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Estate Planning Using Reverse Mortgages & Life Insurance

Posted by Ricky Rash, CRMS on June 15, 2010 at 11:35 AM Comments comments (6)

When it comes to the use of a reverse mortgage as a funding source for financial/insurance planning, I get a lot of questions and inquiries about long-term care insurance and taxes, but a surprising few about life insurance. What you might find interesting is how large the 62-year-old and older life insurance market is. What makes this so exciting is that the opportunity to sell life insurance in the senior marketplace would be so much bigger if more life insurance agents were made aware of the potential source of funding that can be tapped into via a tax-free Government-Insured reverse mortgage.

 

What we have here is a triple-win situation -- seniors who would like to buy life insurance, but don’t think they can afford to; life insurance agents that would like to provide a product to those seniors; and reverse mortgage advisors who can provide both the life insurance agents and seniors with the key to solving the funding problem.

 

Just how you go about this is up to you, but allow me to give you three different situations in which I was involved with two different financial/insurance planners. All three resulted in the placement of life insurance funded by a reverse mortgage:

 

The first case involved a 70-year-old widow in Margate, Florida who has two sons, both of whom live in different states. She has more than enough annual income to meet her needs and she didn’t have any significant assets other than her home, which was paid for and had a market value of $200,000. She wanted to leave her sons the house, but realized that neither would ever live there, and the house would end up being sold, after which they would get approximately $100,000 each. She also had a great desire to leave her college alma mater something as a legacy, but didn’t see how she would ever be able to afford to do so. We were able to use a reverse mortgage to provide her with a guaranteed lifetime income that will provide her, after tax, a life insurance policy with a death benefit of $303,756. The policy then listed three primary beneficiaries who are entitled to $101,253 tax-free income each upon her passing. Her sons will end up with at least as much as they would have from selling the house and her beloved college will receive a nice donation in her name.

 

The second case dealt with a 68-year-old man in Boca Raton, Florida who has three daughters, each of which expects to inherit one-third of his million-dollar portfolio. This represents his total estate with the exception of his house, which was valued at $275,000. In addition, he also has a special needs grandson that he wanted to make sure was taken care of. Unfortunately, two of the daughters were not really open to the idea that they would lose part or possibly all of what they saw as their rightful inheritance. What we were able to do was to introduce the idea of using a reverse mortgage to fund a life insurance policy, which would be put into a trust for the grandchild. We made sure that this reverse mortgage will provide him with lifetime distributions that will produce the annual premium required to put a $249,000 life insurance policy in place for the grandchild.  All family members were taken care of and the client was able to quell any financial disputes going forward.

 

The third case in which we used a reverse mortgage to pay for a life insurance policy had to do with a retired couple living in Aventura, Florida. At the time, he was 72 and she had just turned 71. Although their estate is worth approximately $3.6 million, they live comfortably on distributions from their retirement accounts and social security. What they wanted to do was to leave money for their local congregation without reducing the amount they intended to leave their children. This case required some advanced estate planning, during which we reached the conclusion that by using a reverse mortgage, they will be able to leave their temple a significant gift, which will not only provide them with a significant tax write-off, but also reduce their overall assets when totaling up the size of the estate. Being that we are in a time of uncertainty as to what future estate taxes will be, they found the Reverse Mortgage/life insurance solution very attractive -- we were able to use the tax-free funds freed up by a reverse mortgage to put a $364,948 second-to-die policy in place.

 

I could recite several more examples, but the bottom line is that there is a huge market out there comprised of people who own homes, are over 62 years old, and want/need life insurance for estate planning and other purposes. In turn, those in the reverse mortgage field have an unlimited number of common prospects with life insurance salespeople, and those of whom are willing to take the time required to build some bridges will most likely benefit greatly from their efforts.   The key is understanding your clients needs, education and patience.  Most people view reverse mortgages as a product for the needy or cash strapped, and not as a wealth planning tool.  This couldn't be more further from the truth, as tens of thousands of people are learning how to unlock the "trapped equity" in their homes and create a legacy for their children and grandchildren for years and years to come.

