Suppose that there never had been such a thing as a reverse mortgage and that you, an insurance company business planner, just thought of the idea. Your task now is to explain your idea by means of a worked through hypothetical example, showing how the insurance company makes money and really isn ’ t taking on much risk.

Assume that your customer is a 77 - year - old single man. He owns a home in a good neighborhood that appraises at $450,000. Your company can borrow money today at 5.00%, but there is some concern about rates changing, so you want to be able to write a contract with an adjustable interest rate. Your company ’ s business model assumes a 2%

spread between borrowing and lending to fund profi ts. Estimate your company ’ s costs for preparing the package and servicing it as a $25,000 up - front fee. Looking at the Life Table for men (Table 10.1 ), a 77 - year - old man is most likely going to live about another 10 years.

Start by keeping interest rates constant at 5.00% so you ’ ll have to charge your client 7%.