The cost of senior care can be extremely daunting for retirees. According to Assisted Living, independent living can cost anywhere from $1,500 to $4,00 a month, while residing in assisted living facilities has an average cost of $3,500 to $10,500 a month.
While most people view life insurance as a way to care for their loved ones after they die via the death benefit, permanent life insurance policies can also be cashed out to access funds for retirement planning.
To get the most value out of your policy and make the best decision for your financial future, check out the following 5 ways to use your life insurance policy when nearing retirement:
1. Obtain the Cash Value from a Permanent Policy
Whole life, universal, variable, and indexed-universal are all considered permanent life insurance policies that have the death benefit.
According to Harbor Life, the death benefit is defined as the money beneficiaries will receive after the death of the policyholder, which is typically given as an untaxed lump sum payment. By paying the premiums for these policies, you are both keeping the policy active and contributing to an investment account where cash value grows.
This includes both the money you’ve contributed, along with the interest you’re earning through investments.
The cash value component of a permanent policy makes it a great way to fund retirement while simultaneously getting life insurance coverage.
As you age, you’ll also eventually be able to use the interest earnings to pay premiums and keep the policy active, as long as the policyholder is contributing enough.
2. Invest Premium Savings from a Term Policy
While permanent policies offer coverage throughout your life and accrue cash value over time, term insurance only offers coverage across a specific window of time (1-30 years) and as a result, will not build cash value.
Since term policy premiums are typically cheaper than a permanent policy, policyholders can use the cost savings to create a retirement fund that can be used for things like senior care.
3. Borrow from the Policy through a Loan
Policyholders with whole life insurance can use their policy as collateral through a whole life loan program.
This allows retirees to get a one-time, tax-free distribution that can be paid off with interest in life, or be taken from the policyholder’s death benefit.
Retirees might be able to go through their insurance carrier if whole-life loans are offered or utilize a third-party whole-life loan program instead.
4. Surrender Your Policy to Recoup Value
If you’re nearing retirement and can’t afford your policy premiums, you can choose to surrender a permanent policy, which immediately terminates coverage.
Individuals who choose this option will receive a check that includes the cash surrender value of the policy minus the surrender fees.
According to Harbor Life, cash-surrender value is the amount of money a policyholder receives by surrendering their policy to the insurance company, typically equivalent to the current cash value of the policy minus loans, interest, and surrender fees.
While surrendering your policy is an option, it’s not recommended. Policyholders will only receive one “take it or leave it” offer from their insurance companies, and you’ll get a minimal return.
Instead, you can get a far higher offer by taking your policy to the secondary market and selling it through a life settlement.
5. Sell Your Policy Through a Life Settlement
You might not know it, but your life insurance policy could be one of your most valuable assets. According to Harbor Life, a life settlement is a transaction that involves a policyholder selling their life insurance policy to a third-party buyer for a lump cash sum payment.
In addition to a large cash payment, you’ll save additional money for retirement by no longer needing to pay expensive insurance premiums. With a life settlement, you can receive as much as 60% of your policy’s death benefit, which is 4 to 11 times higher than surrendering it.
Get the most out of your life insurance policy and enjoy a comfortable retirement
Given the average cost of senior living skyrocketing, covering increasing nursing home costs can be challenging.
Rather than relying on Medicaid to pay for assisted living, seniors can leverage their life insurance policy to unlock years of built-up wealth and get the retirement they deserve.
Navigating the high costs of senior care can be daunting for retirees, but life insurance policies offer valuable resources to alleviate financial pressures.
Permanent life insurance policies with cash value components, such as whole life or universal life, can be utilized to fund retirement needs while maintaining coverage. These policies accrue cash value over time, which can be accessed to pay premiums or supplement retirement income.
Term policies, although lacking cash value, present an opportunity to save on premiums and invest the savings in a dedicated retirement fund.
Policyholders can also explore borrowing against their whole life policy or surrendering it for its cash value, though surrendering is often less advantageous than other options.
For those seeking the highest possible return, selling the policy through a life settlement offers a significant lump sum—often much greater than the cash surrender value.
This option not only provides immediate financial relief but also eliminates future premium payments, making it an attractive choice for covering senior care costs.
By strategically leveraging life insurance policies, retirees can unlock substantial funds to secure a comfortable retirement, reducing reliance on Medicaid and ensuring better financial stability.
This proactive approach helps mitigate the financial challenges associated with senior living and healthcare expenses.
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