The major reverse mortgage programs allow borrowers the choice of receiving fixed monthly loan payments for as long as they remain owners of the home. Under the Home Equity Conversion Mortgage (HECM) program, this payment option is known as the “tenure” or “lifetime income” plan. Although this payment option can provide the elderly homeowner with a steady, guaranteed income for as long as they own the home (even until death), only about 5% of HECM borrowers choose it.

One big reason is fear that declining health, death of a spouse, or other factor could force the sale of the home. Payments under the HECM tenure option would cease and the loan become payable once the homeowner sells.

To address this issue, some advisors recommend taking HECM loan payments in the form of a “lump-sum” advance and using the funds to purchase an immediate annuity. An immediate annuity is an investment you buy from an insurance company that pays a regular monthly sum of money for a fixed period or for life.

The main benefit of this strategy is that the guaranteed monthly income stream stays in place even if the home has to be sold. Another benefit: the immediate annuity usually will produce a larger monthly payment than the monthly payment under the HECM tenure option. There are a couple of reasons for this:

• Federal law specifies how HECM tenure payments will be calculated and the calculation method is intentionally conservative to protect the government against risk that the final loan amount will exceed the home’s value. For example, HECM borrowers electing the tenure payment plan are assumed to live until they are 100 years old. This type of assumption is much more conservative than the actuarial assumptions used by insurance companies to price annuity products. Similarly, federal law prohibits taking gender into account despite the fact women are known to live longer than men. Immediate annuities are based on gender-based actuarial tables.
• Immediate annuities are purchased through an open-market with competitive pricing pressures benefitting consumers. Website (such as http://www.immediateannuities.com/ further empower consumers who can shop around for the company offering the best deal.

A recent study from Boston College’s Center for Retirement Research lends further support to the prudence of the reverse annuity mortgage strategy. One aim of the study was to find the optimal payment form for taking a reverse mortgage. The conclusion is that the lifetime income (tenure option) is generally the best choice. But, particularly for older homeowners taking out a reverse mortgage after other financial wealth (such as stocks) has been exhausted, the combination reverse mortgage annuity strategy likely will produce the best financial outcome:

“(A)n alternative to taking a lifetime income from a reverse mortgage is to take a lump sum and use that to purchase an immediate annuity from an insurance company. At age 65, these two alternatives produce very similar incomes, but at older ages, the strategy of combining a reverse mortgage with an immediate annuity yields a substantially higher income. So the dominant strategy is probably to spend down one’s financial wealth, take a reverse mortgage, and use the proceeds to buy an annuity.” (Emphasis added.)

With today’s internet tools, it is easy to get numbers to compare for you own situation. Simply use a reverse mortgage calculator to determine both the (a) lump-sum amount and the (b) monthly tenure payment you could quality for. Then go to www.immediateannuities.com to see how much your (c) monthly annuity would be if you used the lump-sum reverse mortgage loan for this purpose. The difference between (b) and (c) is the additional monthly income from the annuity. Here are the results for a few sample comparisons we did:

Single Male; $200k Home; $0 Mortgage; Monthly Adj HECM	Age 65	Age 75	Age 85
Reverse Mortgage: Monthly Tenure Payment	$613	$820	$1,245
Reverse Mortgage: Lump-sum Payment	$102,162	$122,291	$143,899
Immediate Annuity: Monthly Payment if Lump-Sum Used for Annuity	$706	$1,123	$1,982

A Few More Related Articles of Interest:

RAM - Reverse Annuity Mortgage

Reverse Annuity Mortgage - Clarifying the Term

Retirement Deals to Watch Out For

Reasons Why People Don’t Choose Lifetime Payments

California Reverse Mortgage Fraud Bill Signed Into Law