Many continuing care retirement communities, often referred to as CCRCs or “life plan communities,” require an entry fee upon entry. CCRC entry fees are usually refundable to the resident or the resident’s heirs in some form. Entry fees under a traditional CCRC contract are refundable on a declining basis over the first few years of occupancy. After such time there is no remaining entry fee refund. This is generally referred to in the industry as a declining-balance refund.
Other types of entry fee contracts decline in the same was as a traditional contract, but never go below a certain point. For example, a 75% refundable contract may decline over the first year or two just like a traditional contract, but it never declines below 75%. Therefore, the resident or the resident’s heir will receive back 75% of the entry fee no matter how long they live in the community.
The tradeoff: All other things being equal, the entry fee for traditional, declining balance CCRC contract would be lower than it would be for the refundable entry fee contract.
So the question becomes whether to pay the higher entry fee and get a refund later (either if the resident moves or to the family at death) or choose the lower priced traditional entry fee plan and keep the difference. While there are many variables that would ultimately determine which option works out better financially, in general the shorter the time frame the better the refundable contract will look. Why? Because if a resident instead goes with the traditional contract and keeps the difference in their own savings or investment account, it has less time to grow and make up (or exceed) the difference. It’s simply a time-value of money calculation.
CCRC entry fee refund examples
Here are two more detailed examples of how the above two entry fee contract types work:
Declining Balance Entry Fee Contract:
The entry fee for a two-bedroom cottage at ABC Community is $290,000. Under the traditional contract, the community gets 4 percent of the entry fee upfront and then it amortizes at 2 percent each month for the next four years, totaling 100 percent. If, for instance, the resident moves out of the CCRC or passes away in the thirty-sixth month, then 76 percent of the entry fee, or 220,400, stays with the community [4 percent + (2 percent times 36 months)]. The remaining 24 percent, or $69,600, would go to the resident or the resident’s heirs. If the resident is still living in the community after four years, there would be no remaining refund available from that point forward.
Refundable Entry Fee Contract:
ABC Community also offers a 50 percent refundable contract. If the resident elects this option, the entry fee for the same unit used in the example above is now $380,000—an increase of about 31 percent over the traditional contract fee. In this case, the community still amortizes 4 percent of the entry fee up-front and then 2 percent per month for the next 23 months. This is a total of 50 percent that is retained by the community [4 percent + (2 percent x 23)]. After two years the community does not further amortize any of the entry fee so the resident or the resident’s heirs receive the full 50 percent refund. In this example, the resident, or the resident’s estate, will receive back a minimum of $190,000 [50 percent x $380,000] no matter how long they live in the community, and possibly more if the occurrence takes place within the first two years.
If you or a loved one is considering a moving to a CCRC/life plan community with a refundable entry fee contract it is important to be clear on what the stipulations are for receiving such a refund. For example, does the residential unit have to be re-occupied before the refund will be paid? Does a new entry fee need to be received on the residence first? If so, do monthly fees continue during that period of time? Is there a priority order in which entry fee refunds are paid? And are there certain factors that could impact the amount of the refund? Understanding these details can help you make a better-informed decision.
By myLifeSite