealth managers. Too risky, many said. They viewed it as taking advantage of aging clients. The same is true now for reverse mortgages.
However, many financial advisors and wealth managers are now finding that their clients can achieve additional retirement income security from what is often a client’s most valuable asset: their homes.
In fact, the reverse mortgage program is a superb vehicle, a true financial planning tool and a safety net for so many older adults, if used correctly. The industry has redefined itself to meet the needs of older adult homeowners while providing financial safeguards.
Reverse mortgages, reverse purchase mortgages and reverse jumbo mortgages have helped over 1 million older adult homeowners use their home equity to gain peace of mind, establish wealth management tools for estate planning, and remodel homes so they can age in place.
These mortgages also allow homeowners to assist loved ones by satisfying mandatory financial obligations, thus freeing up cash for other needs such as the purchase of a new home without a monthly mortgage payment.
Reducing market volatility
“Mass affluents” — investors who have $1 million to $2 million in retirement savings — can use a reverse mortgage to supplement their income during market volatility. Drawing from their brokerage, IRA and 401(k) accounts — which have been going up and down over the years — can be a mistake. This is because if poorer returns occur in the early years of retirement, a portfolio is likely to be exhausted if it’s continuously drawn on.
Using a reverse mortgage credit line to fill in when securities portfolios are down, rather than drawing upon the securities, can be a wise choice. If one draws from a reverse mortgage credit line (which has a guaranteed growth rate) and allows the portfolio to recover, then the client will have a much better chance to see money flowing through a 30-year retirement. Moreover, a reverse mortgage line of credit cannot be frozen, capped, canceled or reduced.
Tips for introducing reverse mortgages
All financial advisors put together financial plans for their clients so they will not outlive their money. Fortunately, they can present many options to clients when introducing reverse mortgages. For example, advisors can have a client use the reverse mortgage to:
- Refinance an existing mortgage in order to access a larger pool of funds with flexible or no monthly mortgage payments and to improve cash flow. (In other words, reposition debt.)
- Set aside funds to cover medical or in-home care expenses.
- Set up a standby line of credit that grows every year.
- Buy a vacation home. With the reverse purchase program, borrowers who own a home free and clear in a high-value area can pull out equity with a reverse mortgage line of credit to pay cash for a vacation home. The family can enjoy the vacation home for years. When the parents pass, their primary can be sold to pay off the reverse mortgage line of credit. The vacation home can then be passed to children.
- Purchase a long-term-care insurance policy with a life insurance rider. If the borrower needs in-home long-term care to age in place, they will be covered. If a borrower passes away suddenly without needing any in-home long-term care, their beneficiaries receive the life insurance benefit.
Which clients benefit most from a reverse mortgage?
There are many ways a financial advisor can identify a client who will benefit from a reverse mortgage. When advisors are reviewing client portfolios, they can see if their clients are underfunded and are exceeding safe withdraw rates, which means they are pulling out more than the 4% rule. This can be problematic. Financial advisors need to consider new alternatives.
As people age, many unexpected expenses can arise, such as medical bills, prescription drugs, home repairs, and the need for long- term care. Additionally, when a spouse passes, one of the couple’s Social Security checks goes away. A reverse mortgage can help when saving and retirement accounts run low and life insurance is no longer available. Reverse-mortgage holders receive the option of taking money out with flexible payments, but this is not mandatory. Your clients can also choose how to pay back a reverse mortgage.
Which clients are not fit for a reverse mortgage?
Reverse mortgages aren’t a fit for everyone. Financial advisors must ensure that they really understand how the reverse mortgage works and that they fully communicate this to their clients. Borrowers must be educated on how their spouses, partners, roommates, and heirs might be affected by a reverse mortgage.
In addition, reverse mortgages are unlikely to be a good fit for clients who:
- Tend to withdraw more equity than they need. For instance, spending all the equity and not planning for a spouse’s needs.
- Have not or are resistant to properly setting up a will or estate plan. A reverse mortgage should not be a surprise to client heirs.
- Are homeowners likely to move soon. When it comes to reverse mortgages, it is best for the client to remain in the home for at least five years.
Final thoughts
A reverse mortgage can be a viable option for people who understand how these loans work and have a plan for how they’ll use its equity. Under the right conditions, a reverse mortgage can be an excellent tool for long-term financial stability in retirement.
The reverse mortgage simply gives people a greater capacity to borrow more money in the future regardless of the home value. And the home equity is tax-free.
Additional Reading: Reverse Mortgages Can Reduce Tax Obligations
People are living longer but not accumulating additional wealth needed to support a longer life of retirement. Thus, the reverse mortgage option is now beginning to be recognized as a valuable and important financial planning tool/safety net for those who truly need it.
Michael Friedman is the owner of Reversing PA Mortgage, LLC. Visit www.reversingmtg.com to learn more and to connect with Michael.
