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Unique Planning Cases

My Client is 70 and I established a reverse mortgage for her over a year ago to resolve a significant estate problem caused by an overly-zealous and aggressive nephew. After the reverse funded and the home was then funded into her new Trust, her daughter approached me to find a way to refinance the home and begin paying down the debt. I talked with my Client regarding this, and she confirmed they had discussions about this and she was very happy to accommodate her efforts.

Most Planners are reluctant (and sadly unaware) of how useful the FHA Reverse Mortgage can be with resolving unmanageable problems that come along in retirement. (I'm not "that" Planner 8) ). In this matter, the Daughter has some very strong advantages to not refinancing this debt into a 30 yr mortgage. The first option available to her with using Mom's reverse mortgage was the fact that her efforts need not be timed for once every 30 days at a specified sum, 360 consecutive times. All payments immediately reduce the debt. Reverse mortgages are "non-recourse" and there is no requirement to make a payment. Ever. So if she was to calculate the debt and use a mortgage calculator to calculate the 30 yr payment for that sum? ($2,800/month; $33,600/yr), in 30 yrs, she would be all done making payments. And she wouldn't need to pay for refinancing or closing costs. Just begin making payments. Mom would immediately make her the dedicated beneficiary of the home at a mutually agreed upon strike price within the trust, and they could begin.
PROBLEMS:
But, with her comorbidities? It would be likely her life expectancy is about 10-15 yrs. IF she died? Daughter needs to find a way to pay off the balance of the reverse. Possible, but at what rate and terms? If she paid off the reverse with a 30 yr fixed rate, she would STILL be on the hook for the remainder of the debt and have no practical or feasable way to pay it off.
What if Mom breaks the rules and decides to use the money Daughter paid toward the debt for whatever? What if Mom died 6 months from now, and the loan balance at current rates would be approximately $2,800/month for the P&I?

There are other problematic considerations but the basic premise is true - The NON-RECOURSE factor of a Reverse mortgage is a great advantage to the Mom AND the Daughter.
Let's look at the best option - Daughter buys a life ins policy on Mom for an amount significantly larger than the debt. Even with her comorbidities, A rated Life insurance contract guaranteed to age 100 is about $1,333.34/mo; 16,000/yr. That's about HALF of what a mortgage payment would be, and if she died? The money to cure the mortgage is applied upon demand, tax free. The premiums are flexible, and cash value can carry premiums during a hardship. By keeping the reverse, she can take equity from the HELOC to continue making payments. With the Daughter being able to afford a $2,800/mo mortgage payment, by taking advantage of Life Insurance would allow the Daughter to dollar cost average the remainging $1,467/month ($2,800 - $1,333) into a solid mutual fund DCA program that would likely yield an additional $500,000 "bucket of money" as an emergency fund, or source of premiums or sinking fund or alternative source for their own retirement. By using Life Insurance, Mom can't inadvertently use the equity in the loan that would otherwise be built up by the daughter's payments.

And to those "termites" out there? Term carriers will only go out 15 yrs on a level term program on a 70 yr old; the same amount of Term would be around $900/1,000 per month, and lac the flexibility to skip premiums and not be a long term solution. BAck in the 80's and "Buy Term, Invest the Difference" wass the rage, I wass using peremanent Life Ins to fund Irrevocable Life Insurance Trusts to provide funds to pay Federal Estate taxes and not be included into inflating the estate by the death benefits owned and paid outside the Irrevocable trust. (WHY CAN'T YOU USE TERM INSURNCE To FUND THAT!?! Because you don't know how long you're going to live. If you knew you would be dying soon? You're probably not insurable).

Permanent (Cash Value) Life Insurance is the correct solution to the inherent risks associated with this family effort. Imagine the heartache and angst that could be caused if Mom used the equity made available to her through the Dauther's efforts...
MOST PLANNERS would suggest the Daughter go get a mortgage. I see things differently. That's what you should expect from YOUR Financial Advisor.

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