Reverse mortgages often get compared to annuities, they were even called reverse mortgage annuities back in the day. Both a HECM and an annuity are often considered safe ways for people to supplement their income during retirement, but what if the company backing the products go under?
The fourth annual survey of Merrill Lynch advisers found that more than 70% of advisors said they were concerned about the risks insurers have taken on with guaranteed -minimum variable annuities — and nearly a third said they doubted the insurers themselves understood those risks.
The annuity frenzy started about five years ago and continued even as the market got worse last year. The most basic ones promise that investors won’t lose their original investment, while the more-generous ones promise annual increases of 7% or more in the guaranteed amount.
The Merrill survey suggests an increasing wariness among advisers about "the risk profile" of the insurers creating the products, according to the survey authors, Edward Spehar and Roman Leal.
- 71% said they thought the insurers had taken on greater risk with recent versions, up from 68% the year before.
- 32% agreed that insurers "do not adequately understand the risks that they are assuming in the variable-annuity business," up from 17%.
What I found most interesting from the chart above is that the amount brokers who feel insurers adequately understand the risks from these products continues to shrink. It makes me think about our own industry and the debate about whether HUD’s insurance premiums are too high.
As the markets have tumbled a lot of people I talk to have realized that the HECM product is aggressive in terms of how much it offers borrowers and makes us wonder… are the insurance premiums enough?