Long Term Care without Insurance: Is Home Equity the Answer?

A recent study showed approximately 70% of individuals turning 65 today will need some form of long-term care in their remaining years. 

The average cost of that care can vary from $1700/m on the low end, to over $9,000/m on the high end. 

But did you know Long-Term Care Insurance is one of the most expensive types of insurance in the marketplace? 

If you find that it’s unaffordable to pay for this insurance, or don’t qualify, there are other ways in which you can pay in an efficient way for the care in your later years. 

The Challenge: How to pay for Long-Term Care without Insurance

In addition to purchasing Long-Term Care Insurance, some consider a trust or legal routes to shield assets from a nursing home. 

These strategies can be particularly effective as you have time on your side, but there are potential downsides to considering this:

1. The “Five-Year Lookback Rule
2. Potential loss of control of the assets
3. Loss of Favorable Tax Benefits
4. Considerable Cost of Establishing a Trust

The Five-Year Lookback Rule is a rule that disallows “gifts” to a trust or individuals within a 5 Year time period to utilize Medicaid benefits. Oftentimes, retirees may delay this plan, and it leads to a disqualification of benefits. 

Depending on the type of trust, it may also limit how much control you may have in terms of access to your funds. 

You could also lose access to tax benefits such as a stepped up basis for non-qualified accounts, and marginal bracket rates for trusts are far less favorable than for individuals. 

Lastly, the cost of setting up a trust can be hefty. However, if properly executed, it can still save your life savings, so it very well could still be a viable option. 

Your Home as the Solution

Home equity can be a potential solution to this ever-present problem. Retirees may often pay off their home at retirement, which is a great thing. But two issues with home equity can occasionally come up: 

1. It’s often difficult to access the equity in your home to produce income in retirement.
2. It’s unclear if the children/heirs want the home at the passing of the parents.

That said, many retirees want to stay in their home as long as feasibly possible. Let’s take a look at the options to see if this is possible. 

Three Ways to Access Your Home Equity

1. The Lump Sum Approach

This approach allows immediate access to the home equity. Here’s how it works:

Let’s see an example:

• Home Value: $400,000
• Age: 70
• Interest Rate: 5%
• Available Amount: $200,000 (less fees)

This option works best for those who need immediate funds for:

• Creating a care fund
• Meeting immediate long-term care needs

2. Monthly Income Stream

This approach turns your home equity into a reliable monthly paycheck. You have two options:

Tenure Payments (Lifetime Income) Using the example from above:

• Available Amount: $200,000
• Monthly Payment: $1,000 for life
• Perfect for: Regular, predictable care expenses

Term Payments (Fixed Period)

• Same $200,000 available amount
• Higher monthly payment: $1,800
• But only for a fixed period (e.g., 10 years)
• Ideal for: Bridge funding until other resources kick in

3. Line of Credit

For what we’re referring to, this may often be the most suitable option. Think of it as a growing safety net:

• Initial Line: $200,000
• Unique Feature: Unused portion grows over time
• Only pay interest on what you use
• Perfect for: Future care needs and emergency expenses

While your situation will vary, all features can be utilized in conjunction with each other. 

Real-World Example: Making It Work

Meet Bob and Linda, age 68, who set up a reverse mortgage to prepare for potential care needs:

• Home Value: $450,000
• Available Equity: $225,000
• Strategy: Combined Approach
  • Set aside $100,000 as a growing line of credit
  • Took $25,000 upfront for a short-term need
  • Created a $100,000 tenure payment plan ($500/month)

This strategy gave Bob and Linda immediate funds for home updates, ongoing monthly income, and a growing safety net for future needs.

There would be origination fees and closing costs in this plan. However, much like a traditional mortgage, these costs can be rolled into the loan balance, which could reduce upfront costs. 

Who Should Consider This Strategy?

This approach might be right for you if you:

1. Meet the Basic Criteria:
   • Age 62 or older
   • Own your home with significant equity
   • Plan to stay in your home long-term
2. Have These Financial Characteristics:
   • Want to avoid or can’t qualify for long-term care insurance
   • Prefer to maintain control of your assets
   • Have significant home equity but limited liquid assets
   • Want flexibility in how you access funds
3. Share These Goals:
   • Desire to age in place
   • Want to maintain financial independence
   • Seek peace of mind about future care needs
   • Prefer self-funding care over traditional insurance

Understanding Tax Implications

The tax treatment of reverse mortgages offers several advantages. The funds you receive, whether as a lump sum, monthly payments, or line of credit draws, are not considered income for tax purposes. Think of it like taking a loan against your savings account – you don’t pay taxes when you withdraw your own money.

If you have a long-term care need, you can still deduct qualifying medical expenses. 

For example, if you use $50,000 from your reverse mortgage to pay for long-term care expenses, and these expenses exceed 7.5% of your adjusted gross income, you may be able to deduct them on your tax return. This can create significant tax savings, especially in years with high medical expenses.

What Happens to the Home?

This is often the biggest concern for homeowners considering a reverse mortgage. Here’s how it works:

As long as you live in the home as your primary residence, you maintain ownership and control. You can:

• Make improvements
• Sell the home (and repay the loan)
• Continue to build equity in a rising market

The loan becomes due when:

• You permanently move out
• You pass away
• You fail to maintain the property
• You don’t pay property taxes or insurance

Protection for Surviving Spouses

Many couples worry about what happens when one spouse passes away. Here’s the good news: reverse mortgages offer important protections for surviving spouses.

If both spouses are on the loan:

• The surviving spouse can continue living in the home
• Loan payments continue unchanged
• All reverse mortgage protections remain in place

Even if only one spouse is on the loan, new HUD rules provide protections for eligible non-borrowing spouses, allowing them to remain in the home after the borrowing spouse passes away, provided they:

• Were married to the borrower at the time of loan closing
• Continue to live in the home as their primary residence
• Keep up with property taxes and insurance
• Maintain the property

Impact on Heirs

When planning your estate, it’s important to understand how a reverse mortgage affects your heirs. Here’s what they need to know:

When the last borrower passes away, heirs have several options:

1. Repay the loan and keep the house
   • They can refinance the reverse mortgage
   • Use other funds to pay off the balance
   • The payoff amount is the lesser of the loan balance or 95% of current appraised value
2. Sell the house
   • Use the proceeds to repay the loan
   • Keep any excess equity
   • Non-recourse protection means they’re not responsible if the loan exceeds the home’s value
     1. This protection means the borrower and/or heirs would never owe more than the home’s value when repaying the loan. If the loan balance exceeds the home’s value.
     2. This protection applies to a Home Equity Conversion Mortgage (which is a reverse mortgage) which is insured by the Federal Housing Administration. 
   • Deed the house to the lender

For example, if your home is worth $400,000 when you pass away, and the reverse mortgage balance is $250,000, your heirs would have $150,000 in remaining equity they could receive after selling the home.

Depending on your future plans for the home, these considerations can help determine if this is right for you. 

Conclusion

Using home equity for long-term care funding isn’t just about accessing money – it’s about creating a strategic plan that provides both financial security and peace of mind. While this approach isn’t right for everyone, it offers a powerful tool for those looking to fund potential care needs while maintaining control of their financial future.

Remember, the key is to view your home equity not as a last resort, but as an integral part of your long-term care strategy. When properly structured, it can provide the flexibility and security needed to face one of retirement’s biggest challenges. Be sure to check out another strategy we discuss for funding long-term care needs utilizing your IRA.