A look at the most prevalent misgivings of reverse mortgages.
In 2008 when I first started writing about reverse mortgages, the prevailing perception of the product in the financial/insurance world was primarily negative. That negativity was overwhelming rooted in the belief that costs associated with a reverse mortgage were unjustifiably high.
Like most negative perceptions, on its face this misunderstanding appeared to be impossible to overcome. Fortunately, perception is not reality, but rather nothing more than what seems to be reality from a specific point of view. The problem with perception is that there is no rule that insists it be based on fact.
In this case, once people started taking a step back and asking the question, “Too expensive compared to what?” people were able to prove mathematically that compared to other financial planning tools, reverse mortgages were very competitive. Hence, perception was trumped by reality, except for those who choose to consider math a pseudo-science.
In any event, over the past three-plus years those of you working with reverse mortgages have done a very good job at dispelling that once enormous hurdle because today the cost feature is not the automatic deal killer it once was.
Today, when I talk to financial planners and insurance advisors – those with concerns about including reverse mortgages in their senior client planning process – mention totally different reasons for their misgivings.
The three most prevalent reasons I hear are as follows:
(1) Their retired clients are already in a comfortable position financially, with incomes more than adequate to meet their monthly needs, and they see no need for any additional income.
This is a viable argument, and if you are going to promote the virtues of math when they work in your favor, you have to accept them when they work against you. However, another issue might not be taken into consideration: taxes. The idea that a person can maintain their income, yet reduce the amount of income tax they pay, almost universally gets a positive reaction from planners and clients alike. One example might be a senior couple with an adjusted gross income of $50,000 and no debt. They aren’t what we would consider rich, but they are comfortable and really don’t need any additional income. Based on the 2011 federal income tax tables they will pay $6,650 in federal tax this year. If they replace $12,000 of their income with money generated from a reverse mortgage they would still have an annual income of $50,000, but their taxes would be $1,800 less, a reduction of 27.07 percent in taxes paid. They may not need the money, but I would bet that given the choice they would find something they’d rather do with that $1,800 than write a check out for taxes.
Having said that, let me give a warning to the wise: Venturing into this arena without being well versed can be a career killer. It is not that hard to learn what you need to know, and it doesn’t take much to keep abreast with changing issues, but if you are not willing to put in the time and effort I strongly suggest you don’t venture into this field.
(2) Making the last payment on a mortgage is one of, if not the most, significant and rewarding financial accomplishments in the lives of most Americans. As such, it is understandable that for many seniors the idea of putting any type of mortgage on the home they worked so hard to own outright far exceeds their comfort level. Even in cases where a reverse mortgage may be a sensible alternative, this objection is almost always too strong to overcome.
Personally, I don’t think specific objection to reverse mortgages will ever go away as long as the term “mortgage” is part of the product name.
(3) The last negative perception I want to comment on is one that recent economic and market upheavals may have started to dispel. Basically what we are dealing with here is the idea of leaving a legacy. For many people, passing assets to family, friends and charities is an attractive idea, and in some cases, this idea grows beyond any rational expectation. Over the years I have known a number of retired people who were making unnecessary personal sacrifices in order to pass on assets to people and organizations. Because this idea is often extremely personal it can be a touchy topic to broach.
In many cases a reverse mortgage can be used to not only increase the amount they can pass on to family members, but also provide them with an opportunity to pay back something to a person, place or organization that had a positive effect on their life.
The example that I use here comes from a real case one of our affiliates brought to my attention last summer. Her client was a retired schoolteacher who wanted to leave money to her alma mater, but felt guilty because if she did, she would be reducing the amount she would leave her two children. Her insurance advisor showed her a life long-term care policy that provided her with a very attractive solution to her problem.
Using the proceeds from a reverse mortgage she was able to purchase a $250,000 LTC-life insurance policy that would pay her $5,000 in monthly LTC benefits if ever needed. If, on the other hand, she never needed long-term care, the $250,000 death benefit would be paid out as follows: $100,000 to each of her children and $50,000 to her beloved alma mater. And if she used part of it, whatever remained would be distributed to the three beneficiaries: 40 percent to each child and 20 percent to her alma mater.
The result: Her children end up with at least what they would have received initially; she has long-term care coverage that she didn’t have before, and she has, at minimum, created an opportunity for her alma mater to receive a sizable donation.
OK, so I only have ideas for two of the three reasons currently given for not considering a reverse mortgage, but give it some time. Much like everything else, the pros and cons of reverse mortgages will change.
As always, should you have any questions feel free to contact me. firstname.lastname@example.org