Comparing Life Settlements and Reverse Mortgages: Two Sound Financial Planning Strategies for Seniors

by Darwin Bayston, CFA - President and CEO - Life Insurance Settlement Association | June 21, 2016 Leave a Comment

What is your financial planWe’re all aware of the retirement funding shortfall in America. Research from the National Institute on Retirement Security (NIRS) found that retirement savings are dangerously low, with the U.S. retirement savings deficit between $6.8 and $14.0 trillion. The NIRS reports that the average working household has virtually no retirement savings and when all households are included -- not just households with retirement accounts -- the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households.

Faced with this daunting financial reality, it’s essential that seniors maximize all of their available assets in order to produce the cash needed to fund their retirement years. There are a variety of financial planning strategies that you may wish to consider, but two specific vehicles are gathering increased attention from financial advisors:

  • A life settlement: the sale of a life insurance policy to a third party for more than the policy’s cash surrender value. A policy owner receives a cash payment, while the purchaser of the policy assumes all future premium payments and receives the death benefit upon the death of the insured.
  • A reverse mortgage: a loan available to homeowners that allows them to convert part of the equity in their homes into cash. The loan is called a reverse mortgage because instead of making monthly payments to a lender, as with a traditional mortgage, the lender makes payments to the borrower -- the borrower is not required to pay back the loan until the home is sold or otherwise vacated.

Some of you may be wondering why a professional in the life settlement industry would be writing favorably about a reverse mortgage. The answer is that I believe they are both valid options and may actually complement each other as alternatives for seeking increased financial resources in your retirement years. They may not be utilized by the same people -- nor at the same time -- but it is not a matter of either/or for consumers. Both options may benefit seniors in need of funds.

There are some immediate similarities between these two financial planning strategies for seniors. Bankrate described life settlements as a way for seniors who own life insurance policies to create “real value for the capital they have invested in their policies.” Investment News reported last week that reverse mortgages can help seniors “by allowing them to use loan proceeds during down markets rather than tap a shrinking nest egg.”

Beyond their similarities as vehicles for extracting value from personal property to free up cash in the retirement years, these two strategies do have some important differences that differentiate them. Here are a few basic distinctions in order to determine which one might be best for you:

AGE

  • Life Settlement – 70, or younger with health impairments
  • Reverse Mortgage – 62 or older

HEALTH

  • Life Settlement – higher value if illnesses present
  • Reverse Mortgage – not relevant

ASSETS

  • Life Settlement – not relevant
  • Reverse Mortgage – liens on property may reduce value 

AMOUNT AVAILABLE

  • Life Settlement – determined by marketplace
  • Reverse Mortgage – determined by appraisal value

CASH PAYMENT

  • Life Settlement – lump sum
  • Reverse Mortgage – lump sum or income stream 

REGULATION

  • Life Settlement – regulated by 42 states (90% of US population)
  • Reverse Mortgage – regulated by the Federal Housing Administration

As more American seniors learn about life settlements and reverse mortgages as sound financial planning options, they will have two powerful strategies at their disposal in order to truly maximize the value of their assets. That level of creativity is essential to combat the retirement savings crisis in America.

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