The Missing Lever: The Role of Home Equity in Planning for In-Home Care

Most clients have an opinion about where they would prefer to receive care as they age. For many, the answer is simple: at home.

The harder question is how they will pay for it.

According to the U.S. Department of Health and Human Services, roughly 7 in 10 people turning 65 will need some form of long-term care during their lifetime. And the 2025 national median cost for 44 hours per week of in-home care is more than $80,000 per year. For financial advisors, this creates a common planning challenge.

We can model retirement income. We can allocate investment portfolios. We can evaluate insurance. We can build cash reserves. But there may be another resource sitting right in the middle of the client's balance sheet that receives surprisingly little attention:

Their home equity.

Not as a last resort, not as an emergency source of money after everything else has been exhausted, but as a potential part of the long-term care funding strategy from the beginning.

The Long-Term Care Conversation Is Often Too Binary

Long-term care planning can quickly turn into a discussion about whether or not a client should purchase long-term care insurance. And for clients who can qualify, comfortably afford the premium, and are willing to maintain the coverage, insurance can provide tremendous leverage. The problem, as many advisors have discovered, is that not every client fits neatly into that box.

Some cannot qualify medically, others can qualify, but don't like the premiums. Some waited too long, some are reluctant to commit substantial dollars to coverage they may never use, and many recognize that the best time to purchase insurance comes at a time when there are many competing demands for capital; college expenses, second homes, and our own retirement savings.  And for many, they simply do nothing.

That last group may be the most important.

The better comparison isn't always: Long-term care insurance, self-insure, or home equity?

Sometimes it is: A coordinated funding strategy or no strategy at all?

That is where home equity deserves a seat at the table.

Two Planning Clocks Are Running in Opposite Directions

One of the most important issues in long-term care planning is timing. Insurance generally becomes more difficult and more expensive to obtain as a client ages. Health changes can also change the equation dramatically.

A Home Equity Conversion Mortgage line of credit works differently.

There is no medical underwriting. Qualification is based on factors such as age, home equity and the required financial assessment, rather than whether the homeowner has developed diabetes, suffered a stroke, or experienced another medical event.

There is also another important distinction.

An unused HECM line of credit can increase over time based on the loan's contractual growth feature. The available credit grows monthly at a rate tied to the note rate plus the ongoing FHA mortgage insurance premium rate. That means the conversation looks very different at 62 than it does at 72 or 82.

The client doesn't necessarily need the money today. In fact, that may be exactly the point. Establishing access to home equity while the client is healthy and financially stable can create an additional source of future liquidity that has years to grow before a care event ever occurs.

As an example, an $850,000 mortgage-free home establishes approximately $240,000 of available credit at age 62. Under the assumptions used in the example, that available line grows to approximately $736,000 by age 77 without requiring the homeowner to draw the funds along the way.

That doesn't make the strategy free, and it doesn't make it right for every client. It does make time a potentially valuable planning asset.

Home Equity Is Not a Free Lunch

This is an important distinction, particularly when discussing the strategy with your clients. A HECM Line of Credit is still a mortgage. There are upfront costs, including FHA mortgage insurance, potential origination charges and other closing costs. If those expenses are financed into the loan, they become part of the loan balance. With payments being optional, when unpaid, interest and ongoing mortgage insurance accrue on outstanding balances.

And if the client eventually draws from the line to pay for care, those dollars will reduce the equity ultimately available to the estate. That needs to be understood clearly. But, as we know, every long-term care strategy has a cost.

Insurance has premiums, self-funding requires capital, portfolio withdrawals can create tax consequences or force the sale of assets during unfavorable markets. Doing nothing carries risk too. The planning question isn't whether one option has a cost and another does not. It is whether the cost, flexibility, and potential benefit of each strategy make sense for that particular family.

Home Equity Can Play More Than One Role

This is where the conversation gets more interesting. Home equity doesn't have to replace insurance; it can serve several different purposes. For one client, a HECM line of credit may be a standby reserve because insurance is unavailable or unattractive.

For another, restructuring an existing mortgage may improve monthly cash flow and help make insurance premiums easier to carry.

For another, home equity may become a supplemental care reserve, covering costs that extend beyond an insurance policy's benefit period.

And for some retirees, the line may play an even broader role in retirement income planning.

Consider a client who needs care during a significant market downturn. Without another source of liquidity, the family may be forced to withdraw additional money from an investment portfolio precisely when the portfolio is down. A coordinated home equity strategy can potentially provide another choice. Instead of selling investments following a poor market year, the client may draw from their revolving home equity line.

During an in-home care event, some or all of the incremental care expense might also come from the line rather than the investment portfolio. That is no longer simply a conversation about paying a home health aide. It becomes a conversation about protecting the larger retirement plan.

Which Strategy Wins?

As always, it depends. If a client can qualify for long-term care insurance, can comfortably afford it and values the coverage, insurance may offer the greatest leverage.

If insurance is unavailable or premiums create too much pressure on cash flow, home equity may provide a flexible alternative.

And in many situations, the answer may be a combination of the two.

A smaller insurance policy might cover a portion of the risk while home equity creates an additional reserve for longer care periods, deductibles, uncovered expenses or other retirement needs. The goal isn't to prove that one product is better. The goal is to identify all of your client's available resources and intentionally coordinate them.

The Conversation Should Happen Earlier

Too often, home equity enters the financial planning conversation when a client is already in trouble. The portfolio is declining, care is already needed, cash flow is tight, kids may be covering expenses; the family is looking for options.

By then, home equity may still help, but a significant portion of its planning value may already have been lost. A client doesn't have to wait until they need long-term care to plan for long-term care. And they don't have to wait until they need money from their home to begin thinking strategically about their home equity.

Hopefully this reframes some of your thinking about ways to address the risk of in home care, and the role that home equity can play in the equation. 

If you’re interested in learning more, there is a deeper conversation we explore in our Advisor Insights webinar, “The Missing Lever: Home Equity in the Long-Term Care Conversation.”

We'll look at the timing advantage, compare the economics of several funding approaches, and work through three hypothetical client scenarios:

• A client outside the traditional long-term care insurance sweet spot
• A homeowner using mortgage restructuring to improve cash flow while maintaining an insurance strategy
• A retirement income case examining how a coordinated HECM strategy can affect the probability of long-term plan success

Most importantly, we'll discuss a practical framework advisors can use to determine when insurance fits, when home equity fits, and when a combination may provide the better solution.

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If you're advising homeowners approaching or already in retirement, home equity is likely one of the largest assets on their balance sheet. The question isn't simply whether they should use it.

The better question is:

What role, if any, should it play in the plan?

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The examples discussed are hypothetical and for educational purposes only. HECM availability, principal limits, interest rates, costs and other program terms may change. Any strategy should be evaluated based on the client's individual circumstances and in coordination with their financial, tax, legal and insurance professionals.