When assessing how to pay for senior living, many older adults start with personal assets like savings, pensions, and 401Ks. What many don’t realize, however, is that insurance policies can be another source of funds. Even those who haven’t purchased long-term care insurance can use other types of insurance to pay for senior living when other cash isn’t readily available. Here’s a look at some of the ways to use insurance for senior living.
The case for long-term care insurance
The most obvious insurance for senior living is long-term care insurance, but it can be costly. According to the Kiplinger.com article, “Long-Term Care Insurance: 10 Things You Should Know,” one way to make it more affordable is to purchase a policy with lower coverage and use other assets to make up the difference. When choosing to purchase long-term care insurance, however, keep in mind that it’s a use-or-lose it policy, does not accrue cash value, and provides no death benefit.
Another possibility is a hybrid long-term care/life insurance policy which the nerdwallet.com article “When Hybrid Long-Term Care Insurance Makes Sense,” notes can be insurance for senior living and provide a death benefit to survivors. Either way, however, it is important to read the fine print and keep in mind that, in general, the more paid in advance the better the benefits that will be available when it’s time to use insurance for senior living.
Maximize life insurance
Life insurance is usually purchased early in the life of a family for financial protection in the event one or both parents die. Once the children are grown and on their own, using permanent life insurance (not term life insurance) for senior living becomes a viable option. There are several ways to get cash from permanent life insurance for senior living, including:
Loans
Permanent life insurance builds cash value over time which can be a considerable amount once retirement age is reached and can be borrowed against by the policyholder. While this may seem like an easy way to get fast cash, the cnn.com article, “Borrowing against your life insurance policy: How it works” explains, there a few aspects to consider first.
For starters, the loan is not taken from the cash value account but rather the cash value is collateral for the loan. So while loan repayment is optional, there is compounding interest to worry about. When a life insurance loan is left unpaid, the interest can add up to the point where the loan amount exceeds the cash value and causes the policy to lapse. The insurer will then surrender the policy and use the cash left to pay off the loan. Ultimately, this will mean the loss of death benefits for survivors. Similarly, failure to repay the loan before death will decrease the death benefit by the loan amount that is outstanding at the time of death.
Life settlements
Since 1911 life insurance policies have been considered property which allows the policyholder to sell their policy at will. This is known as a “life settlement” and it offers another way to use life insurance for senior living. According to the finra.org article, “What You Should Know About Life Settlements” a life settlement is the sale of a life insurance policy to a third party who may hold it to maturity, sell it, or sell interests in it to other investors. Life settlements provide the policyholder with a lump sum while the buyer pays the premiums and receives the death benefit upon the policyholder’s death.
On the downside, however, there are a few cautionary notes. First, make sure the buyer and any brokers involved are reputable by checking the status of a buyer with the state insurance commissioner or the broker using the FINRA BrokerCheck tool. Next shop around for the best deal, and keep in mind that the proceeds from a life settlement may be taxed and may also limit a senior’s ability to receive government assistance like Medicaid.
Cash withdrawal
Lastly, withdrawing cash from life insurance for senior living is a tax-free option unless the amount withdrawn exceeds the accrued value available. Although this will lower the death benefit amount it can be the quickest and easiest way to access funds from insurance for senior living.
Viatical settlement
When a policyholder is terminally or chronically ill a viatical settlement, the sale of a policy at a discount, is another option. However, as noted in the investopedia.com article, “Viatical Settlement: What it is, How it Works,” while the seller receives a lump sum, the death benefit goes to the purchaser upon the death of the original policyholder.
For more information download our free guide for Funding Senior Living and Housing! If you’re ready to speak to us, contact us to schedule a tour.
