By Chris Orestis
Financial professionals often have this word of advice when the market takes a tumble and your 401(k) and other retirement accounts lose value: Ride it out. If you make a move now, you are locking in your losses. The market will come back – if you’re patient. That’s great advice for younger investors who have time on their side. It’s less so for retirees who need that money for weekly living expenses right now or for discretionary income to spend on entertainment, play online games, or go on vacation. With every withdrawal they make, they are lowering the account’s balance, which means when the recovery does happen, they won’t enjoy its full power.
Unfortunately, many older Americans may feel financially trapped in this scenario and assume they have no alternative other than to keep drawing money from those retirement accounts. But here are two options that don’t require you to dip into your retirement savings and are immediately available. One is a reverse mortgage; the other involves cashing in on your life insurance through a life settlement.
Let’s explore how each works:
A reverse mortgage is a mortgage loan or line of credit, usually secured by a residential property, that enables the borrower to access the unencumbered value of the property. The loans are designed for older homeowners and do not require monthly payments for as long as the homeowner is living in the home. Borrowers are still responsible for paying property taxes and homeowner’s insurance. Reverse mortgages allow homeowners who are 62 or older to borrow against the home equity they have built up in their homes now, and defer payment of the loan until they die, sell, or move out of the home.
One downside, though, is that because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month. The rising loan balance can eventually grow to exceed the value of the home, particularly in times of declining home values or if the borrower continues to live in the home for many years. However, the borrower (or the borrower’s estate) is generally not required to repay any additional loan balance in excess of the value of the home at the time it is sold. One example of a reverse mortgage is an FHA-insured HECM (home equity conversion mortgage), non-recourse loan. The cost of the FHA mortgage insurance is a one-time fee of 2% of the appraised value of the home, and then an annual fee of 0.5% of the outstanding loan balance.
Many people don’t know this, but life insurance policy owners have the legal right to sell off an unneeded or unwanted life insurance policy through what’s known as a “life settlement.”
For struggling seniors, this is an immediate financial solution they can access in times like these if they are having difficulties paying their bills. After all, the settlement is for a policy a senior already owns and has made premium payments on for years. There are no fees to do a life settlement and no out of pocket costs When a person settles their policy, the policy owner receives cash which can often be tax-free and they are no longer responsible for premium payments. The process can be completed from start to finish in 90 days or less.
Another bonus in these social distancing times is that the entire life-settlement process is conducted remotely and there is no need for in person meetings at any time. During the coronavirus pandemic, struggling seniors who own a life insurance policy, or who have paid off or nearly paid off their mortgages, should review these other options before they make any moves toward depleting their retirement savings. The opportunity could be there to put yourself on much firmer financial footing.
Chris Orestis is President of LCX LIFE and a nationally recognized healthcare expert and senior advocate. He has 25 years experience in the insurance and long-term care industries, and is credited with pioneering the Long-Term Care Life Settlement over a decade ago. Known as a political insider, Orestis is a former Washington, D.C., lobbyist who has worked in both the White House and for the Senate Majority Leader on Capitol Hill. Orestis is author of the books Help on the Way and A Survival Guide to Aging, and has been speaking for over a decade across the country about senior finance and the secrets to aging with physical and financial health. He is a frequent columnist for Broker World, ThinkAdvisor, IRIS, and NewsMax Finance, has been a featured guest on over 50 radio programs, and has appeared in The New York Times, The Wall Street Journal, CNBC, NBC News, Fox News, USA Today, Kiplinger’s, Investor’s Business Daily, PBS, and numerous other media outlets.