Life Insurance as a Method of Decreasing Reverse Mortgage Risks

| April 3, 2008 More


Creative Commons License credit: Leonid Mamchenkov

The reverse mortgage is a home equity loan available to senior citizens. It essentially takes the home equity that the individual has already invested in his or her real estate and gives it back to the home owner. It is primarily used by seniors who are at risk of losing their homes as a result of the high cost of living that they experience after retirement.

However, many seniors have concerns about taking out a reverse mortgage. The most basic concern is that it will ultimately mean that the bank owns the home. This isn’t entirely true. What is true is that when the home owner sells the home or passes away, the amount that’s been taken out in home equity must be paid back.

Seniors have been concerned that this fact means that they won’t have a home to leave to their children after they pass away. That’s because it would become the adult child’s responsibility to pay what is owed to the bank in home equity on the reverse mortgage loan.

To counter this, some seniors are taking an innovative approach. They are purchasing life insurance and designating the adult child as beneficiary of the money. When they die, the adult child gets that life insurance money and then can use that to pay off what’s owed on the home. They then essentially get the home as an inheritance free and clear of costs.

This type of real estate move isn’t wise for most people. However it may be the right choice for seniors interested in remaining in their homes until their deaths while still passing on that home to children in the future.

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Category: Mortgages

Comments (1)

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  1. There is a problem using a reverse mortgage to fund a life insurance policy. Since a homeowner must be at least 62 to qualify for a reverse mortgage, the insurance premiums on the individual(s) are quite high. So high, in fact, that the homeowner will not have the opportunity to use much of the reverse mortgage funds for themselves during their lives. There is little point using all of the money from a reverse mortgage to fund an insurance policy whose sole purpose is to refund the reverse mortgage debt. And, if the homeowner lives a long life, the reverse mortgage debt will far exceed the insurance death benefit.

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