Innovative Uses of a Reverse Mortgage

Posted by Ricky Rash, CRMS on March 25, 2010 at 9:29 AM Comments comments (8)

Generally speaking, a Reverse Mortgage can be used in almost any way you choose. It is up to you to determine the best way to the use money you access by tapping your home equity.


 

Most seniors use a Reverse Mortgage to help close a gap between their retirement expenses and their retirement income. However, Reverse Mortgages offer particular financial advantages when used by seniors as an estate planning tool in a retirement plan.


 

Consider the following uses of a Reverse Mortgage:


 

Funding for Healthcare or Medical Treatment

Long term care is a big risk to most seniors' financial planning for retirement.

 

While 42 percent of people over the age of 65 require or will require long term health care, neither Medicare nor Medicare supplemental insurance cover the costs of these services - either in your own home or in a nursing facility. Moreover, most seniors don't have long term care insurance.

 

Many financial retirement planners recommend that their clients secure a Reverse Mortgage to help fund a long term care insurance cost or other medical costs.

 

Using a Reverse Mortgage to pay for medical costs and/or insurance can be an important part of asset protection planning for the benefit of you and your heirs.


 

Other Asset Protection Strategies – Leave Something to Your Heirs

You might consider using the proceeds from a Reverse Mortgage to fund a life insurance product. This is particularly useful if you have built up significant home equity.

 

Funding a life insurance policy with a Reverse Mortgage gives you control over your estate and assures the legacy you leave retains its value by:

 

Lowering the total estate value subject to taxes: The full value of your home is subject to estate tax, but a Reverse Mortgage against the property reduces its value - lowering applicable estate taxes. Your heirs will not owe as much estate tax upon the sale of your home. Furthermore, when the life insurance policy pays the benefit to heirs, they receive the benefit in tax-free dollars.

Leaving your heirs a guaranteed sum: By purchasing a life insurance policy for your heirs with funds from a Reverse Mortgage, you know exactly what you are leaving behind.

When your property is sold, any equity over the loan amount would be subject to taxes, but the remainder would still revert to your heirs. However, the unknown nature of future real estate markets makes this a potentially risky scenario. Purchasing a life insurance policy with Reverse Mortgage funds provides for greater control of your estate and legacy.

 

Furthermore, if you use the money from a Reverse Mortgage to buy additional life insurance for your heirs, that insurance purchase would have been made with tax-free dollars. The larger premium paid for life insurance coverage would translate into a larger death benefit.

 

If you have equity in your home, you may want to explore how a Reverse Mortgage could be an important component of your estate plan.


To discuss estate planning and other benefits of a reverse mortgage, contact us at 1-800-966-8390 today.



Reverse Mortgage Industry News -- From Capitol Hill

Posted by Ricky Rash, CRMS on August 26, 2009 at 4:50 PM Comments comments (5)

For those Congressmen who have had it with the healthcare town meeting circuses at home, we’re ready for you to come back to DC. We’re awaiting some big decisions when the Drama on the Hill autumn act begins. Still on the table are the possibility of an appropriation to cover OMB’s projected HECM insurance shortfall for fiscal 2010, an extension of the $625,500 national loan limit and continuation of the suspension of the cap on total reverse mortgage output.

 

Here’s an update on where the issues stand:

 

APPROPRIATION

 

To recap: The request for a credit subsidy for the first time in the history of the HECM program appeared in the President’s fiscal 2010 budget. OMB estimated a subsidy of $798 million would be required to cover losses that might be incurred over the life of loans originated in FY 2010. The need is apparently based on an estimated continued drop in home prices, though OMB does not reveal what that estimate is in fear of creating a self-fulfilling prophesy.  The estimate was then confirmed in an independent program assessment made by the Congressional Budget Office.  In June, newly confirmed HUD Secretary Shaun Donovan was quoted as saying, “We are open to raising premiums or restricting eligibility to cover the subsidy.”

 

Where we now sit: The bill passed by the House contains no appropriation but advises the HUD Secretary to make adjustments to the principal limit factors to achieve a net zero subsidy rate.  The bill passed by the Senate Committee on Appropriations provides for a subsidy of $288 million. It also calls for a 5% reduction in the principal limit. This bill will be voted on by the entire Senate when it returns from August recess.

