Reverse Mortgages

							                 Project One




    Life Settlements and Reverse Mortgages

                 Risk Seminar




                               By:
                                     Cory Anckner




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        Bibliography

Kaszuba, Mike. "Who's cashing in on life insurance policies aimed at elderly?" Startribune.com 9 Feb.
        2009. 14 Feb. 2009
        <http://www.startribune.com/politics/state/39292652.html?elr=KArksLckD8EQDUoaEyqyP4O:D
        W3ckUiD3aPc:_Yyc:aUUsA>.


Kirchheimer, Sid. "Reverse Mortgages." AARP: Health, Travel, Baby Boomers, Elections, Financial
        Planning, Family, Games, Volunteer, Retirement, Discounts, Seniors. 14 Feb. 2009
        <http://www.aarp.org/money/personal/reverse_mortgages/>.


"Life Settlements - Top Ten Questions." New York State Insurance Department Homepage. 14 Feb. 2009
        <http://www.ins.state.ny.us/que_top10/que_life_set.htm>.


Life Settlements & Viatical Information. 14 Feb. 2009 <http://www.lifesettlementsguide.com/life-
        settlements-information>.


"Nest egg nearly gone? Reverse mortgage can provide the funds you need - Los Angeles Times." Los
        Angeles Times - News from Los Angeles, California and the World. 14 Feb. 2009
        <http://www.latimes.com/news/columnists/la-fi-perfin1-2009feb01,0,2127142.column>.


Reverse Mortgage. 14 Feb. 2009 <http://www.reversemortgage.net/>.


"Reverse mortgages - ABC 4.com." ABC4.com - Salt Lake City, Utah News, Weather, Traffic, Sports,
        Snow and Skiing Reports, Breaking News and Severe Weather Coverage. Taking Action Getting
        Results Investigations, Email Alerts, Pictures, Slideshows, Mormon and LDS News and
        Information, KTVX - ABC 4.com. 14 Feb. 2009
        <http://www.abc4.com/guides/finance/story/Reverse-
        mortgages/u1NEeYJPzUqXITnoT8hxSQ.cspx>.


"Reverse Mortgages - Top Ten Things to Know - HUD." Homes and Communities - U.S. Department of
        Housing and Urban Development (HUD). 8 Jan. 2009. 14 Feb. 2009
        <http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm>.


"Settlements For Life Excels In Overcoming Market Challenges." PRWeb::The Online Visibility Company.
        30 Jan. 2009. 14 Feb. 2009
        <http://www.prweb.com/releases/life/settlements/prweb1927814.htm>.


"WElcome to reverse mortages." ReverseMortgage Home. 2008. 14 Feb. 2009
        <http://www.reversemortgage.org/>.




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       Are you one of the millions of people looking for more income? Our economy has

been in an extreme deficit. As millions of citizens grow older they may find it hard to

keep it with the times and the overly taxing economy as it is rapidly changing. Their

savings accounts have begun to dwindle at rapid rates and the sources of revenues

coming in seem to be diminishing, coming few and far apart. It is for reasons such as

these that in recent year’s new tools have been formed by companies in order for them to

help enhance the balance of the economy. Among these methods are Reverse mortgages

and Life Settlement policies.

       With the economy in the state which it is in, many elderly citizens have found

themselves up against the wall finding it extremely difficult to make the simple standard

payments which are the necessities of everyday living. Payments such as utilities, food,

taxes, and insurance premiums can run on average up to a thousand dollars a month.

Numerous older people have seen their life savings diminished before their eyes due to

the global financial crisis and can longer afford to pay their premiums on high-end life

insurance policies. Being that many of these people are no longer receiving incomes

which can sustain their needs it is wise for them to look else where to find ways in order

to make things meet. The solutions for these problems which many people have

considered is selling off their life insurance policies for a percentage of the death benefit,

or receiving a reverse mortgage on there house in order to not have to move but to

acquire equity from their home in order to attain the necessary funds to survive.

       For people who consider themselves to be “house rich and cash poor” a reverse

mortgage may seem like the greatest alternative. “Reverse mortgages first appeared on

the scene in Great Britain around the 1930s. It met with success and soon spread to other

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parts of Europe in the 1970s.”(history of reverse mortgages) A Reverse Mortgage is

pretty much exactly what it sounds like. You are using your house’s equity as collateral.

A reverse mortgage is a low-interest advance for elder homeowners against their home

which allows them to use the equity from their home without having to sell or take out

another type of loan.

