Seniors with equity built up in their homes can take advantage of the reverse annuity mortgage to get a home equity loan and use the funds to purchase a payout annuity and generate additional retirement income. The program has quickly become popular among people at or near retirement looking for any way to enhance their standard of living through retirement. As with all money management plans, you should consider all pros and cons before making a decision.
Guaranteed Lifetime Income
Typically the key advantage of a payout annuity is the fact that you cannot outlive your income. Insurance companies price the annuity based on your age and design a payout that will continue until your death. Joint-and-last-survivor annuities can also provide a guaranteed income until both you and your spouse are deceased.
Keep Your Home
While some seniors feel they have to sell their home and downsize to get some additional income, the reverse mortgage annuity lets you stay in your current home since you are using a home equity loan to generate a payout annuity. And even if your debt from the loan becomes larger than the home's value, a lender cannot force you to sell your home or go after your other assets.
Home Sold at Death
The entire purpose of the reverse mortgage annuity is to use your home equity loan to generate additional income, and use the value of your home to repay the loan when you no longer live in the home. For many people, this means the home will be sold at death, and therefore the home does not remain in the family. One solution is to buy a insurance policy to repay the home equity loan at death, but it will reduce your amount of spendable income.
Large Upfront Loan
The interest cost of a reverse mortgage with an annuity can be higher than the interest costs associated with a series of regular smaller loans. With the reverse annuity mortgage, you borrow as much as possible upfront to purchase your annuity and incur larger interest costs as opposed to taking out smaller monthly loan payments.
Lack of Flexibility
Although your income is guaranteed for life, your payout annuity is locked-in, and you will not be able to make any changes to your income stream to adjust to any future changing circumstances.
SSI and Medicaid Reductions
Annuity payouts are considered income by Supplemental Security Income and Medicaid. Your SSI benefit payments will be reduced on a dollar-for-dollar basis, and the annuity income may make you ineligible for Medicaid.
Taxable Interest Payments
While regular loan advances from a home equity line of credit are not taxable, the interest portion of your payout annuity will be treated as taxable income. As interest accrues, you'll essentially accumulate interest upon interest. The loan may outgrow the equity left in your home so you (and your heirs) will be left with no assets in the property.
Long Deferral Periods
Some annuities have deferral periods of months or even years before the payouts begin. You should exercise care before making a decision as you may not receive as much income as you originally thought.
Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.