Pay For Long Term Care With A Reverse Mortgage

The chances of needing some sort of long term care are very high. The good news is that a reverse mortgage is a great way to plan for or pay for long term care needs. A reverse mortgage could be used to actually pay for the costs of long term care or used to pay for a long term care insurance policy.

Long Term Care Facts and Why You Should Be Looking At A Reverse Mortgage

Nearly a fifth of older people will incur more than $25,000 in lifetime out-of-pocket long-term care costs before they die.[1]

The lifetime probability of becoming disabled to the point of affecting at least two daily activities, or of being cognitively impaired, is 68% for people age 65 and older. [2]

Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and support in their remaining years.[3]

The clear majority – 80%, of elderly people receiving assistance, including many with several functional limitations, live in private homes in the community, not in institutions. [4]

Research suggests that if savings rates are not increased and government programs to assist the elderly are not strengthened, many retirees will face serious problems attaining needed health and long-term care services in the future.  [4]

By 2030, many retirees will not have enough income and assets to cover basic expenditures, or any expenses related to a nursing home stay or services from a home health provider.[4]

In-home care can range from providing simple services such as housekeeping, grocery shopping and meal preparation all the way to 24 hour assistance. The costs for these services could range from a couple hundred dollars a week to well over a thousand dollars per week.

Regardless of whether it is a couple hundred or a thousand dollars a week or more, the question you need to answer is how you are going to pay for these services. Savings and retirement accounts may be the best option. Medicare may cover you if you were in the hospital and need help during the recovery; however this coverage is usually very short term.  Medicaid may be an option, but they can put a lien against your property to recover the costs. If you are a veteran or spouse of a veteran, there are in-home care programs available. But for some, the reverse mortgage might be the right choice.

If you are currently in need of in-home care services, I would highly recommend seeking the advice of in-home care providers and a reverse mortgage specialist to help you figure out what the best path for you to follow may be.

Your age, value of your home, liens (if any) against the property, other debt levels and amount of assistance needed will determine how much value a reverse mortgage could provide to you in this situation. There are so many different scenarios that it would be impossible to cover them all in this book.

If the facts given above are enough to motivate you to prepare for the future, then you should consider that the reverse mortgage can be an amazing way to cover the costs of in-home care in the future, should they ever arise.

One of the things I often hear from people is that they do not want to get a reverse mortgage because they own their home free and clear and do not currently have a need for one. The reality is that a reverse mortgage can be a powerful tool for planning, not just to deal with current financial problems.

Let’s assume you are 62, healthy and financially stable. You own your $300,000 home free and clear. However, you do not have any long-term care insurance. Here are three different ways you may want to consider using a reverse mortgage to cover the likely need of in-home care services.

Reverse Mortgage Line of Credit

One of my favorite features of the reverse mortgage is the line of credit and how the unused portion of the credit line grows in availability. In other words, the line of credit is not stagnant. If you don’t use it, there is more available in the future. The credit line grows at the current interest rate, plus .5%.

Think about that. At a time when you are most likely to need in-home care services and medical expenses are going to be very high, you could have hundreds of thousands of dollars available to you when you need it the most.

Here is an example of the line of credit growth.

$300,000 Home, Owned Free and Clear – 5.032% Initial Growth Rate – Assuming No Draws from Credit Line*

Age Line of Credit Available
62 109,543
66 140,969
70 172,486
74 211,049
78 258,234
82 $332,316
87 $406,413
90 $497,521

*For illustrative purposes only. Line of credit availability based on youngest borrower’s age, home value and current interest rates. Future growth rates are determined by future changes of LIBOR index rates, which could move up or down. Example above assumes no change in the initial growth rate. Initial interest rate of 4.532%, expected rate of 4.99%, principal limit $123,000, remaining principal limit after fees $109,543.

The best way to look at the reverse mortgage in this situation is that it can be used as a form of self-insurance. Another excellent reason to consider this option over the next two options is that if you never use it, you are going to be leaving most of your home equity to your heirs.

Pay for Long-Term Care Insurance

There are a variety of factors that come into play as far as the monthly costs for long-term care insurance, with age being the most significant. Based on my research, long-term care insurance for a 65-year-old could cost anywhere from $3,000 to $5,000 a year, or $250 to $416 per month. Those premiums would be for $150 of daily coverage for up to four years. The costs go up or down depending on the daily coverage, term of coverage and age.

You could use either the term, tenure or line of credit options with the reverse mortgage to cover the cost of this insurance. If you do not have the budget to afford long-term care insurance payments, the reverse may be an excellent option. Even if you do have the room in your budget, you may be better off spending that money in other areas of your life.

I highly suggest working with an agent that specializes in long-term care to help you navigate the options you have.

Life Insurance with a Long-Term Care Rider

Many consumers are reluctant to buy long-term care insurance because they fear that their investment will be wasted if they do not use it.  Some insurance companies have attempted to solve this problem by combining life insurance with long-term care insurance.  The idea is that policy benefits will always be paid, in one form or another.  These products are relatively new, and the features are changing as the product evolves.  The amount of the long-term care benefit is often expressed in terms of a percentage of the life insurance benefit. These policies for older adults usually require a lump sum purchase, meaning you pay for the policy up front instead of monthly payments.

There may or may not be much benefit to using a reverse mortgage to purchase this insurance product. It is highly dependent on how much coverage you will receive for your upfront payment. If you could receive $150,000 from the reverse mortgage, but you are only able to purchase $150,000 of life insurance, plus the long-term care rider, you would probably be better off getting the line of credit option and letting it grow over time.