Blog

Combining Annuities with Reverse Mortgages – Did We Just Touch the Third Rail?

New Research in the Journal of Personal Finance Compares Outcomes

Combining SPIAs with Reverse Mortgages Provides a Way to Gain Additional Retirement Income Security

You gotta be kidding me right! I almost fell off  my rocker when I saw this headline and read the paper. Reverse Mortgages and Annuities mentioned in the same sentence without the earth immediately opening up. For those who may not know, reverse mortgages have been the enemy of single premium immediate annuities for the better part of 8 years (since around 2006 or so) and the two can barely be mentioned in the same sentence without something really bad happening.  By this I mean that using ANY money from the proceeds of reverse mortgage to buy an annuity of any sort is a huge violation. Even though the the SPIA in this study was purchased from the investment portfolio, and not from the reverse mortgage proceeds, it still gives me pause. Why?

Read the Article HERE and see excerpt (below)


Reverse Mortgages and SPIA Research


No, No, No – A Different Vantage Point

I have a much different outlook. I have been a practitioner for the last 16 years, and in that time I’ve had more than 6,000 consumer conversations, trained thousands of financial advisors on ways in which the HECM tool could benefit their business and have 2,300 clients who have actually completed a reverse mortgage. But taking the proceeds out of HECM and purchasing an annuity, are you Nuts! {But Don, the article is not advocating that!} I know, but I am just leery when both words appear in the same sentence. 

Every month I teach hundreds of Advisors and I am very careful to always speak about the Three No-No’s regarding reverse mortgage proceeds.

  • NO Annuities | NO Equities  NO Exceptions

And I would not want any advisor to get any ideas of going where the article did not.

History

But why this concern and this reaction to something that is not even presented? History.

Some of you may not know the history of the reverse mortgage and the annuity. When I started in the year 2000, a consumer could go on the AARP website and get a reverse mortgage quote that included a Lump Sum payout, a Line of Credit option, a Monthly Payment and a SPIA.  That’s correct, right there embedded in the software was a John Hancock single premium immediate annuity to be compared alongside with the HECM.  It was a happy marriage that had peacefully co-existed for many years. But then again SPIA’s were paying out at 6,7,8%,9% so it really just made sense.

But as those rates began to drop, the advent of the equity indexed annuity began to emerge.  Solid companies were giving illustrations of “safe money”. It made perfectly good sense to me (and still does) to capture some of the upside of the market with none of the downside risk. Who could be mad at that? And thus began the movement away from SPIA into the new EIA market.

And that’s where it began to get ugly. Advisors, in those days who were making commissions of 8-11% and began to get the evil eye.  And the reverse mortgage because a easy funding source for them to make tons of money.  So in Maine and in Washington State, two advisors each had a client take a HECM and dump 100% of the proceeds into annuity products (which was not the issue per se). But these earlier products had really long and draconian surrender periods. It was not uncommon to see 8,12 or 16 year surrender terms with steep penalties for early access.

So when Mrs. Jones needed a new roof and some repairs and wanted to pull out $30,000, she was hit with a tremendous shock. Penalties on her own money and no liquidity. She told her banker and her daughter and thus the war began. The Insurance Commissioner was called, the Banking Commissioner, The US Congress and Senators Claire Conner McCaskill and Congressman Barney Frank got involved. The NASD (which morphed into FINRA) was involved. People were fired, fined and even punished further than that. And the edict eventually thundered down from above.  DO NOT MENTION REVERSE MORTGAGES AND ANNUITIES IN THE SAME SENTENCE TOGETHER HENCEFORTH, NOW AND FOREVER MORE!

And thus the Financial Cold War between Housing Wealth and Annuities began.

It was never that SPIA, FIA’s or DIA’s were bad, often to the contrary. It was that certain producers were looking more at the commissions than at the implementation of the annuity as part of an overall comprehensive retirement income plan.  Greed killed it. And that greed is not limited to a product or producer. It is the temptation of every advisor who helps people with their money. But nevertheless, we threw out the baby with the bathtub with the bathwater in it.

2011 – 2016

So as the Financial Cold war loomed, something happened that began to cause it to thaw. Beginning in 2009, MetLife’s Mature Market Institute partnered with the National Council on Aging to produce the Study “Tapping Home Equity in Retirement”. This began to change everything.  Not back to where it was before but further than we had been even it times past.

Some real research and significant dialogue about how reverse mortgages could be used in a variety of ways to enhance retirement outcomes (WITHOUT ever taking the proceeds to purchase an annuity) to accomplish it developed.  From that point forward most hostilities began to ease and then cease all together among most fronts. (There are a few holdouts to be sure, but they are like the escaped war prisoner who was never told that the war was actually over).  Insurance companies and investment firms (and even FINRA themselves in 2013) changed their position about the usefulness of home equity in retirement.

But don’t sing Kumbuya just yet. Because, even though all parties have shook hands and hostilities have ceased. The third rail is still live and dangerous: Annuities being purchased with HECM proceeds.  Again, I know “the SPIA in this study was purchased from the investment portfolio, and not from the reverse mortgage proceeds” 

I Didn’t Get the Memo

SPIA Conclusion

As an educator practitioner, let me say, I never got a Memo!  What memo? The ones that says, it now OK to talk about HECM proceeds and Annuities in the same sentence. Are you serious, talk about them? Yes. If a consumer were to say to me that they were considering using HECM proceeds to purchase an annuity, there are 2-3 additional forms they would fill out and the truth is, I would say to them that I could not help them and simply leave the appointment.

