Reverse Mortgage vs Annuity: Which Fits Retirement Income Better?
Both a HECM tenure payment and an immediate annuity turn a lump of value into a monthly check for life. But they start from different places (equity vs cash), price on different math (loans vs mortality pooling), get taxed differently, and treat your heirs differently. Here's the honest head-to-head comparison — including when each one wins, and when you might sensibly use both.
The 30-second answer
Choose a reverse mortgage (HECM tenure) when your primary asset is home equity, you want tax-free income, and you want to preserve residual value for heirs. Choose an annuity when you have liquid savings you want to convert into a guaranteed lifetime paycheck, don't need to preserve principal for heirs, and want the modestly higher payout that pooled mortality pricing provides. The two aren't mutually exclusive — some retirees use both, tapping home equity via HECM and converting a portion of savings into an annuity for baseline guaranteed income.
What each product actually is
Reverse mortgage (HECM tenure payment)
A Home Equity Conversion Mortgage is a loan available to homeowners 62+ that converts a portion of home equity into cash. Under the tenure payment option, the lender pays you a fixed monthly amount for as long as at least one borrower lives in the home as their primary residence. No repayment is required during your lifetime in the home — the loan balance grows over time and is repaid when the home is sold, you move out permanently, or the last borrower passes away.
Immediate annuity (SPIA)
A single-premium immediate annuity is a contract with an insurance company. You hand over a lump sum, and in exchange the insurance company pays you a fixed monthly amount for a specified period — most commonly life (payments continue until your death), sometimes with variations like joint life (continues until both spouses die), period certain (guaranteed minimum number of payments), or life with cash refund (heirs get any unpaid principal).
Head-to-head comparison
Reverse mortgage (HECM tenure)
- Source of funds: home equity
- No upfront cash required
- Payments: monthly, life of tenancy
- Tax treatment: not taxable (loan proceeds)
- Impact on estate: loan balance owed at end; remainder of equity goes to heirs
- Stops if: you move out permanently, or last borrower passes
- Adjustable rate exposure: yes (payment amount is fixed at origination, but interest accrues variable)
- Federal FHA insurance backing
Immediate annuity (SPIA)
- Source of funds: cash / IRA / savings
- Requires lump sum upfront
- Payments: monthly, for chosen period (usually life)
- Tax treatment: partly taxable (return of principal is tax-free; growth is ordinary income)
- Impact on estate: life-only leaves nothing; period-certain or refund riders preserve some value
- Stops if: you die (unless a rider provides otherwise)
- Fixed rate lock at purchase
- Backed by insurance company + state guaranty association
How much monthly income does each produce?
Numbers change with age and rate environment, but for a rough sense, here are typical monthly income figures for a 70-year-old in 2026 running $500,000 through each product:
| Product | Amount deployed | Approx monthly payment | Total after 15 years |
|---|---|---|---|
| SPIA life-only (single life) | $500,000 cash | ~$3,600 | ~$648,000 |
| SPIA life with 10-year period certain | $500,000 cash | ~$3,400 | ~$612,000 |
| HECM tenure (from a $500K principal limit) | $500,000 in home equity | ~$3,100 | ~$558,000 |
Illustrative only. Actual amounts vary with insurer, age, gender (in states that permit it), rates at issue, and program specifics. Get quotes for your actual situation before deciding.
The annuity's slightly higher monthly payout comes from mortality pooling — the insurance company can afford to pay each annuitant more because some will die earlier than expected and subsidize those who live longer. The HECM doesn't rely on mortality pooling; instead, its payment is determined by the principal limit, expected rate, and life expectancy calculation.
But that headline comparison misses the crucial point: the annuity required $500,000 out of your pocket. The HECM required $0. Comparing them on payout alone ignores that they're funded from entirely different sources.
The tax difference matters more than most people realize
HECM tenure payments are not taxable — they're treated as loan proceeds, not income. That means a $3,100/month HECM payment is $3,100 in your pocket.
SPIA payments have an "exclusion ratio" — the return-of-principal portion is tax-free, but the growth portion is taxed as ordinary income. For a 70-year-old with a 15-year life expectancy, the taxable portion might be 20-30% of each payment. For a $3,600/month SPIA in a 22% federal bracket plus 5% state, roughly $700 goes to taxes, netting about $2,900 — very close to the HECM's $3,100 tax-free.
