Reverse Mortgages and Life Expectancy
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One of the most important (but least discussed) aspects of reverse mortage planning is life expectancy. From the lender’s standpoint, life expectancy is crucial in determining how much can be loaned, how large monthly payments will be (under term or tenure payment options), and how much needs to be set aside from the loan to pay for loan servicing costs.
From the borrower’s standpoint, a realistic analysis of life expectancy is critical in detemining whether a reverse mortgage makes financial sense. Primarily this is because high upfront costs need to be amortized (i.e. smoothed out) over at least 7-10 years to be reasonable. For borrowers who die within a few years of taking out a reverse mortgage, the transaction will likely end up having been very expensive.
The key life expectancy factor a reverse mortgage borrower needs to be concerned with is “given my current age, how many more years should I expect to live?” Surprisingly, the older you are, the better your chances of living longer than the national averages.
For example, the average life expectancy for a male in the U.S. is about 74 years. But if you are currently 62 years old, you are statistically expected to live another 18.21 years - to 80 years old. This is because you have already outlived many of the people born in the same year. The Social Security Administration maintains a regularly updated life expectancy actuarial chart at its website. Sample life expectancies from the SSA tables are shown below:
Remaining Life Expectancy at Different Ages Current Age Male Female 62 18.21 21.43 65 16.05 19.06 70 12.75 15.35 75 9.83 11.97 80 7.31 8.95 85 5.24 6.42 90 3.7 4.47
When you apply for a home equity conversion mortgage (HECM), the most popular reverse mortgage, lenders use actuarial charts similar to those above to project how many more years you (or your spouse, whomever is younger) will live. This projection is then factored into the loan’s financial calculations.
No adjustments are made for being overweight, smoking, poor health, or other factors. You are simply assumed to have a specific remaining lifespan based on current age.
The savvy borrower will go a step further and develop a more refined assessment of their life expectancy taking into account personal health and lifestyle information. An excellent tool for doing this is the Longevity Game available at Northwestern Mutual website.
Working through this exercise with honest answers (and, perhaps consultation with your doctor) will help put you in a much better position for determining whether a reverse mortgage makes financial sense for you.
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