Retired seniors with equity in their home, who depend on pensions rather than a bucket of financial assets, can supplement their pension income using a HECM reverse mortgage in two different ways. One way is to choose the “tenure” option under the HECM program, and receive a fixed annuity payment for as long as they remain in the house. The second way is to choose the line of credit option, using some or all of it to purchase an immediate annuity from a life insurance company.
Advantages and Disadvantages
While the HECM tenure annuity pays a little less than the life annuity at most given ages, the borrower retains ownership of the reserve account underlying the annuity. This allows him to change his mind from time to time and switch to a credit line for the reserve amount still available. And if he dies early, the tenure continues to his spouse or the remaining equity in his home goes to the estate. On a life company annuity, in contrast, early death terminates all payments unless the policy has a guaranteed payout, which would reduce the monthly annuity amount he received and make it nearly identical to the HECM tenure payment option.
On the other side of the ledger, if the borrower gets sick and has to go to a nursing home, the HECM annuity will terminate after a year of non-occupancy. That’s why it is called a “tenure payment” rather than a “life annuity”. However, the homeowner can take all remaining monies out before that year is up and then sell the house to acquire the remaining equity. With a life company annuity, in contrast, the senior could be in a nursing home indefinitely without shutting off the annuity.
Regulations that Govern
Life Annuity Purchases With HECM Funds
At an early stage, after 1998, in the evolution of the HECM, some seniors were induced to take out mortgages for the express purpose of purchasing life annuities. The duel licensed loan officer/insurance agent involved earned two commissions, and the needs of the senior were often disregarded. As a result, a law was passed that in effect prevents a lender from disbursing funds at the closing that will be used to purchase an annuity.
California Civil Code Section 1923.2(i) states that:
“A lender or any other person that participates in the origination
of the mortgage shall not require an applicant for a reverse
mortgage to purchase an annuity as a condition of obtaining
a reverse mortgage loan.”
But the law doesn’t get in the way of seniors whose retirement plan includes the purchase of a life annuity from an insurance company. They need only to take a HECM credit line at closing, then draw on the line later to pay for the annuity. This keeps the HECM transaction and the annuity transaction separate, as they should be, and allows the senior to shop for them separately.
- Thanks to The Mortgage Professor for information used here.
Marc has 36 years in financial services and 6 years in teaching.
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