Add federal, state, and (potentially) Social Security taxation impacts, and the tax-free HECM often catches up to or exceeds the annuity on after-tax basis, despite the smaller pre-tax number.
What happens to your heirs
This is where the two products diverge most sharply.
Reverse mortgage: When the loan ends, the home is sold or refinanced. The loan balance (original principal + accrued interest + insurance premium) is paid off first; any remaining equity goes to your heirs. If the loan balance grew larger than the home value, FHA insurance covers the difference — your heirs owe nothing extra. This is the non-recourse feature.
Annuity (life-only): Payments stop at your death. There's nothing left for heirs from the annuity. The full $500,000 you handed over to the insurance company is gone.
Annuity (with period-certain or refund): If you die during the guaranteed period, remaining payments go to beneficiaries. If you die after, still nothing. And these riders reduce the monthly payment amount.
For a family that intends the home to pass to children, this favor the reverse mortgage strongly — you retain the residual asset that can be preserved (heirs pay off the loan) or sold.
Longevity risk: what if you live to 100?
Both products handle longevity risk well, but differently:
- SPIA: The insurance company keeps paying no matter how long you live. If you live to 105, they've probably paid you far more than you handed them. That's mortality pooling working in your favor.
- HECM tenure: Payments continue as long as you're in the home. If you live to 105 and stay in the home, the lender keeps paying. If you eventually move to assisted living, tenure payments stop — this is a real risk to consider. Some retirees mitigate this by combining a HECM line of credit (which survives a move because it can be drawn as needed) with tenure, hybridizing the two.
The combination strategy
Some retirement planners actively use both. The most defensible version: use the HECM to preserve investment portfolios during down markets (reducing sequence-of-returns risk) while using a small SPIA to guarantee baseline income covering essentials. This layers longevity insurance, tax efficiency, and asset preservation.
The less defensible version — and the one that's historically been a source of predatory sales — is using a HECM lump sum to fund an annuity purchase from the same salesperson. That structure has real problems: you convert a growing line of credit (a valuable HECM feature) into a fixed annuity contract, pay large annuity commissions, and lose flexibility. If a lender or advisor pushes that specific combination, get a second opinion from an independent fiduciary before signing anything.
Which one should you actually pick?
Rough decision framework:
Reverse mortgage tends to win when:
- Your primary asset is home equity, not liquid savings
- You want to leave residual equity to heirs
- Tax efficiency is important (higher tax brackets)
- You plan to stay in the home long-term
- You value the growing line-of-credit feature as backup insurance
Annuity tends to win when:
- You have $500K+ in liquid savings you don't need immediate access to
- You have no heirs, or preserving inheritance isn't a priority
- You want the highest guaranteed monthly payout available
- You might move (assisted living, closer to family) and want income that follows you
- You want fixed-rate certainty rather than any variable-rate exposure
Frequently asked questions
What's the main difference between a reverse mortgage and an annuity?
Reverse mortgages tap home equity you already own; annuities require you to hand over cash you already have. They come from different asset pools.
Which pays more per month — a reverse mortgage or an annuity?
Annuities typically pay slightly more per month for equivalent amounts due to mortality pooling, but HECM tenure income is tax-free while annuity income is partially taxable. On after-tax basis they're often very close.
Can I combine a reverse mortgage and an annuity?
Yes, and some strategies use both. Use caution with any salesperson pitching a HECM-to-buy-an-annuity combination — historically a target for abusive sales practices.
Do reverse mortgage tenure payments last for life?
Yes, as long as you continue to live in the home as your primary residence. Payments stop if you move out permanently.
Are reverse mortgage or annuity payments taxable?
Reverse mortgage payments are not taxable (loan proceeds). Annuity payments are partially taxable — return of principal is tax-free, growth is ordinary income.
What happens to my heirs with a reverse mortgage vs annuity?
Reverse mortgage leaves any remaining equity to heirs after the loan is paid off. Life-only annuities leave nothing.
Not sure which tool fits your retirement plan?
Free 15-minute call. I'll show you what a HECM tenure payment looks like in your situation — and I'll be honest if an annuity or another tool fits better.