HOME EQUITY CONVERSION MORTGAGE (HECM)
QUESTION: What if I told you that there was a way to pay for
your future long-term care costs without touching any of your life or retirement savings?
Would you want to learn more about it? Ha! I
bet you would!
The Home Equity Conversion Mortgage (HECM) is a terrific way to
fund a life insurance policy with a long-term care accelerated benefit component. This is a brand new option, which at the time of
this publishing, almost no one knows about. And mark my words, this is
going to revolutionize the way we, as a country, collectively finance our
long-term care needs.
PREDICTION: The
financing our country’s immediate long-term care needs for our Baby Boomer population is going to primarily come by way
of Home Equity Conversion Mortgages (HECMs).
What is a HECM?
A HECM is a FHA-insured mortgage for homeowners age 62 or older who have either
paid off their mortgage on their current residence or have “significant” equity
already established. It allows the homeowner to withdraw some of the equity in
their home to fund certain financial necessities like a life insurance policy
with a long-term care component, without spending a penny more than they were
before they obtained the HECM.
I know what you’re thinking, “Are you kidding me?! This is
too good to be true!”
The short answer is nope,
this is not too good to be true. Congress has been
looking for a way to help people finance their long-term care needs because
they know they’re not going to be able to finance the increasing care needs of
the aging "Baby Boomer" population because of an ever decreasing workforce which is creating less tax revenue moving forward with more folks retiring and going on government programs like Medicare and Social Security. In 2009,
the Financial Industry Regulatory Authority (FINRA) changed its position on
HECMs (once thought of as a last resort) to use “Housing Wealth” to fund
longevity needs like future long-term care. FINRA is an independent,
not-for-profit organization authorized by Congress to protect America’s
investors by making sure the securities industry operates fairly and honestly.
“Given pensions are going away and Social Security age
going up, given health care costs are increasing, households are in a bind. The
one asset almost all retirees hold is the house.”
– Dr. Tony Webb,
Boston College Center for Retirement Research
HECM Basics
Ø
Your must be 62 years of age or older to qualify
Ø
The real estate used to secure the HECM must be
your primary residence; This is the address on your Driver’s License and your
Voter Registration;
Ø
You must own the property outright or you must
have paid down a considerable amount on the mortgage; The “rule of thumb” is
you will need to have at least 50% equity in your home;
Ø
No monthly payment is required – EVER!
Ø
No defined term on the loan – it won’t come due
until you pass away;
Ø
You must have the financial resources to
continue to pay ongoing property charges such as property taxes, insurance, and
Homeowner’s Association fees;
Ø
The HECM is FHA-insured so if the mortgage ever goes under water - the government is on the hook for it, not you!
HECM Consumer Safeguards
Ø
Homeowner retains title;
Ø
Homeowner/Estate is entitled to any remaining
equity;
Ø
Homeowner may stay in the home permanently;
Ø
Homeowner is NEVER required to make principal
and interest (P&I) payments;
Ø
Mandatory Third Party Counseling – The FHA funds
housing counseling agencies throughout the country who provide information to
you for free or at a very low cost;
Ø
Growing equity line that cannot be cancelled
HECM Costs
The costs to
secure a HECM are minimal and you can finance most of these costs from the
proceeds of the loan. Financing the costs means you do not have to pay for them
out of your pocket. These costs include the initial FHA Mortgage Insurance
Premium. So let’s look at a generic case study that a local lender
specializing in HECMs provided to me to use as a simple example.
Note: This is just an example used for illustrative purposes. Everyone's case is going to be different based on their unique health and financial condition.
Note: This is just an example used for illustrative purposes. Everyone's case is going to be different based on their unique health and financial condition.
Let’s
assume we have a female named Jane
who is age 65 with the following financial scenario:
Income = $2,000/month
Investments = $144,230
Home Equity = $250,000
No LTC Insurance in
place
Total Value of
Estate = $394,230
Jane’s
Problem
·
Exposed to LTC Risk with No Asset Protection
Plan in Place
·
No Legacy Plan
What Jane
Wants
·
Eliminate her LTC Risk
·
Leave a Legacy for her heirs
-
Question: What Happens If Jane Doesn't Have a Plan In Place To Pay For Her Future Long-Term Care Needs?
Assuming Worst Case Scenario: Nursing Home Placement
Ø
Average
private pay nursing home rate (private room) - $7,000 per month or $84,000
per year;
Ø
Monthly
shortfall - $5,000 per month
Ø
Will
deplete $144,230 nest egg in 2.5 years (or 30 months)
Ø
Heirs
will receive - $0 of her life savings nest egg
Question: What Can We Do To Prevent This Spend Down of Retirement Savings?
Funding Source: Loan Proceeds from the HECM
Ø
Secure FHA-Insured HECM loan
Ø
Elects lump sum distribution option of $70,643
Ø
Elects a $500 per month loan distribution option
Ø
Funds life insurance contract with long-term
care accelerated benefits with single premium payment of $70,683 and $500 per
month for 10 years.
Ø
REMEMBER
- these monies accessed through the HECM are considered loan proceeds and thus
are TAX-FREE.
