Question: My husband and I are considering selling our home (current value of $325,000) and moving into a senior retirement village. We can have a smaller residence built for us for $200,000 and pay a monthly fee instead of having to keep up the yard, make repairs, etc.

Although we are both in good health -- he is 72 and I am 69, we are concerned about long-term care should one or both of us become chronically ill. This community provides progressive living so that, should one or both of us need assisted living or nursing care, we will be paid a percentage of the $200,000 to move out of our new residence and go on to the next level of care. My husband receives a pension, and we both get Social Security and some interest and dividends from our investments. We can’t see the downside to our plan. Are we missing something?

Answer: Progressive living communities for seniors have been cropping up throughout the United States, and many are successful because a growing number of seniors share your concerns. While there are many benefits to this type of living, there are drawbacks that should be addressed.

In your situation, when you sell your home, you will be able to exclude all of the capital gain. Therefore, assuming you receive $325,000, after anteing up for your new residence, you will have $125,000 remaining that can be invested and who knows what interest rate.

Since you will not receive a property interest in your” new home”, the contract you will sign will be a “service agreement” which will establish what is legally expected of you and the owner. For that reason, you should make sure you contract with the entity that bears the financial responsibility for the operation of the facility and make sure that entity is financially sound. If the owner goes belly-up, your investment may well go with it.

In addition, residents’ rights to form an association to deal with management policy should be clearly spelled out. Will you be entitled to a personal income tax deduction for the pro-rata share of property taxes associated with your residence? Are the monthly charges segregated into medical and non-medical components so that you may be entitled to income tax deductions?

Since the cost of almost everything is increasing and returns on investment have been freefalling, you can expect increased monthly fees, and the question is whether you can afford it. That’s why, if the contract does not allow for increased monthly fees or strictly limits increases, the owner of the facility may run into financial difficulties which is not in your best interest.

All reasons for termination of your contract to live in your new residence should be specifically stated in the contract along with what health conditions will justify either or both of you being transferred to the assisted living or nursing home.

For example, if one of you moves because of health reasons, will the other remain in the residence? What fees will be charged? Refund policies upon death or moving must be clearly stated. And remember: your refund will be cost-based and will not include appreciation of the property in which you live.

If you or your husband require assisted living or nursing home care, what happens if there is no room for you in those portions of the facility? What happens if one of you dies and the other remarries?

Progressive senior living can be a wonderful solution for some if the underlying entity if financially sound, but with the increased costs of care, we still believe that long-term care insurance should be examined to offset potential future care costs.

Be sure to have a lawyer review your contracts. In this economy, the facility may well be willing to negotiate with you. But being overly agreeable to reduce your obligations may be the sign of a financially weak owner. Be careful.