Many continuing care retirement communities (commonly called CCRCs or life plan communities) require an entry fee when a resident joins. These entry fees are often refundable, either to the resident or to their heirs, depending on the contract. Under a traditional CCRC agreement, the entry fee refund typically declines over the first few years of residence and then ends entirely. This structure is known as a declining-balance refund.
Other contracts use a partially refundable structure that also amortizes the entry fee at the start but never drops below a set percentage. For instance, a 75% refundable contract may amortize similarly to a traditional contract in the early months but guarantees at least 75% of the entry fee will be returned, regardless of how long the resident lives in the community.
The tradeoff is straightforward: all else equal, a traditional declining-balance entry fee will be lower than an entry fee that guarantees a refund. Choosing between them depends on personal priorities and financial goals—whether you prefer a lower upfront cost or a higher upfront price with a guaranteed refund.
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Deciding which option is better often comes down to the expected time frame. If you expect a shorter stay, a refundable contract usually looks better because you will receive a larger refund sooner. If you choose the traditional, lower-priced option, the money you save up front must grow over time to catch up to the value of the refundable contract. In other words, it’s a time-value-of-money decision: the longer you can invest the difference, the more likely the traditional option can equal or exceed the refundable option’s benefit.
CCRC entry fee refund examples
Below are two practical examples showing how declining-balance and refundable entry fee contracts typically work.
Declining Balance Entry Fee Contract:
Suppose the entry fee for a two-bedroom cottage at ABC Community is $290,000. Under a traditional contract the community retains 4% of the entry fee up front and then amortizes 2% each month for the next 48 months until the full amount is retained. If the resident leaves or dies in the 36th month, the community will have retained 76% of the entry fee [4% + (2% × 36 months)], which equals $220,400. The remaining 24%, or $69,600, would be refunded to the resident or their heirs. If the resident remains beyond four years, no refund would be available after that point.
Refundable Entry Fee Contract:
ABC Community also offers a 50% refundable contract. In this case the entry fee for the same unit is $380,000—about 31% higher than the traditional fee. The community retains 4% at signing and then 2% per month for 23 months, totaling the 50% retention [4% + (2% × 23)]. After two years the community stops amortizing and the resident or their heirs are guaranteed a 50% refund, or at least $190,000. If the resident leaves or passes away within those first two years, they may receive a larger refund based on the amortization schedule in effect during that time.
If you are considering a CCRC or life plan community with a refundable entry fee, make sure you understand the specific terms that govern refunds. Important details include whether the residence must be reoccupied before a refund is paid, whether a new entry fee must be received for the unit, whether monthly fees continue during any vacancy, the order in which refunds are paid, and any circumstances that could reduce the refund amount. Clear answers to these questions will help you compare contracts and choose the option that best fits your financial and personal needs.
Post updated on July 26, 2024