lifepreserverToo much is made of the constant warning that seniors should NEVER purchase another financial product in conjunction with their reverse mortgage.  We agree that you should avoid reverse mortgage originators who team with persons selling annuities, life and long term care insurance and/or other so-called investments.  But the key word here is “team”.  These financial products are not bad in and of themselves.  In fact, there are some situations where an experienced reverse mortgage originator might strongly urge a borrower to purchase one of these products.  I work with many professionals who are expert in these products and I learn from them every day.  Those whom I trust are honest and sincere and, on occasion,  work with my clients on a referral basis (only – no compensation is ever exchanged) to meet their needs.  But, of course, I would not ever require them to purchase anything.

Example

I recently completed a HECM loan for a couple aged 59 and 62.  They were referred to me by their attorney who had completed guiding them through a complex bankruptcy.  They had a sizeable conventional mortgage that continued to impact monthly cash flow.  The only way they could do the reverse mortgage was for the younger partner to come off the deed.  But I carefully outlined the dangers of doing this to both homeowners.  In the event of the death of the older homeowner, the reverse mortgage would become due and payable and if the younger partner wanted to remain in the home, she would need to payoff the reverse mortgage balance due.

Insurance Hedge

Given HUD’s new interpretation of the non-recourse feature and arm’s length transactions for heirs or relatives… we knew that it was possible that the survivor would need a large amount of cash to buy the house back should the husband pass away unexpectedly.  They simply didn’t have the money.  So, we recommended term life insurance for the older partner in an amount about equal to what it would take to pay off the loan 9 years from now.  9 years was about 1/2 the life expectancy of the husband as shown on the TALC… and the Amortization Schedule projected the balance due at that point in time.  Term insurance premiums, even at age 62, are reasonable and the product is a great hedge for the surviving younger spouse.  Upon the demise of her husband, she would have the cash needed to remain in the home… if she chooses to do so.  If he survives beyond the 9 years, it may well be possible to rewrite or refinance the HECM assuming property values return to better levels in the future.

Author – Robert H. Irving, CSA
Senior Reverse Mortgage Consultant

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