In the early days of reverse mortgages, an annuity was often issued in conjunction with the reverse mortgage. With this type of mortgage, also known as RAM, the borrower would purchase a single premium annuity and receive a series of payments issued monthly; in exchange, upon the borrower's death, the lender received title to the mortgaged property.
While the proceeds from lump sum reverse mortgage payments can still be used to purchase an annuity, this practice is no longer advised. Below are some of the pitfalls associated with reverse annuity mortgages:
The financial return on annuities is tied to stock market or investment performance, and does not yield a fixed monthly income.
Payments from annuities can take years to kick in; often, the payments are deferred for such a long term that you may not live long enough to collect.
Costs associated with thie type of mortgage far exceed those associated with a traditional reverse mortgage.
Hidden fees-such as "surrender charges," annual maintenance fees, and charges for purchasing investments-can mount up and quickly erode any gains.
Unlike traditional reverse mortgages, annuity advances are considered income and will reduce SSI benefits. In addition, annuity advances could make you ineligible for Medicaid.
A portion of the funds received from cash advances from annuities is taxable.
Annuities are a risky investment overall, with many annuity providers going defunct.
Investing funds received from a reverse mortgage is a very perilous venture, and one that should not be entered into unawares. Even with conservative investments, it's not likely that you would recoup the fees and closing costs associated with the loan. Before entering into a reverse mortgage, research your options thoroughly to avoid a financially devastating mistake.