Reverse Mortgages and Life Insurance

Written by Jonathan J. Neal Tuesday, 08 June 2010 16:57

When it comes to the use of a reverse mortgage as a funding source for financial/insurance planning, I get a lot of questions about long-term care and taxes, but a surprising few about life insurance.  This is understandable being that the long-term care issue is such low hanging fruit, but what most insurance and RM advisors fail to understand is that there is a significant need and desire for life insurance in the 62 and older marketplace.

Combine that with the fact that there are a lot more — and I mean a lot more — life insurance salespeople than there are LTCi salespeople.  What you might find interesting is how large the senior, or in our case the 62-year-old and older, life insurance market is.  What makes this so exciting is that opportunity to sell life insurance in the senior marketplace would be so much bigger if more life insurance agents were aware of and made their prospects aware of the here-to-for unrealized source of funding that can be tapped via a reverse mortgage.

What we have here is a triple-win situation, made up of those seniors who would like to buy life insurance but don’t think they can afford to, life agents that would like to provide a product to those seniors, and reverse mortgage advisors who can provide both the life agents and seniors with the key to solving the funding problem.  All that is required to reap the rewards of this unprecedented opportunity is the time to let every life insurance salesperson you come in touch with know that you have the ability to unlock the funds they and their prospects want and need.  The only question is whether or not you are going to be one of the RM advisors who will take advantage of this opportunity.

Just how you go about this is up to you, but allow me to give you three different situations in which I was involved with two different financial/insurance planners. All three resulted in the placement of life insurance funded by reverse mortgages. 

The first case involved a 70-year-old widow who has two sons, both of whom live in different states.  She has more than enough annual income to meet her needs and she didn’t have any significant assets other than her home, which was paid for and had a market value of a little over $200,000.  She wanted to leave her sons the house, but realized that neither would ever live there, and the house would end up being sold, after which they would get approximately $100,000 each.  She also had a great desire to leave her alma mater something, but didn’t see how she would ever be able to afford to do so.  We were able to use a reverse mortgage to provide her with a guaranteed lifetime income that will provide her, after tax, a life insurance policy with a death benefit of $303,756.  Of which we listed three primary beneficiaries who are entitled to $101,253 tax-free income each.  Her sons will end up with at least as much as they would have from selling the house and her beloved college will get a nice gift.   

The second case dealt with a 68-year-old man who has three daughters, each of which expects to inherit one-third of his million-dollar bond account.  This represents his total estate with the exception of his house, which was valued at $275,000.  The option here was that he also has a special needs grandson that he wanted to make sure was taken care of.  Two of the daughters, who are aunts to the special needs child, were not really open to the idea that they would lose part or possibly all of what they saw as their rightful inheritance.  What we were able to do was introduce the idea of using a reverse mortgage to fund a life insurance policy, which would be put into a trust for the grandchild.  We made sure that a reverse mortgage will provide him with lifetime distributions that will produce the annual premium required to put a $249,006 life insurance policy in place for the grandchild. 

The third case in which we used a reverse mortgage to pay for a life insurance policy had to do with a retired couple.  At the time, he was 72 and she had just turned 71.  Their estate is worth approximately $3,600,000, from which they don’t take income as they live comfortably on distributions from their retirement accounts and social security.  Combined, these provide them with annual income that far exceeds their needs.

What they wanted to do was leave money for their church without reducing the amount they intended to leave their children.  This case required some advanced estate planning, during which we reached the conclusion that by using a reverse mortgage, they will be able to leave their church a significant gift, which will not only provide them with a tax write-off, but also reduce their overall assets when totaling up the size of the estate.  Being that we are in a time of uncertainty as to what future estate taxes will be, they found the RM/life-insurance solution very attractive.

In the end, we were able to use the funds freed up by a reverse mortgage to put a $364,948 second-to-die in place.

Of course, these three examples required a lot more planning and analysis than I have time or Erica has room for in one article.  Nonetheless, the bottom line is that there is a huge market out there comprised of people who own homes, are over 62 years old, and want/need life insurance.  In turn, those in the reverse mortgage field have an unlimited number of common prospects with life insurance salespeople, and those of whom are willing to take the time required to build some bridges will most likely benefit greatly from their efforts.