Net Gain Benefit on Day One with HECM
Jane’s Monthly
Income $2,000
Accelerated Monthly
LTC Benefit (if needed) 9,463
Total Monthly Income
Available 11,463
Less Nursing Home
Costs (7,000)
Net Cash Flow (if
care needed) $4,463
Death Benefit on Day
1 $473,173
So did we accomplish
Jane’s goals with the HECM? I’ll say so! We eliminated her exposure to LTC
risk immediately by eliminating the monthly shortfall which would have depleted
her assets in 30 months AND
we improved her Legacy value by immediately adding a death benefit to her heirs
of $473,173. We did all this AND WE DID
NOT SPEND AN ADDITIONAL DIME OUT OF POCKET outside of maybe a $450 or $500
appraisal fee. So on day one, her kids would receive a TAX-FREE death benefit of $473,173 as opposed to a home worth
$250,000 which, if her kids decided to sell it, the proceeds would be
considered taxable income to them. And remember, on day one, she still has
$179,371 of equity left in the home ($250,000 appraised value less the
initial HECM loan of $70,643).
What about the loan?
What effect does the loan have on all this? Let’s look at this scenario 10
years from now when Jane is 75 years old. The lender used an assumed fixed
interest rate on the HECM of 5.120%. Financing and closing costs of $7,766 were
also assumed which were automatically financed by the HECM. We also assumed
that increases in her income, the cost of a nursing home, and her property
value to increase at an average of 4% per year. Based on these assumptions,
this is how it would look in Year 10.
Jane’s Financial Position
With the HECM In Year 10 at Age 75
Jane’s
Monthly Income $2,960
Accelerated Monthly
LTC Benefit (if needed) 9,463
Total Monthly Income
Available 12,423
Less Nursing Home
Costs (10,362)
Net Cash Flow (if
care needed) $2,061
Death Benefit $473,173
HECM Loan Balance -
Year 10 $221,131
Jane’s Property
Value - Year 10 370,061
Equity in the Home
- Year 10 $148,230
So let’s look at how Jane made out with
and without this HECM 10 years from now. First we’ll compare it assuming she
did not need any care during that time. And secondly, we’ll compare it assuming
she did need care in the final 30 months.
WITHOUT PLANNING
Jane – Age 75
Income = $2,960/month
Investments = $213,496
Home Equity = $372,708
No LTC Insurance in Place
Total Estate Value =
$586,204
WITH PLANNING
Jane
– Age 75
Income
if sick = $12,423/month
Investments
= $213,496
Home
Equity = $148,230
LTC
Plan in Place = Peace of Mind
Tax
Free Death Benefit = $473,173
Total Estate Value = $834,899
Again, Jane fared pretty well by adding the HECM. Even
though she did not need nor use the benefit of the accelerated long-term care
benefits, she still increased the value of her estate by $248,695 ($834,899
with HECM compared to $586,204 without HECM). And this doesn’t even consider
the fact that the death benefit will be passed on to her heirs TAX-FREE. AGAIN, NO REQUIRED MONTHLY PAYMENTS AND SHE
JUST INCREASED THE VALUE OF HER ESTATE BY NEARLY $250,000!
-
WITHOUT PLANNING
Jane – Age 75
Income = $2,960/month
Investments = $0
Home Equity = $372,708
No LTC Insurance in Place
Total Estate Value =
$372,708
WITH PLANNING
Jane – Age 75
Income if sick = $12,423/month
Investments = $213,496
Home Equity = $148,230
LTC Plan in Place = Peace of Mind
Tax Free Death Benefit = $189,283
Total
Estate Value = $551,009
So the worst possible situation has happened and Jane needs
skilled nursing care for two and a half years or 30 months. How does she fare
when all the worst possible things happen? Even after requiring 30 months of
care in the an expensive private pay nursing home, the HECM with life and
accelerated long-term care benefits STILL
INCREASED THE VALUE OF HER ESTATE BY $178,301!
The other benefit that we have not even talked about here
is that through the HECM, you will have access to cash through a line of credit
established at closing whereby this line of credit will grow as the value of
your house increases over time.
I think now you can clearly see and understand the
tremendous value and suitability of a HECM to fund your future long-term care
needs and how it can protect your family from not only bearing the
responsibility of being your caregiver, but also, how it effectively protects
the value of the estate you leave behind to your loved ones. And once again, it
bears repeating: THERE ARE NO REQUIRED
MONTHLY PAYMENTS FOR THIS COVERAGE...EVER! What more could you ask for?
WHEN SHOULD YOU CONSIDER A HECM?
IF YOU ARE 62 YEARS OF AGE OR OLDER....
THE TIME TO ACT IS NOW!
WHY?
Because you must be “insurable” to take full advantage of the Life Insurance with Long-Term Care Rider Protection!
ARE YOU INTERESTED?
WANT TO LEARN MORE?
LET'S WORK TO KEEP YOUR SPOUSE AND YOUR KIDS ---- YOUR SPOUSE AND YOUR KIDS ---- AND NOT YOUR CAREGIVER!
I CAN HELP YOU SET THIS UP AND STREAMLINE THE PROCESS FOR YOU AND YOUR FAMILY!
For a personal and confidential consultation contact:
Mike Campbell, CLTC
Licensed Agent
Certified HECM Specialist
(440) 487-6715
mike_campbell@roadrunner.com
