Help Your Parents with the New Financial Options for Older Americans

A few years ago, a woman in her 80s—let's call her Anne—received a call from a charming man, offering a financial opportunity that sounded too good to pass up. By the end of the call, she'd agreed to transfer most of her savings into a variable annuity.

After she hung up, though, she started to doubt herself. Was the annuity really the foolproof solution that the agent had made it out to be? She called her friend Lewis Mandell—a financial literacy expert.

Mandell looked into the annuity Anne had purchased, and saw that whatever potential it held was negated by an astronomical commission. Fortunately, he knew that by law she had three days to revoke her purchase. Thanks to Mandell’s advice, Anne did just that—and avoided putting her savings at risk.

Not all complex financial products carry the same potential for harm. Many options marketed to seniors have tremendous potential in the right circumstances. But according to Mandell, older people can be more susceptible to poor choices because of the effects of aging.

What if one of your parents had been presented with the offer Anne received? By learning about the complex financial options that older Americans are likely to encounter, you can help your parents navigate this territory. Consider the following products:

Reverse mortgages
A reverse mortgage, also known as a home equity mortgage, allows people age 62 and older to borrow against the equity in their homes. Borrowers can receive the funds as a lump sum, a series of monthly payments or as a line of credit. The repayment on the interest and money borrowed is deferred until the borrower dies or sells the home.

•    Pros: Reverse mortgages can be a good source of income for people of limited means whose assets are largely in their home. It is a way to recreate the steady cash flow of a paycheck. 

•    Cons: Borrowers are at risk of losing their homes if they default on their loans. Reverse mortgages also tend to come with relatively high fees, making them less suitable for homeowners who plan to move in the next few years.

Annuities
An annuity is a tax-deferred retirement vehicle that provides a steady source of income for a fixed amount of time. Fixed annuities pay the same amount over time, while variable annuities allow you to choose from a selection of investments, and the amount it pays out depends on their performance.

•    Pros: Fixed annuities offer predictable income over time, and the institution that offers it will assume the risk on any investments made with the money. Variable annuities can boost investors’ savings by exposing them to the long-term growth potential of the markets. And any gains they earn aren't taxed until withdrawal. These products can be a good option for those who have already maxed out their 401(k) and IRA contributions.

•    Cons: The income from fixed annuities is subject to inflation—your fixed income may have a decreased spending power as the years go on. Variable annuities are subject to market fluctuations: If your investments decline, you get a lower pay out (though the payments often have a guaranteed floor). And many variable annuities—like the one Anne almost bought—also come with steep sales premiums, maintenance fees and surrender fees.

Life insurance settlements
In a life insurance settlement, a life-settlement company pays cash in exchange for ownership of an individual’s life insurance policy. The policyholder no longer pays the premiums, and when the policyholder dies, the benefit goes to the investor who now owns it.

•    Pros: If your parents could use the cash now, and have few other options, then a life insurance settlement could make sense. Another option to explore is the possibility of borrowing against the policy, rather than selling it. That option allows your parents to keep their insurance, rather than transferring it permanently.

•    Cons: Your parents are unlikely to receive the full face value of a policy when selling it to a settlement company. The amount they receive depends partly on their life expectancy—and sharing personal health information is part of the application process. That loss of privacy is worth considering. What's more, people who choose this option may be subject to capital gains taxes, and the large lump-sum payment may push them into a higher tax bracket.

Talking through tough decisions
If your parents are considering a big financial move, you can be an important resource—but you shouldn't be the only one. Make sure they speak with a knowledgeable advisor or family friend who can help find the right option for their circumstances. A good support network can help people continue to make the best decisions for themselves and for their families.

Andrew Palmer is a writer who has covered everything from reality television to the intricacies of estate planning for blended families. His areas of expertise include personal finance, retirement planning, investing, and the wealth management industry.