Negotiations continue among Congressional staffers while members of Congress are away on recess. The fact that the House and Senate versions of the bill have differing provisions on HECM means that the issue is a highly negotiable item.

 

The discrepancy simply throws the bill into conference. The final decision doesn't necessarily have to be what's in either bill. It could be completely different, even providing the entire $798 million credit subsidy initially requested in the President's budget proposal.

 

NRMLA has been providing information to key Congressional staffers and others who are trying to help us preserve the HECM program as it currently operates. For example, an analysis of three of our major lenders' portfolios has shown that nearly 21% of current borrowers would have come up with too little cash from the reverse mortgage to pay off their existing indebtedness if principal limits are reduced by 10% - resulting in many being forced to move out of their homes.

 

 

 

PRINCIPAL LIMIT

 

In February 2009, the American Recovery and Reinvestment Act raised the maximum claim amount for HECMs from $417,000 to $625,500—but only through December 31, 2009.  The House bill would extend the $625,500 limit through September 30, 2010.  The Senate committee version of the bill does not address loan limits for HECM or other FHA programs. If the language in the current Senate version were to be enacted, the HECM maximum claim limit would return to $417,000 as of January 1, 2010 for the balance of fiscal 2010 (which runs through September 30, 2010.) Historically, the House has been more assertive on FHA loan limits and the Senate has typically accepted the House provisions on this topic.  Once again, this will be decided in conference and current positions are no indication of where that committee will come down.

 

LOAN CAP

ARRA also continued an ongoing suspension of the loan authorization cap, or the total number of the HECMs that HUD can insure at any time, through December 31, 2009.   Currently, both the House bill and the Senate Appropriations committee bill extend the suspension of the loan cap through September 2010.

As reported in the NRMLA Monday Report on August 17, a group of association members are working together as a Re-Engineering Task Force examining the assumptions made by the OMB and CBO that resulted in the call for a subsidy, considering the proposals in both the House and the Sensate committee’s bills and exploring other possible methods of covering any possible shortfall.

 

ALSO IN THE WINGS: HUD COUNSELING PROTOCOL

 

In addition to the decisions on the Hill, we have been awaiting the release of the new HUD counseling protocol. Given the critical evaluation of counseling in the GAO report and the concern expressed publicly by Comptroller of the Currency John Dugan that too many seniors cannot afford to keep up on their taxes and insurance payments, new ideas could not be issued at a more opportune time.  From presentations at our conferences by some of the people involved at HUD, most notably Meg Burns, the Director of the Office of Single Family Program Development for the FHA, and Ruth Roman, the Director of the Program Support division for the Office of Single Family Housing, we can anticipate the following improvements to be adopted in both lending and counseling:

 

To address the taxes and insurance issue, HUD has been discussing requiring lenders to do a financial assessment of potential borrowers, to determine whether or not they will be able cover their monthly obligations, plus taxes and insurance, after obtaining the HECM. If it is deemed that there might be a problem, the lender will be required to either:

 

(1.) Create a taxes and insurance set aside

(2.) Put a limit on the payment plan that assures enough cash remains for the ongoing expenses

(3.) Take other steps as are necessary to help protect the borrower from a tax or insurance default

 

The counseling protocol will focus on counselors explaining what the features of the product mean by giving the clients examples of circumstances. Counselors will have to provide borrowers with handouts in preparation for a counseling session. They will be required to perform an assessment of the borrowers’ comprehension of the session by mixing a series of specific questions designed to measure grasp of the product into the conversation. In addition, emergency counseling will be made available for those facing illness or foreclosure and in need of swifter action.  Along with the new protocol, HUD will be introducing a new Roster of HECM Counselors. Qualifying for the HECM counseling roster will require that an individual be employed by an approved counseling agency, pass an exam, take continuing education credits and retake the exam every three years.

 

HUD will also initiate a “mystery shopping” program to check on counselors adherence to the protocol, which can address the concerns in the GAO report. Counselors who are found to need additional training will be provided with mentoring.


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