Life Insurance and Reverse Mortgage Strategy
Life insurance is an essential part of the financial plan of every individual. And it is particularly important if you have others depending on you, such as your spouse and children. For example, if you are the primary breadwinner in your house, you should have enough insurance to (at the very least) replace your income until your youngest child turns 18.
These days, life insurance is being used in countless ways to not only insure against a worst case scenario, but also for tax planning, estate planning, and even for retirement. One very creative strategy is to combine a life insurance policy with a reverse mortgage; thus allowing the policyholder all the benefits of cashing out the equity in their home, while at the same time ensuring that the mortgage can be satisfied when they die.
What is a Reverse Mortgage: Reverse mortgages are financial vehicles available only to individuals 62 years of age and older that allow homeowners to convert a portion of the equity in their home into cash. To qualify, borrowers must have their homes paid off, or have a remaining balance low enough to be satisfied with the proceeds from the closing of the reverse mortgage. Individuals receive a lump sum or fixed monthly payments, depending on the terms of the loan, and unlike a home equity line of credit, the loan does not need to be repaid as long as at least one borrower is alive and the home is being used as a primary residence.
Which Type of Life Insurance works Best with a Reverse Mortgage: There are two general forms of life insurance, term and permanent life. While term life insurance has significantly lower rates and works very well for individuals who need lots of insurance during their working years, it is generally not the best option to combine with a reverse mortgage. To ensure coverage will remain in effect for the life of the individual policyholder, it is best to have permanent life insurance.
Here is an example of a scenario wherein this strategy might work. A retired couple in their early 70s and in good health wants to tap into some extra money to help supplement their Social Security and pension during retirement. They own a house free and clear with a value of $600,000, and they qualify for a lump sum reverse mortgage on the property of $350,000, or ongoing monthly payments of $2100. To help cover the balance of the loan, they could take out a $350,000 guaranteed joint survivor universal life policy that would remain in effect as long as the premiums are paid (usually until age 121).
For such a policy, monthly premiums could vary widely depending on the health of those insured. In general, however, a healthy couple could expect to pay somewhere between $600 and $1000 a month for $350,000 in coverage. In this scenario, if the couple opted to receive monthly payments, worst case scenario, they would come out about $1000 ahead every month. Keep in mind also that the heirs can always help supplement the monthly life insurance premiums to help make retirement more comfortable for Mom and Dad.
Life insurance combined with a reverse mortgage is not for everyone, but it is a very innovative strategy for those in the right circumstance who want to safely cash in on the equity in their home during retirement. For further information on this and other ways life insurance can be an effective financial tool, speak with your local independent insurance broker.