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Insure Against Depletion of Financial Assets
Insure Against Depletion of Financial Assets

Millions of seniors retire with a modest nest egg that they intend to use up during their retirement years, but face the risk that their funds will be fully depleted while they are still alive. They may follow the advice of a financial planner who tells them how much of their fund they can draw each year consistent with a low probability of running out of money. However, a low probability of going broke can be a source of continued anxiety.

A standard remedy for anxiety associated with low-probability hazards to life, limb or pocketbook is insurance. In this case, the insurance is provided by a HECM credit line, which if unused grows month by month at a rate equal to the interest rate on the HECM, which changes every month, plus the 1.25% insurance premium.

While many borrowers fear adjustable rate mortgages because rising rates increase the mortgage payment, that is only true on standard mortgages. On a HECM there is no required payment and rising rates increase the growth of an unused credit line. Seniors using the HECM to insure against the possibility that their financial assets will run out benefit from rising interest rates. When interest rates begin to rise in the future, the growth in unused lines will accelerate.

A HECM term payment can also be used to prevent depletion of financial assets. This approach is discussed in Increase Spendable Funds For a Limited Period.