Reverse Mortgage, Life Insurance, and Inheritance
As stated previously, reverse mortgages are advantageous to senior homeowners for a number of reasons. Because all reverse mortgage loan payments are deferred as long as the property remains the borrower’s primary residence, there is no obligation to repay the reverse home mortgage until the owner dies, the home is sold, or the owner otherwise vacates the property (for example, to move into an assisted-living facility).
One of the main reasons that many older homeowners are wary of taking out a reverse mortgage, however, is because they want to pass their home on to their children. A reverse mortgage loan seems to conflict with inheritance aims, because often the reverse mortgage balance matches or even exceeds the value of the home. Even though the principal of the loan can never exceed the home, the reverse mortgage is usually repaid using the proceeds from the sale of the house.
Fortunately, there is a way in which senior homeowners can secure a reverse mortgage and still leave their home to their children.
Life Insurance
If homeowners want their home to be passed onto their children, they should take out a life insurance policy that will pay off their mortgage, thus allowing the entire value of the home to pass to their children. In this situation, consider having your children own the life insurance policy, because, if the parent(s) become institutionalized, the cash value of this policy will be includable in their assets and may have to be withdrawn, or the policy surrendered in order to pay for long-term care expenses. If the children own the policy, there is a substantial likelihood that the life insurance premium will not be included in the parents’ countable assets, which is also beneficial in terms of Medicaid eligibility requirements.
Substantial life insurance policies written in the heirs’ name safeguards the borrower and their heirs, reducing an exposure many have not recognized in non-recourse loans. The property heir(s) can use the proceeds of the homeowners’ life insurance policy to pay off the reverse mortgage principal, and thus the loan is paid in full and the lender removes the lien from the property.