Using Reverse Mortgages to Pay for LTCI Policies

Posted on November 10, 2010.

Author: Frank Darras

With baby boomers knocking at the retirement door, we all need to get a handle on how we are going to care for our aging parents and ourselves. The insurance industry is currently blazing the marketing trail with a variety of feature-rich, long term care insurance policies. There are over 75 million Americans who potentially need this product. The cost of taking care of an aging boomer population has even prompted state governments to encourage the sale of LTCI policies in hopes that the sale of these policies will relieve the drain on Medicaid coffers.

What this means to agents is that state governments are now more likely to help you sell more LTCI policies. Enter the reverse mortgage as a viable solution and closing tool. This can be a good selling opportunity, but there are limits.

Getting your older clients to bet their house on an insurance policy can backfire, so help them do their homework. Don't let them run off to just any lender. Refer them to www.hud.gov or tell them to call the Department of Housing and Urban Development (HUD) for free information. Scam artists often try to sell the same information, so being forthcoming with the facts should enrich your relationship with your client and build trust.

Help your client understand the protections offered by HUD. Remember, these people are someone's parents, and doing your diligence today could lead to decades of recurring revenue from family members who are happy with how you helped their parents in the autumns of their lives.

HUD, which insures reverse mortgages through its Federal Housing Administration, works like this:

  • Homeowners 62 and older who have paid off their mortgages or have only small mortgage balances remaining are eligible to participate in HUD's reverse mortgage program. The program allows homeowners to borrow against the equity in their homes.
  • Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. Homeowners whose circumstances change can restructure their payment options.
  • Unlike ordinary home equity loans, a HUD reverse mortgage does not require repayment as long as the borrower lives in the home. Lenders recover their principal, plus interest, when the home is sold.

The remaining value of the home goes to the homeowner or to their survivors. If the sales proceeds are insufficient to pay the amount owed, HUD will pay the lender the amount of the shortfall. The Federal Housing Administration, which is part of HUD, collects an insurance premium from all borrowers to provide this coverage.

  • The size of a reverse mortgage loan is determined by the borrower's age, the interest rate, and the home's value. The older a borrower, the larger the percentage of the home's value that can be borrowed. For example, based on a loan at today's interest rates of approximately 9 percent, a 65-year-old could borrow up to 26 percent of the home's value, a 75-year-old could borrow up to 39 percent, and an 85-year-old up to 56 percent.
  • There are no asset or income limitations on borrowers receiving HUD's reverse mortgages.
  • There are also no limits on the value of homes qualifying for a HUD reverse mortgage. However, the amount that may be borrowed is capped by the maximum FHA mortgage limit for the area, which varies from $81,548 to $160,950, depending on local housing costs. As a result, owners of higher-priced homes can't borrow any more than owners of homes valued at the FHA limit.
  • HUD's reverse mortgage program collects funds from insurance premiums charged to borrowers. Senior citizens are charged 2 percent of the home's value as an up-front payment plus one-half percent on the loan balance each year. These amounts are usually paid by the lender and charged to the borrower's principal balance.
  • FHA's reverse mortgage insurance makes HUD's program less expensive to borrowers than the smaller reverse mortgage programs run by private lenders without FHA insurance.

The dangers
Think about your senior clients as if they were your own parents. Would you want them to get a value on their house and agree to receive a monthly payment for 10 years, only to outlive the 10 years and use up the allowance?

If clients don't get their reverse mortgage through HUD, they could end up with no house, no money, nowhere to live, and nothing to leave to their heirs. This can happen, even with payments as little as $200 per month.

Lenders promise, "No payments as long as you occupy the home." Your clients should understand what that means. Additionally, when lenders say tax-free, your client may not pay taxes for selling the house but must still pay Social Security, Medicare, and property taxes.

The reverse mortgage is based on age and value of the home. Clients retain the title until the contract expires, but then they may lose their home.

Finally, some policies say that borrower's heirs retain 100 percent of the unused equity. Often, however, heirs may have to come up with the money used while living in order to receive any equity at all.

Every year, Generation X-ers, baby boomers, and seniors pay billions of dollars in insurance premiums. Help your clients make good, sound decisions before they sign on the dotted line. This should help you write clean policies and grow your business while offering a viable independent living alternative to seniors.

Frank N. Darras is a disability and long term care insurance lawyer. He can be reached at 800-458-4577.