For the most common type of Reverse Mortgage (a Home Equity Conversion Mortgage or HECM), the insurance provider is the Federal Housing Administration (FHA). Most Financial Advisors understand that if a Reverse Mortgage comes due and the value of the property is less than the amount owed then the FHA pays the Lender the difference. What is not as well known is that if a lender goes bankrupt the FHA steps in to make payments due to borrowers, to guarantee credit lines and to provide funds for advances. Furthermore, FHA Mortgage Insurance guarantees your Reverse Mortgage credit line even if the collateral (i.e., your house) loses value. To illustrate how important this protection is, after the Housing Crash, when lenders were freezing equity lines, lowering limits or canceling them altogether, Reverse Mortgage holders had no such problems. In fact, the limits on Reverse Mortgage credit lines increase over time regardless of whether the value of your home goes up or down, which means you may have access to more funds even when you have no equity left in your home. Furthermore, FHA Mortgage Insurance enables Reverse Mortgage contracts to make the house the only permissible source of repayment for the loan. This means that all other assets you own are safely off limits and your heirs are protected as well.
Another little-known fact is that the FHA is the only Federal Agency that is fully self-funded, which means no tax money is required to run it. Therefore, unlike other government agencies, the FHA must survive on the revenue it generates from the services it provides and the Mortgage Insurance Premiums charged are its only source of income.
So, if you are trying to decide whether or not to obtain a Reverse Mortgage and an expensive Up-Front Mortgage Insurance Premium is causing you to hesitate, remember that you get what you pay for, and in this case, that is lifetime protection for yourself, your estate and your heirs.