Reverse Mortgage - Long Term Care

Reverse mortgages are powerful financial tools that can be used in many situations. The following is an example reverse mortgage scenerio that shows how reverse mortgages can be used to fund long term care.

A 65 year old couple is concerned that they will not have enough money to cover long term care expenses and future medical costs. Their investment properties and pension provide a comfortable level of income today, but they are worried it may fall short in the future.

Their assets include a highly appreciated $2.2 million waterfront property with a detached rental cottage. The problem is that they will owe almost $275,000 in capital gains if they try and sell the property outright.

One solution for them to consider is to take out a reverse mortgage against their property. They would be able to receive an $800,000 line of credit from the reverse mortgage. They could then use part of the line of credit to purchase a SPIA (Single premium immediate annuity) and use the annuity payments to pay the monthly premiums on a long term care policy. The remaining portion of the reverse mortgage line of credit could then be used to cover any future medical expenses.

As their property continues to appreciate over time, it's possible for the appreciation to far exceed the withdraws that are used to cover their future medical expenses. After 25 years (age 90 for the retirees) the balance on their reverse mortgage will be between $2 and 3$ million depending on the frequency and timing of their line of credit withdraws. If their home continues to appreciated at 6% over the same 25 years, it will grow in value to over $8.8 million.

This would provide their heirs with a significant estate and at the same time provide the security and liquidity that the couple feels they need to pay for future health care and other expenses.

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