Some reverse mortgage sales persons have come under scrutiny for pushing annuities at borrowers. So what exactly is an annuity and what does it have to do with reverse mortgages?
What Is an Annuity?
An annuity is an insurance product that pays out a steady income stream during retirement. The money can be paid out as a lump sum, monthly, quarterly, or annually. You can set up an annuity to make payments over the rest of your life or just for a certain period of time.
Investing Proceeds of Reverse Mortgages
A reverse mortgage loan allows you to cash out some of the equity in your home. Once you have that money in hand, you’ll need to find the best place to invest it so that you can withdraw money when you need it. Some reverse mortgage lenders use high-pressure sales tactics to get people to invest reverse mortgage money in annuities. But investing in an annuity is usually really costly, which can make it a pretty risky investment for many people. Also, many reverse mortgages can be set up as a line of credit that allows you to withdraw funds as needed.
Pros and Cons of Annuities
Some people choose to invest in annuities partly because there are no contribution limits and the money is tax-deferred. But some cons of these investment products include the fact that sales persons often earn commissions that can be pretty high. Other fees include surrender charges that can range from about 7% to 20% if you take the money out after only a year.
However, there are some annuities that don’t have such hefty fees. Carefully research these products before deciding if you want to use one to invest money you received from a reverse mortgage loan.