Reverse mortgages can be a boon, but come with potential risks

Dear Liz: Please write about the issues people can face when they have a reverse mortgage and need to move out to get long-term care. My mother, who is now 94 and lives on a small teacher’s pension, got a reverse mortgage in her late 60s to donate to charity because she was sure she would not live past her 80s. Now she needs long-term care and does not have the funds for it. If she moves out, she is required to sell the home. The capital gains taxes will eat up any remaining equity after that reverse loan is paid.

Answer: A reverse mortgage can be a helpful tool for people 62 or older who are house rich and cash poor. These mortgages allow people to tap some of their equity without requiring that the balances be paid back until the borrower dies, sells the home or permanently moves out.

The problem is that the debt can grow over time and leave too little equity for late-in-life expenses, such as long-term care.

Of course, many people make the mistake your mother made by underestimating their longevity risk — the chance they’ll live longer than expected and run short of money. They focus on maximizing current income by saving too little, taking out reverse mortgages too soon or applying early for Social Security without fully considering what these decisions could mean for their future selves.

Please get your mother in touch with an elder law attorney who can assess her situation and suggest alternatives. He can advise her about qualifying for Medicaid, the government health program for the poor. Medicaid will pay for long-term care expenses but rules vary by state, and a mistake could delay her eligibility.

Dear Liz: I was married for 10 years before divorcing. My second marriage also ended in divorce. I married for the third time and was widowed. I am collecting a survivor benefit. Am I also entitled to receive a benefit from my first marriage of 10 years? My first husband is still living.

Answer: Social Security is basically “either/or,” not “and.” If you qualify for two benefits, you typically get the larger check — not both.

Since you are currently unmarried, your ex is still living and your first marriage lasted 10 years, you may be eligible for a divorced spousal benefit. That can be up to 50% of your first husband’s benefit at his full retirement age.

You would only receive that benefit, however, if it were larger than the survivor benefit you’re currently receiving. Survivor benefits are up to 100% of the late worker’s check, so your first divorced spousal benefit would have to be substantially larger than what your late husband received to make a switch. You can call Social Security at (800) 772-1213 to inquire.

Dear Liz: I’ve read that after age 65, health savings account money can be spent on anything. Your recent column said it could be spent only on medical expenses. Which is true?

Answer: At age 65, there is no longer a penalty if you spend HSA money on something other than qualifying medical expenses. Those withdrawals will be subject to income tax, however, so you’d be losing one of your HSA’s three tax breaks (deductions on contributions, tax-deferred growth and tax-free withdrawals for qualified medical expenses).

You don’t have to have incurred the medical expenses in the same year you spend the money for the withdrawals to be tax-free, however. Savvy HSA owners keep records of any out-of-pocket medical expenses that weren’t reimbursed by insurance, flexible savings accounts or other means. As long as the unreimbursed expenses were incurred after the HSA was established, they can be used to justify tax-free withdrawals years or even decades in the future.

Dear Liz: You’ve written about health maintenance organizations and how they may not cover care outside their networks. Be aware that HMOs will sometimes cover specialists outside of their network, especially in cases where they don’t have that type of specialist, or for an unusual condition needing a second opinion. It doesn’t hurt to ask! I did that when I knew that I should see an orthopedic oncologist to evaluate my scans recently, and my HMO did not have that specialist. I found that type of doctor, and then requested a referral and obtained it, and so it was totally covered. I also did that in 2007 when I had a similar condition needing surgery, and I even had surgery in a hospital different from the one that my HMO normally used, all totally covered.

Answer: Thanks for sharing your experience! HMOs typically don’t cover out-of-network care except in emergencies, but there may be exceptions. HMO members should educate themselves about their plan’s coverage and learn how to advocate for their care. It can also help to have a primary care physician who understands the system and is willing to ask for exceptions to HMO rules when appropriate.

Liz Weston, Certified Financial Planner, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.