       With a standard mortgage, the lender classically supplies the borrower with a

lump sum of money, which is usually used to pay for a piece of property. In return, the

borrower agrees to pay back the doaner in monthly installments for a specific amount of

time at a specified rate of interest which can either be in fixed or variable amounts. The

quantity of the monthly fee is determined by the reimbursement period and the amount of

interest being charged. A reverse mortgage operates in a very similar way except instead

it works in reverse. Instead of the homeowner having to pay the financial institution

mortgage payments, once your house is paid off and you have reached a certain age, you

can then borrow from a financial institution and have them giving you payments. How

the homeowner decides to collect the mortgage earnings can vary; they may receive it as

a lump sum, in timely payments, or even as a line of credit. The youngest homeowners

age and the equity accumulated of the appraised value of the property play a very

significant role in the determination of how high the loan amount will be and how much

will be paid. The funds presented by the loaner are generally backed by the “Federal

Housing Administration”, so in the event anything is to happen to the lender such as

going out of business you will still be able to get your money.




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       Unfortunately this money is not free and doesn’t come cheap. Like any loan this

money must eventually be paid back to the loaner. The borrower pays the money back

with interest either when they die, sell their home, or decide its time for them to move out

of the residence. “The loan does not have to be repaid until the last surviving homeowner

permanently moves out of the property or passes away.”(top ten things to know HUD)

After this occurs, the domain has roughly a year to repay the balance of the reverse

mortgage or trade the home for the debt due to pay off the balance. All left over equity is

inherited by the domain. So unfortunately although you may only borrow a small

percentage of the entire equity of your home, unless you pay it off the lender takes full

possession of the home.

       The desired market loaners look for in Reverse mortgages is to appeal to the

elderly crowd who is settled in their home but struggling to make payments last, so they

are looking for greater financial security to supplement social security or to pay for

unexpected medical expenses. Because the lender presumes the mortgage won't get paid

back until the consumer dies and because the loan balance grows until it is paid off, the

amount that can be tapped at any given time is based on your life expectancy. This is why

to qualify for a reverse mortgage, you must own your home, and be at least 62 years

old(because they figure by that time you are approaching death).

        “Reverse mortgages can provide a lot of people with peace of mind because even

when the market is down, you can secure lifetime income," said Tony Garcia, Tapping

home equity to finance your golden years is growing in popularity, with 107,367 reverse-

mortgage loans made in 2007, but they still account for only about 1 percent of older

households, according to the AARP. The lower your interest rate, the more you can



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borrow.” (Kirchheimer, Sid). This segment shows that reverse mortgages have already

been helping tons of people consolidate their finances to pay for their debts. These people

now have the security they need to go on with life with a regular mindset without having

to worry about finding new jobs or relocating to smaller facilities to compromise with the

economy.

        Many older people whom have seen their life savings diminished amid the global

financial crisis can no longer afford to make premiums on high-end life insurance

policies and even though they are finding them selves with a tuff economic strain they are

not looking to start borrowing from the equity of their home. For some other individuals

with life insurance policies which have a high net worth and whom are up there in age,

(specifically over the age of 65) may find it to be a bit more beneficial for them to sell off

all or a portion of their life insurance policies in order to collect. This process is referred

to as a Life Settlement. A life settlement is a financial transaction in which a consumer

which owns a life insurance policy which they may see as being unneeded or unwanted

sells their policy to a third party for some monetary benefit which is more than the Cash

Surrender value given by the life insurance company. The third party then becomes the

new beneficiary of the policy at maturation and is accountable for all successive premium

payments.


        Life Settlement providers are the buyer of the transaction and therefore are so

liable to give the policy owner a sum of money which is greater then the cash surrender

value they would have received from the insurance company. The top providers in the

industry fund several transactions each year and hold the seller's policy as a private

portfolio asset. These policies are backed by institutional funds. The providers gets his

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rewards when the policy holder dies and so therefore is dependent upon their life

expectancy. If the seller dies before the estimated life expectancy, the provider will

receive a greater return. But if the seller lives longer than expected, the providers return

subsequently will suffer and be lower. You can even lose part of your principal

investment if the person lives long enough so that you have to pay additional premiums

to maintain the policy.


