Here’s a great article validating a strong trend I see in my clientele of late, folks whose financial advisor recommends a reverse mortgage credit line be set up now, while the borrower is of sound mind and body, to have on stand by if needed. Remember, you continue to be the owner on title, a reverse mortgage is simply a loan. If used, it needs to be paid off at the time of the house sale, remaining equity goes to you or your heirs(s). But unlike a regular equity line. it requires no monthly payment, can NOT be reduced or closed at the whim of the lender, it is your life time loan as long as property insurance, taxes and any HOA dues are kept current. Here’s the article from Financial Advisor Magazine:
According to Pew Research, more than 10,000 baby boomers are turning age 65 each day in the United States — and this trend related to the largest generation of seniors in history will continue on for the next 15 years. To frame the scope of this social issue a bit further, consider these additional startling facts:
1. For couples, there is a 91 percent chance that one spouse will require care. (“Do Retirees Need Long-Term Care Insurance?” USA Today, Sept 10)
2. A majority of Americans falsely believe that their medical insurance will pay for long-term care. (U.S. Department of Health and Human Services)
3. The cost of senior care may range from $29,640 per year for in-home care to more than $94,170 per year for convalescent care. (John Hancock, Long-Term Care Cost of Care Survey)
4. Less than 3 percent of Americans maintain long-term care insurance. Stated another way, more than 97 percent of Americans make no advanced plans for their eventual senior care needs. (American Association for Long-Term Care Insurance)
As an financial advisor, you may want to consider how your aging clients’ care needs could affect their financial plans, and not only that, but how your younger clients may be impacted by their aging parents’ challenges. Advanced senior care planning can open up a variety of opportunities for advisors and their firms to add new wealth management clients — aging baby boomers as well as the adult Gen-X children of your senior clients.
It is vitally important to gain the business of the adult children of your senior clients now. A 2014 Vanguard study (“Retaining Heirs: Connecting with the Next Generation of Clients”) estimates that a whopping 95 percent of next gen investors plan to fire their parent’s advisor when the parent’s estate transfers to them. So, regardless of the level of service and attention advisors provide their boomer clients today, those who don’t have a plan to bring heirs in as clients early-on may be left out in the cold.
To stay ahead of the trend and to retain and grow business, the easiest way for advisors to secure heirs as clients is to begin serving them prior to the wealth transfer. Like anyone you do business with — a mutual fund wholesaler or your auto mechanic — customer loyalty comes when the client places value on the product and their service provider. So how can advisors engage heirs and provide value today? By solving what is quickly becoming a financial planning challenge for many unaware Gen-Xers before it overtakes their financial security: the likelihood that one or more of their parents will require long-term care.
A U.S. Department of Health and Human Services (HHS) publication entitled, “Who Needs Care?” states that 70 percent of Americans will require some form of care in their lifetimes. Going with the notion that senior care is one of the most insurable events in our lives, why is it that more than 97 percent of the U.S. population fail to plan ahead? According to another HHS publication, “What is Covered by Health and Disability Insurance?” the first reason is a general misconception that long-term care will be paid by the senior’s medical insurance. Some may also assume that government assistance will be provided when the time comes. The reality is that Medicaid will pay for most long-term care patients in the U.S., but coverage is generally targeted to individuals with lower income and fewer assets. For some boomers, even after spending down assets, Medicaid looks to see if assets were liquidated to qualify, and uses a recapture provision to get repayment from the estate. Oftentimes, there is nothing left for the heirs after an extended convalescent stay.
In light of these facts, it’s important that advisors familiarize themselves with the various forms of senior care. Most know about in-home care, assisted living and convalescent care. However, most aren’t aware that in-home care may provide some distinct advantages in certain situations.
A report entitled, “Home — the Best Place for Home Health Care,” by the Joint Commission Home Care Program states, “Not only can care be provided less expensively in the home, evidence suggests that home care is a key step toward achieving optimal health outcomes for many patients. These studies show that home care interventions can improve quality of care and reduce hospitalizations due to chronic conditions or adverse events.”
Clients over age 60 may have missed the window to purchase affordable long-term care insurance. Each year after age 60 premiums become extraordinarily high and it becomes less likely your client will medically qualify. If your client isn’t affluent, senior care costs could quickly impact their retirement income, requiring portfolio liquidation or financial assistance from adult children to ensure the necessary cash flow.
Advisors can use this opportunity to serve both clients and heirs, establishing value and gaining trust to engage heirs as new clients. Start by having a senior care planning conversation with your age 60+ clients. Then review the extremely high long-term care statistics and understand how senior care may affect their financial plans and ultimately, those of their heirs. Next, determine the best solution to cover the cost of care.
When long-term care insurance isn’t an option, consider a standby Home Equity Conversion Mortgage (HECM) line of credit. A HECM loan, commonly known as a reverse mortgage, is a government-insured mortgage for those aged 62 and over. Borrowers are not required to pay monthly loan payments as long as they live in the home as their primary residence and continue to pay taxes, insurance and home maintenance. The loan becomes due when the last borrower has left the home. A unique feature of the HECM reverse mortgage many are surprised to learn about is its growing credit line. When used as a standby, the unused portion grows at a rate of 1.25 percent over the interest rate, compounding monthly. As the borrower ages, the reverse mortgage line of credit continues to grow, providing access to significantly more funds. This makes reverse mortgage a superior funding tool versus a traditional HELOC, which doesn’t grow over time and requires monthly payments. Since senior care needs often come in the form of an unexpected broken hip, heart attack, etc., the best strategy for millions of seniors may be to set up the standby line of credit in advance, so funding is ready when needed. In the meantime, the credit line grows, steadily increasing available funds over time (fig. 1).
Once your client has a senior care funding plan in place, ask to bring their adult children into the conversation. Meet together, if possible, and show them how this plan protects them financially by mitigating the need to assist parents with care. For assistance in explaining the senior care planning discussion, check with an established and reputable reverse mortgage lender to see what resources they have available to help walk financial advisors through determining if a reverse mortgage is a viable solution for their senior clients