Moving to a senior living community brings positive changes, like a more laidback lifestyle and easier social connections. The change can be stressful, especially for older adults and their families who worry about new expenses. One way to pay for senior living is by using a life insurance policy.
We naturally think of life insurance like a savings account to provide for our beneficiaries after our death. It ensures that our partner, children, grandchildren, etc. will have cash to replace lost income and cover debts, often with money left over. But a life insurance policy is also an asset that can be bought and sold, providing the seller with money before death.
“As circumstances evolve, you may no longer have as much of a need for coverage,” says Elias Papasavvas, founder and CEO of Second Act Financial Services. His business focuses on helping older adults meet their financial goals. “If you find this to be the case, then your life insurance policy may be an asset you can tap into or even sell for cash.”
What to know about using a life insurance policy
There are several ways to use a life insurance policy to pay for senior living expenses, from selling the entire policy through a life settlement exchange to a tax-free 1035 exchange of the policy into an annuity.
Life settlement
The most basic way to use a life insurance policy is called a life settlement. In this exchange, the policyholder sells to a third party (a life settlement provider) and receives an immediate payment. The life settlement provider pays future premiums and receives the death benefit when the insured dies – meaning the insured and the original beneficiaries are no longer involved.
Life settlement companies typically prefer high-value policies –$100,000 minimum – from policyholders over the age of 65, says the Texas Department of Insurance and will pay more if the policyholder has a health condition resulting in a lower life expectancy.
Other life insurance policy options
If you need additional money but you don’t want to lose all of the death benefits, your policy may offer other options that allow you to maintain it for your beneficiaries.
Papasavvas explains that some policyholders may be able to choose a hybrid option, i.e., “keeping a portion of the coverage intact with no future premium obligations.”
“Some life insurance policies allow you to take a policy loan up to the amount of the cash value,” says the New York State Department of Financial Services. “You may also be able to take out some of the cash value to meet your immediate needs.” In addition, some policies offer an option to “reduce amount of the death benefit in order to lower the amount of premium you are required to pay.”
For policies with a cash surrender value, the holder can end the policy and receive the cash value (note that there may be charges for early surrender).
Another option for some policyholders is a tax-free 1035 exchange of your life insurance policy into an annuity. “The annuity can then be used to provide a guaranteed income stream for a period or for life,” says Papasavvas.
Long-term care benefit
“A potential buyer of your policy may provide the option to use some of the cash payout in a more structured manner to cover your senior living or long-term care payment needs,” says Papasavvas. In addition, “Some life insurance policies may have a long-term care insurance rider.”
Before making a final decision, the NY Department of Financial Services reminds consumers to comparison shop, learn the tax implications, and realize that “the proceeds you receive from a life settlement may be accessible by your creditors.” Proceeds could also affect public assistance benefits such as supplementary social security benefits, food stamps, or Medicaid.
Regulations vary across state lines, so research your state’s laws and regulations.
Using a life insurance policy to fund your senior living community expenses could work for you. “However, be sure to discuss it with a financial advisor to make sure there are no unintended consequences or better options,” counsels Papasavvas.