Key Takeaways
- Both reverse mortgages and life settlements turn illiquid assets into usable cash for retirees with income needs.
- A reverse mortgage taps home equity without forcing a move, while a life settlement turns an unused life insurance policy into a lump sum.
- The best option depends on your goals, timeline, and how each choice affects your long-term finances.
In this article (Skip to...)
- What is a reverse mortgage?
- Ways to use reverse mortgage funds
- What is a life settlement?
- Reverse mortgage or life settlement: which option is better?
As more retirees look for ways to supplement their income, alternative financial strategies are gaining attention. Two options that often come up for seniors are reverse mortgages and life settlements.
At a glance, both approaches aim to solve a similar problem: turning value that’s tied up in long-held assets into usable cash. But these options work very differently and come with distinct trade-offs.
What is a reverse mortgage?
A reverse mortgage allows homeowners age 62 or older to borrow against their home equity without making monthly mortgage payments. The most common type is the Home Equity Conversion Mortgage (HECM), which is insured by the Federal Housing Administration (FHA).
Instead of making payments to a lender, the loan balance grows over time and is typically repaid when the borrower sells the home, moves out permanently, or passes away. As long as borrowers meet ongoing requirements, they retain ownership of the home and can continue living there.
How a reverse mortgage unlocks home equity
A reverse mortgage converts a portion of a home’s equity into cash. The amount available depends on several factors, including the borrower’s age, the home’s value, current interest rates, and the payout method.
Proceeds can be received as a lump sum, monthly payments, a line of credit, or a combination of these options. Reverse mortgage funds are loan advances, not income, and are generally not taxable.
Common ways reverse mortgage funds are used
Borrowers use reverse mortgage proceeds in a variety of ways, including:
- Supplementing retirement income when Social Security or pensions fall short.
- Paying off an existing mortgage to eliminate monthly payments.
- Covering healthcare or long-term care expenses.
- Creating a line of credit for future needs or emergencies.
- Reducing withdrawals from retirement accounts during market downturns.
Key trade-offs to understand
While a reverse mortgage can provide long-term cash flow and flexibility, it isn’t free money. Upfront costs and ongoing interest cause the loan balance to grow over time, reducing the equity remaining in the home.
Borrowers must also continue paying property taxes, homeowners insurance, and maintenance costs. And because the loan is repaid from the home’s value, heirs may inherit less equity.
See if you qualify for a reverse mortgage. Start here
What is a life settlement?
A life settlement involves selling an existing life insurance policy to a third-party investor for a cash payment. The buyer takes over premium payments and receives the death benefit when the insured person passes away.
The payout is typically more than the policy’s cash surrender value, but less than the full death benefit. Life settlements are generally considered by older policyholders who no longer need or want their coverage.
How a life settlement converts life insurance into cash
To qualify for a life settlement, policyholders are usually age 65 or older and have a policy with a substantial death benefit. Health status also plays a role, as it affects the buyer’s expected return.
Once the policy is sold, the transaction is permanent. The policyholder receives a lump-sum payment and no longer has any claim to the policy or its future benefits.
When life settlements are typically considered
Life settlements are often explored when:
- The original purpose of the policy, like business succession or estate taxes, no longer applies.
- Premiums have become unaffordable.
- There are no longer dependents relying on the death benefit.
- Immediate cash flow is needed for healthcare or living expenses.
Key trade-offs to understand
The biggest trade-off with a life settlement is giving up the death benefit, which can significantly affect your estate plans and surviving family members. There may also be tax consequences depending on how much was paid into the policy and how the proceeds are structured. Because the transaction involves third-party buyers and brokers, life settlements can be complex and require careful review.
Reverse mortgage or life settlement: Which is the better option?
A reverse mortgage may make more sense for homeowners who want to age in place, need flexible access to cash over time, and consider their home their primary financial asset. It can be especially valuable for those looking to manage cash flow without selling investments or downsizing.
A life settlement may be a better fit for those who no longer need life insurance coverage and prefer a lump-sum payout. It can be appealing when premiums are burdensome or when short-term liquidity is the top priority
The bottom line on reverse mortgage vs life settlement
Reverse mortgages and life settlements are both tools designed to unlock value from assets that might otherwise remain untapped. The right choice depends on whether you value long-term income, immediate cash, or flexibility. Understanding the trade-offs of each option will help you make the right decision.
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