There is a case right now where the attorney general of Massachusetts is aggressively pursing criminal charges against a reverse mortgage loan originator and a financial advisor who provided variable annuities to that client.  That is happening right Now! And from what I understand the loan originator did nothing wrong, except he may have known what the advisor was planning and did not walk away.  It’s crazy and perhaps an overreach on the part of the attorney, but it does tell you the climate we have lived in for the last 10 years.

S0 yes, I see the academicians writing about it and waxing eloquent and profound,  (and stating that it could be great for the client), A fact that was never disputed. But I still have not seen anything that says it would be anything other than High Treason to use a reverse mortgage to purchase an annuity. {I know, the article does not say that), but having lived this dance for 16 years, I just wanted to be very clear just in case someone had any ideas.  Note to File: “Don’t use reverse mortgage proceeds to buy an annuity”

I know the idea of the scholarship is to weigh the alternatives, {and it does a great job of this} but from the practitioner side, the question still arises; where COULD a client find extra money to purchase an annuity if they didn’t have it in their portfolio…? That’s the concern. Putting Ideas into peoples head

Well anyway, I must move on.  So until I get word from on High that its ok to resume and even mentioned annuities and reverse mortgages in the same sentence, I shall carry on as instructed.

Nevertheless the excellent Article I saw today begins a well needed dialogue.  Hopefully we will start to see some changes, good changes and needed. But If only we could change the temptation and greed of the human heart.

– dg


Endnote

I found this comment from a friends LinkedIn page that I found very helpful:

The principal component of both SPIA distributions and HECM payouts is cash flow; it is not income. While there is an income component to SPIAs, there is also a return of capital component. With HECM payouts there is no return of capital or income. Yet the heading used for the column showing the total annual cash flow from both is mislabeled as “Income from tenure and SPIA.”

There is once again a drive within the industry to rename debt proceeds something else like home equity which is ridiculous. Home equity does not convert into cash without a vehicle to do that or through a sale of some or all of the interests in a home. Home equity is the name for the answer to a specific subtraction problem. It is not an asset but rather a net asset.

SPIAs and HECMs are very different and one of the chief ways in which they differ is portability. As to which may be best, the facts and circumstances of the prospect must be carefully reviewed. Depending on facts and circumstances, SPIAs, HECMs, or both can improve cash inflow for many, many retirees. Again there is a measure of financial security with both of these products which many other financial products do not provide.


DonGraves-AmericanCollege

Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
Don Graves, RICP® is a Retirement Income Certified Professional and one of the Nation’s Leading Educators on the Emerging Role of Reverse Mortgages in Retirement Income Planning. He is president and founder of the HECM Institute for Housing Wealth Studies and an adjunct professor of Retirement Income at The American College of Financial Services. He has helped tens of thousands of Advisors as well as more than 3,000 personal clients since the year 2000
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®

Categories: Advisors, Financial, Strategic Usage, Topics

Tags: , ,

Comments: 6 Responses

  1. Tom Davison says:

    The SPIA in this study was purchased from the investment portfolio, and not from the reverse mortgage proceeds.

  2. Good article. I have a whole section in my course about leveraging HECMs, SPIAs and globally diversified portfolios together as three legs of a stool some folks need.

    But keep in mind the kind of annuities your article discusses are SPIAs. These are immediate income streams. They can be great products and can be purchased at very low loads to fee only advisors who make no commissions off them.

    These are different than ‘annuities’ so-called which are nothing more than insurance investment products. Those aren’t really annuities (though that’s the popular word for them) but GICs, guaranteed investment contracts. Those are a different animal and not many fiduciary advisors would recommend them.

    The confusion of these two is a big pet peeve of mine. The former are important products for some folks. The latter are commission ridden products, with 40-60 pages of disclosures, impossible to comprehend, which are nothing more than very expensive bonds! It’s critical to make the distinction between these two kinds of ‘annuity’ products.

    Another great ‘third’ annuity product is a longevity annuity that might be another critical component, but it’s a delayed income stream. I just analyzed one, a low-load product, that has a 5+% IRR for a 64 year old who wants to buy one now, start getting income at 85 and expects to live for 10 years. This one has no return of premium guarantees, just pure insurance. My take on any guarantees is that they serve a psychological purpose but are really nothing but expensive bonds. If you want those kinds of guarantees, buy TIPS along with a globally diversified portfolio… and a HECM LOC in many cases!

  3. Rob Klein says:

    The case referenced in MA involved a variable annuity, which falls under securities regulation. Typically speaking that’s equivalent to putting a target on your back, even though some of the living benefits may still be appropriate for what the client want sto do.

    The SPIA is a fine tool for income. It’s extremely difficult to match its advantage – pooled mortality/credits + interest + principal = payment for life. A tax efficient one, too.

    But I’ll go further. What about using a HECM for income while the borrower uses an annuity with the Pension Protection Act of 2006 feature – tax-free benefits for long-term care? You generally don’t buy that annuity for income, rather you use it to protect the estate for erosion due to LTC expenses.

    • @RobKlein

      “You generally don’t buy that annuity for income, rather you use it to protect the estate for erosion due to LTC expenses.”

      But aren’t these kinds of ‘annuities’ (ie, GICs) with a LTC component rather costly? Someone requiring an income stream from a HECM probably wouldn’t have the $ to buy one. Aren’t those kinds of GICs really for HNW people who just want a bit more asset protection?

Leave a Comment

%d bloggers like this: