Reverse mortgage can be attractive

By SCOTT HANSON - delawareonline.com

Q: A while back you wrote about a senior's finances, and I was disappointed that you didn't mention reverse mortgages. We took 80 percent of the equity out of our home with a federally backed reverse mortgage and are enjoying extra income from the “lazy money” in our paid-off home. There are no payments, and the interest and fees are paid when the home is finally sold. Your column was worded as if you weren't familiar with reverse mortgages. Are we missing something?

Joe N., Wilmington

A: I am fully aware of reverse mortgages, and I believe they can play a vital role in a retiree's finances. In fact, I believe that over the next decade they will become a common financial tool for retirement planning, so much so that I have personally invested in a company that specializes in reverse mortgages.

Like most financial products, reverse mortgages are neither good nor bad; it depends on how they are used. For some people, a reverse mortgage can be a lifesaver by providing monthly income to pay for basic necessities, which is a good thing. For others, a reverse mortgage can be a way for retirees to spend money in their 60s that may be necessary for them in their 80s. Used this way, a reverse mortgage may be a bad thing.

Reverse mortgages are a way for retirees 62 and older to tap into the equity in their home to increase their standard of living. Unlike a traditional mortgage or home equity loan, there are no monthly payments required. Interest accrues on the loan and is due when the home is either sold or when the occupants die. Start-up costs are steep, but the long-term benefits can be attractive.

Switch from term to whole life insurance

Q: My mother is 80 years old, and I have been paying for her term life insurance policy in the amount of $203 a month. Recently, I received a notice from the insurance company indicating that it will increase to $544 this month.

I can't afford to pay the premium at this high amount, but I also realize that this is important coverage for her. What can we do?

Angie, Torrance

A: Most term life insurance policies never pay a claim. They have premiums that are fixed for a set term, but once that term expires, premiums are adjusted upward to correspond with the degree of risk the insurance company faces. The older a person gets, the more likely death will occur.

Term insurance is not the type of insurance to buy if you are planning to keep it until your dying day. If she really wants to have life insurance, whole life or universal life may be a more cost effective solution.