Thinking About Annuities….
August 21st, 2008
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The investment community — those who sell investments — seems to be getting the message that reverse mortgages and annuities don’t mix.
An exceptional article posted with InvestmentNews.com — a site directed toward financial advisers — lays out the issue with great clarity:
“Problems with cross-selling inappropriate products such as annuities or long term care insurance policies to seniors who take out reverse mortgages have caused enough concern that a provision was added to the Housing and Economic Recovery Act of 2008 restricting such practices,” says reporter Sara Hansard.
“Under the new law,” she says, “financial companies must also institute ‘firewalls’ to prevent the cross-selling of reverse mortgages with other financial products, loan limits for reverse mortgages were raised, and more funding was provided for counseling consumers seeking reverse mortgages.”
It would not be surprising to see an effort by the insurance industry to gut the anti-annuity provisions of the 2008 legislation in future years. The argument will be that annuities, in some cases, might plausibly benefit selected reverse mortgage borrowers.
The problem is that no one has figured out a way to distinguish those cases where annuities might work with the very real cases where they do not. One approach might be gut prepayment penalties for any annuity that’s funded with dollars from a reverse mortgage. A second approachÂwould beÂto hold annuity sale commissions in escrow and then release them over a period equal to the annuity’s term. After all, if pay-outs over time are good for seniors, why not for those who sell annuities?
For the full story, see: Reverse mortgage abuses tied to annuity cross-sales
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August 21st, 2008 at 10:30 am
I agree that many or even most annuity sales with reverse mortgages are inappropriate. The question is, much like the FHA bill, which seniors will pay much more for a reverse mortgage over the life of the loan, is this provision solely about the protection of the senior?
Better question: is it to prevent FHA from having to pay out on loans that go upside down?. Or another question: if the consumer is paying huge FHA insurance premiums, isn’t it up to them to make the choice as to where to place their home equity?
I’m a little skeptical.
In some cases the borrower mitigates the consequences of going upside down in the loan by separating the equity. Annuities bypass probate with properly designated beneficiaries. Many times I’ve seen surviving children have to wait one year or more for the home to sell (if there’s equity left), where as an annuity would have paid them immediately even though interest was paid on the amount to purchase the annuity. This becomes more evident in a declining real estate market where time to sell equals a loss of tens of thousands of dollars.
As far as holding annuity commissions in escrow to be paid over several years…sure, why not and let’s make reverse mortgage loan originations paid the same way.
A little tongue-in-cheek , but another viewpoint for originators and watchdogs in the industry to see all sides of the issue.
August 22nd, 2008 at 1:55 pm
Annuities are the only product that can guarantee income to a senior for as long as he or she lives, regardless of home ownership, its structure, and equity.
September 4th, 2008 at 2:25 pm
I don’t understand why anyone would use the proceeds of a reverse mortgage to buy annuities. I’ve seen cases where borrowers were in their eighties and they couldn’t begin to collect on the annuities for ten years! Why would you pay for a reverse mortgage to free up cash and then pay again for an annuity which ties up the cash all over again?