Substandard annuities may provide leverage to retirees who are using housing wealth to fund long term care costs, says a research paper on housing issues facing retired Americans

Individuals are generally not buying LTC insurance to fund the cost of such care, write Anna Rappaport and Steven Siegel, who authored the monograph for the Society of Actuaries Committee on Post-Retirement Needs and Risks.

On the other hand, “housing wealth is in many cases accessible should those costs arise in excess of funds otherwise available,” they continue. This is when retirees may find that substandard annuities could provide some leverage, the authors say.

Substandard annuities are a type of immediate annuity that is sold to people with serious health conditions. Because the annuitant’s life is expected to be shorter than healthy peers of the same age, the annuities pay out more that the typical immediate annuity.

The monograph, “Overview of Housing Wealth, Options, and Spending Issues in Retirement,” summarizes key points made in many papers that the SOA committee collected on housing-related issues of retirees.

Rappaport is founder and owner of Anna Rappaport Consulting, Chicago, and chair of the SOA Committee on Post Retirement Needs and Risks. Siegel is a research actuary at SOA, Schaumburg, Ill.

One section in their monograph addresses financial considerations, such as the use of substandard annuities. Other findings from this section include:

–Reverse mortgages may offer significant income potential to some households but at relatively high cost and risk. Furthermore, although they may help older people remain in their homes, they limit future housing choices and are considered a last resort option by some financial planners.

–The options that individuals choose for using housing equity to help finance retirement are far more important for those without defined benefit plans, since they have less regular income during retirement.

–There is much opportunity for further development and improvement of financial products and approaches applied to housing.

While there is no consensus on the best course of action for using housing value to provide for retirement needs, a number of options do exist for this purpose, Rappaport and Siegel say. These include:

–Paying off the mortgage, if possible, to reduce overall expenses

–Selling and downsizing to a smaller home, freeing up funds for investment or annuity purchase

–Selling the home, investing the proceeds and then renting

–Securing a home equity loan or secondary mortgage on the house

–Obtaining a reverse mortgage

–Renting out extra rooms

–Renting out primary residence and live elsewhere at a lower cost

–Keeping the house mortgage free, and letting its value serve as an emergency fund if needed

An overview of the monograph is available here

The full monograph is available here