Alternative Retirement Financing – Reverse Mortgages and Life Settlements

Finding ways to plan for retirement isn’t always easy. Comparing all options is key to avoiding financial mistakes during retirement planning. Understanding the differences between a reverse mortgage and a life settlement can help you determine if either one is a viable option to meet your needs. Reaching out to a financial advisor can also give you professional advice to make it easier to plan for retirement.

What Is a Reverse Mortgage?

A reverse mortgage allows a homeowner to use a loan to borrow against the value of their house by receiving either a large sum of cash, a line of credit, or a fixed monthly payment. Unlike a traditional mortgage, a reverse mortgage doesn’t require a homeowner to make any payments. Instead, the loan balance will be due once the borrower dies, sells the house, or permanently moves away.

Who is Eligible for a Reverse Mortgage?

A person will need to be 62 years of age or older to qualify for a reverse mortgage. Choosing a reverse mortgage can be an effective option for some seniors to plan for retirement, as it offers instant cash for seniors if most of their net worth is in their home equity. Typically, you will need at least 50% equity based on your home’s value to qualify for a reverse mortgage.

Lenders also must structure the transaction to ensure the loan amount doesn’t exceed the value of the home, as the borrower isn’t responsible for paying any difference due to a drop in the housing market or if the borrower lives longer than expected. Ultimately, a reverse mortgage can be a viable option for seniors that understand how the loan works and the potential tradeoffs. Discussing reverse mortgages with a financial advisor is recommended in helping you make the best decision.

How to Avoid Reverse Mortgage Scams

Staying aware of reverse mortgage scams is also essential for seniors. These scams can happen in several ways, whether home improvement contractors or vendors that target unsuspecting seniors. A few tips on how to avoid reverse mortgage scams include:

  • Not responding to unsolicited advertisements.
  • Use your own reverse mortgage counselor.
  • Never sign any documents that you don’t fully understand.

When Will You Need to Repay a Reverse Mortgage?

The lender of a reverse mortgage will require the borrower to pay if you ever sell your house, live in another place for over a year, pass away, or if you stop paying your property taxes or homeowners insurance premiums. Failure to maintain the property can also cause you to repay the reverse mortgage. Keeping these things in mind is key to determining if a reverse mortgage is right for you if you need to consider other retirement alternatives.

What Is a Life Settlement?

A life settlement results from selling an existing insurance policy to another third party for a cash payment. The payment will be greater than the surrender value, but it’s less than the death benefit. Once the sale is complete, the buyer becomes the policy’s beneficiary and will make payments, as they will receive the death benefit once the insured passes away.

Why You Should Consider a Life Settlement

Many people choose a life settlement for various reasons. Sometimes this happens due to the inability to pay premiums, or the policy may no longer be needed. A life settlement can even be used to fund emergencies, whether unexpected medical costs or the death of someone in the family. Researching your different choices with a financial advisor can help you determine if you can benefit from a life settlement while discussing your retirement planning options.

Special Considerations Involving Life Settlements

Keeping a few things in mind is crucial if considering a life settlement. For example, the policy owner can change the beneficiary unless the insurer has specific restrictions. The policy can be used as collateral for obtaining a loan, and the owner can also borrow against the insurance policy. These policies can also be sold to another entity or person. Learning about all of these special considerations is vital for retirement planning.

Closing Thoughts

Understanding how to plan for retirement is essential as you get older. Searching for retirement alternatives can help meet your needs, whether learning about the benefits of reverse mortgages or a life settlement. Weighing all of these options with a trusted financial advisor can help you understand your best choice for financing retirement while avoiding common mistakes. Taking the extra time to compare your retirement planning options is well worth the effort to ensure you make the best decision to meet your needs.