Reverse Mortgage Loan enabled Annuity (RMLeA): A better option over Reverse Mortgage Loan (RML)
All you need to know about Reverse Mortgage Loan enabled Annuity (RMLeA):
Reverse Mortgage Loans (RML) were introduced in 2011 to provide financial security to the senior citizens in their post-retired life. It offered several advantages like principal amount based on the value of property instead of credit history of the borrower, periodic loan receipts being tax-free in the hands of the borrower, etc.
However, it could not scale the success in India which it had experienced in the West. The RML contained several structural discrepancies about the tenure of loan and quantum of periodic payments that made it ineffective in addressing the old age needs of senior citizens in a comprehensive manner. It was unable to give an answer to the questions like -What happens if the borrower outlived the loan tenure? In the absence of alternate accommodation, where would the borrower reside if the primary residence is sold off by the bank to repay the loan? To solve these issues, Reverse Mortgage Loan enabled Annuity (RMLeA) plan has been introduced by the National Housing Bank in collaboration with Star Union Daichi Life Insurance Company Ltd., (SUD Life) and Central Bank of India (CBI). Reverse Mortgage Loan enabled Annuity (RMLeA) provides higher annuity payments for the entire lifetime of the annuitant to ensure he lives with dignity after retirement.
Let me take you through the differences between RML and RMLeA as given in the following table:
The Structure of Reverse Mortgage Loan enabled Annuity (RMLeA)
It is a tripartite agreement between the lender bank, the life insurance company and the borrower. Initially, the borrower mortgages his house property with the bank. The bank then determines the principal loan amount of reverse mortgage loan based on the market value of the property. The loan to value ratio is 55% in this case. The bank will purchase an immediate annuity plan by paying the principal loan amount/purchase price to the life insurance company for the benefit of the borrower. Upon commencement of the annuity plan, the bank would be known as the Master Policyholder and the borrower would be termed as the annuitant. Under the annuity plan, the insurance company based on their sophisticated pricing models will prepare the entire disbursement schedule and determine the annuity payments that should be given to the borrower in periodic instalments. The Master Policyholder may choose the type of annuity and mode of annuity payment (monthly, quarterly, half-yearly or annually) based on preferences indicated by the borrower. Every year, 15 days before the policy anniversary, the bank needs to give existence certificate of the annuitant to the insurer to ensure continuous annuity payments. The annuity payment would cease either on the death of the annuitant or the renunciation/sale of the house property by the annuitant.
Tenure of Loan
The tenure of the loan in case of RML is limited, and the loan can be availed by the borrower for a maximum duration of 20 years. The primary objective of retired people i.e. getting a fixed income for the lifetime is not served in the case of RML if the borrower outlives the tenure of the loan. He would again have to think of another source of regular income upon expiry of the loan tenure.
In the case of Reverse Mortgage Loan enabled Annuity (RMLeA), the objective of getting a fixed income for the lifetime of retired people is served in totality. The borrower/annuitant keeps receiving the annuity payment till he is alive and the annuity payment would cease upon his death.
Quantum of Periodic Payouts
The cost of living in a post-retired life has increased substantially on account of inflation and surge in the health care costs. Consequently, the superannuation benefits of senior citizens are highly inadequate to cover those expenses. In such a scenario, RML initially gave a hope as an income supplement. Subsequently, it was found that periodic payouts received under RML are highly inadequate as compared to the rosy picture which was painted at the time of purchase of the product. On the contrary, the annuity payouts under RMLeA are higher than the periodic payouts received under an RML.
There are several reasons for this significant gap in the periodic payments. Firstly, under RML, the amount of periodic installments were calculated by the bank using conservative lending mandates, but the insurer under Reverse Mortgage Loan enabled Annuity (RMLeA) uses a sophisticated pricing model to arrive at the annuity payouts. Secondly, when the insurer receives the purchase price from the bank under Reverse Mortgage Loan enabled Annuity (RMLeA), it further invests the purchase price, and if the return on investment is more than 6%, then it passes on 80% of the extra return to the annuitant in the form of a bonus.
In Reverse Mortgage Loan enabled Annuity (RMLeA), three types of annuity options are offered by the life insurer namely:
Option 1- Constant Life Annuity wherein no benefits will be payable on death of annuitant
Option 2- Life Annuity with return of purchase price on demise of the annuitant
Option 3- Increasing life annuity with return of purchase price on demise of the annuitant
In Option 2 & 3, the insurer needs to refund the purchase price to the bank to settle the loan principal and in Option 1, the insurer doesn’t return the loan principal to the bank. You will receive a higher amount of annuity payment in case of Option 1.
In the case of Reverse Mortgage Loan enabled Annuity (RMLeA), the amount of loan varies with the age of the borrower i.e. 70% (70-80years), 75% (80 years & above), etc. whereas it is 60% of the value of property in case of RML.
Reverse Mortgage Loan enabled Annuity (RMLeA) offers an advantage over purchasing annuity plan directly from the life insurance company as part of your retirement planning. The annuity received under an ordinary pension plan is taxable in hands of the annuitant. RMLeA is a tax-efficient option because here the annuity payments are tax-free in the hands of the annuitant.
Settlement of Loan
In the case of RML, the bank recovered only that much principal amount which it had disbursed by way of periodic instalments to the borrower. But in RMLeA, the bank recovers the entire amount of principal which it had given to the insurer for making an annuity plan, irrespective of the fact that how much amount has been disbursed by way of loan to the borrower.
Moreover, RML used the house property to recover both the principal as well as the accrued interest amount. But in the case of RMLeA, the house property is used only towards the realization of the accumulated interest amount whereas the principal amount of the bank remains intact with the insurer which would be refunded at the time of the death of the borrower.
If you are looking for a regular income stream to supplement your disposable income post retirement, then annuity enabled reverse mortgage can come handy. The product may seem appealing, but you need to proceed with caution. You need to collaborate closely with the lender bank to understand the quantum and mode of annuity payouts. Also, you need to know the intricate procedure that the bank will employ towards repayment of loan principal and accrued interest. Before taking the final leap, you may discuss this with your legal heirs as the mortgage is going to risk their estate.