        The concepts of life insurance settlements and viaticles are almost identical. Both

occupy the necessity for a policy owner and a third party who is transferred ownership of

a life insurance policy in exchange for a specific amount of money. The main

dissimilarity amongst the two is based upon the expected life of the insured. If the policy

owners life span is seen as being shorter than two years, the service being provided is

considered a 'viatical'.

        A viatical settlement is the sale or transfer of the death benefit by giving the

ownership of a life insurance policy to a viatical settlement company before the policy

matures. This agreement can only entered into when the insured has a disastrous life-

threatening disease or condition. Such illness or condition however is not required for

entering into a life settlement arrangement. In countries without state funded healthcare

and elevated healthcare expenses this is a practical way to be able to pay the

exceptionally high health insurance premiums that brutally ill individuals are challenged

by.


        Like in a regular life settlement the owner of the policy collects cash from the

viatical settlement company; and in exchange the viatical settlement company pays all

future premiums until the primary policy holder dies. Upon the death of the insured the

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life settlement company acts as the new owner and beneficiary of the policy and the death

benefit is paid to them. Such a sale gives the seller an immediate cash relief which is

made at a price discounted from the face amount of the policy but usually in excess of the

premiums already paid.


       “Viatical settlements grew in popularity in the United States in the late 1980s,

when the AIDS epidemic first hit.”(life settlement & viaticle information) As the story

goes most people are aware that the earliest victims suffering from AIDS in the U.S. were

largely gay men. They often had no dependents such as wives or children, but they

normally had life insurance policies through their employment or due to supplementary

investment activity. The dependants in such cases were often their parents who did not

necessarily need the money. For these individuals Viatical settlements offered a way for

them to obtain value from the policy while they were still alive, in order to help them

with there intense medical bills.


       “At the time, the AIDS mortality rate was very high, and life expectancy after

diagnosis was typically short. Investors were reasonably sure that they would collect in a

relatively short time.”(life settlement & viaticle information) Being that settlement

agencies knew that these individuals were going to die rather quickly they knew that the

risk of them losing money on the amount of premiums necessary for them to pay until

death of the individual in which they would obtain his benefits was rather low. Because

of these conditions both the viatical settlement providers and insured’s saw this as a great

way for both of them to benefit and make money. This caused the rate of viatical

settlements to soar.



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        When living with someone who is terminally ill or if you are terminally ill

yourself you have to think much more wisely about how you spend your time and your

money. You may try to find some way to acquire types of Accelerated benefits,

sometimes are called "living benefits", from your insurance policies. Although being that

many insurance companies may be reluctant to give adequate compensation to

individuals in need of the money until after the individual passes, often times the

individual can receive a great larger sum if he decides to sell his off his policy.


        Both of these topic endowment options are very similar in that they are both

instruments to allow individuals to access cash from an existing asset of theirs. However,

there are many vast apparent differences between the two that are imperative to

comprehend. As Defined by the U.S. Department of Housing a reverse mortgage is a loan

that will accrue interest and fees which must be paid back once the homeowner no longer

occupies the home as their primary residence. The size of reverse mortgage loans is

determined by the age of the borrower, the interest rate, and the value of the equity the

home has acquired. The older a borrower, the greater the percentage of the home's value

they will be able to borrow. In a Reverse Mortgage the quantity that may be borrowed is

capped by “the maximum FHA loan limit” which each city and county has; this amount

varies from “$172,632 in rural areas to $362,790 in many major metropolitan areas”.

(Settlements For Life Excels)

        As defined by the Life Insurance Settlement Association “a life Settlement is the

sale of personal property, not a loan, and has no restrictions or requirements to be secured

or paid back”. In a life settlement you are signing over the death benefit to a third party

that will continue to pay the policy's premiums until they collect the full value upon

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policy maturity. Unlike in a reverse mortgage there are no maximums on the amount of

capital that can be raised through a life settlement. There are also no interest charges or

guarantees connected with a life settlement. If you are the policy holder you do not have

to pay any upfront. Unfortunately the rewards derived through a life settlement can be

taxable unless seen to be a viaticle transaction.

       Both of these vehicles can be very beneficial to its users. They serve the need of

coming up with money fast when people are in tight situations. Although each has both a

lot of perks, you must be careful because each of them also have there downsides. Before

anyone goes out to take on either of these endeavors the best thing to do is sit down and

see what exactly your needs are and calculate which will be the most beneficial for you

and which will have the least damaging repercussions. Everyone’s situation is extremely

different and that must always be taken into account when discussing financial issues.




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