A common use for those who seek a reverse mortgage is to take the proceeds in a lump sum and use it to purchase an annuity. An annuity is a product you buy from an insurance company that pays you a sum of money for an agreed-upon term or for life. It acts in the same way as a reverse mortgage that pays a monthly amount. However, an annuity may be a better financial solution.
Example: Your goal is to get the largest monthly payment possible for the rest of your life. You are not sure how long you will want or be able to occupy your home. You are thinking that maybe in five years or so, you might want to move to an apartment or a senior care facility.
You can get a reverse mortgage tenure loan that will guarantee you monthly income for life. The problem is, you must occupy your home for life to get the benefit. If you move in five years, you will then have to repay the loan. How do you get the maximum benefit from your reverse mortgage without having to worry about repayment?
You can take the total amount of your reverse mortgage entitlement at closing and buy a lifetime annuity. With this comes two advantages. First, the annuity will sometimes pay a larger monthly amount than the tenure reverse mortgage. This achieves the first part of your goal, which was to get the highest monthly income available.
The second part of your goal was to have this income continue for your lifetime. What happens in five years when you move from your home? The money you borrowed on the reverse mortgage has to be repaid. If you sell your home to do this, you get the difference between the sale proceeds and the repayment amount. If there is nothing left or the home sells for less than what you owe, you get nothing. You also owe nothing if the home sells for less than what you owe because the reverse mortgage lender cannot look to you personally for repayment. However, if you have taken the money and purchased an annuity, you keep getting your payments for as long as you live, regardless of where you live. You now have your monthly payment without the burden of the reverse mortgage.
This combination of reverse mortgage borrowing and annuity buying is ideal for some people.