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There are certain things we do to protect ourselves as we get older. We make sure our health insurance doesn’t lapse. We take our medications on time, every time, and visit the doctor on a regular basis. We keep an emergency button alarm with us at all times, for safety and security. And for many, life insurance becomes a part of that safety net that shepherds us into our golden years.
Most people view life insurance as a legacy that they can pass down to their children and other family members. It lessens the burden of funeral expenses, at the very least, and might provide much more than that, depending upon how generous your policy is and how long it’s been in force.
But did you know that it’s possible to use your life insurance policy as a source of income?
Using your life insurance policy as income depends upon the type of policy and a few other factors. In most cases, using it for income means taking out a lump sum from the policy – or selling the policy altogether – and then using the funds to create a monthly income stream.
Let’s look at whether this might be a good financial option for seniors and elderly adults.
Understanding the Different Types of Life Insurance
According to Bankrate, 50% of Americans had life insurance in 2022. However, 30% of those with policies believe that life insurance is good only for end-of-life expenses. That leads them to getting much less insurance than they need to pass money on to their heirs or to use for income replacement as they get older.1 Very few Americans are aware that life insurance can be converted to cash during their golden years.
What you can do with your life insurance depends on the type.
Term life insurance is in force for a particular term, such as 10 or 20 years. As long as you pay your premiums, the insurance stays in force. If you pass away during the coverage period, your designated beneficiaries get the payout of the policy. It’s a less expensive type of policy and it is very straightforward – there is no cash value so you can’t borrow against the funds.
Whole life insurance is in force as long as premiums are paid, just like term life insurance. Whole life insurance doesn’t have a set end date for coverage, but your premiums don’t increase as long as you pay them on time every time.
Your premiums are a contribution to the whole life insurance, which means the money grows in the same way that a retirement fund grows. The insurance company will allow you to take out a loan against this amount to cover certain expenses; you aren’t required to pay back that loan, but you will be charged interest. Once the loan amount exceeds the amount of the policy, your coverage will cease.
But there are other ways to get money out of your whole life insurance policy.
How to Get Cash from Your Whole Life Insurance Policy
Keep in mind that when we talk about insurance that can be converted to cash value, there are other types that get into a more complicated situation. These include universal, variable, and indexed policies. Each is a different type of investment vehicle and has different rules.
We’ll focus on whole life insurance to lay out the general rules, but to learn more about each of these types, talk to your insurance agent.
So how can you get your hands on the cash afforded to you by your life insurance policy?
· Life settlements. This is the most common way that individuals cash out their policy. You can take out the amount of money you have contributed to the account over the years. Because you are taking back exactly the amount you contributed to the policy, getting that money back is tax-free. However, a life settlement effectively closes your policy, so there is no payout after you pass away.
· Viatical settlements. These settlements are only for those who have a life expectancy of two years or less. In this case you can sell your policy to an investor for cash. You can sell it for an amount less than what is on the policy; for instance, if your policy is for $50,000, you could sell it for $35,000 and give up the rights to the benefits. That means the investor gets the whole amount upon your death, but you get the $35,000 right away to cover your expenses.
· Surrendering. A company might offer to buy your life insurance policy for a fraction of what it’s actually going to pay out. While you might “lose” money by doing this, you will also gain ready cash that can help you pay for day-to-day expenses. This might make sense if you have a hefty policy. For instance, 20% is a typical offer from a company that would buy your policy; if you have a policy of $200,000, that’s $40,000. Depending upon your situation, that might be worth it to you.
Things to Remember When Getting Cash for Life Insurance
Just as you make a point of keeping your physical health safe with the help of an in-home or mobile alert system for elderly adults, you should also work to keep your financial health as secure as possible. To that end, it’s very important to consider these points before choosing to tap into your life insurance policy.
· Know your rights. Contact your state department of insurance to make sure that all laws and regulations are followed, especially when selling your life insurance policy to a third party. You can bet that they are informed of all the regulations, including the potential loopholes that can benefit them; after all, they’re doing this to make money. By knowing what your rights are and what your state allows, you are ahead of the game.
· Work only with authorized brokers. These individuals can help you navigate the rules of your policy, get you through the process, and ensure you get the proper amount. They can also serve as a go-between if you choose to surrender your policy for cash. They are usually regulated by the state and thus know the rules and procedures unique to your location.
· Watch out for fees. Though brokers do charge fees, some of them are more transparent than others. Make sure you understand the pricing and ask for clarification on any points that seem confusing. And remember, those fees might be regulated by your state as well, so check to be sure. This page at Fidelity Life breaks down the laws in every state.2
· Consider partial withdrawals. The choice doesn’t have to be all or nothing. You might be able to make partial withdrawals from your policy if you need ready cash but don’t want to put an expense on high-interest credit cards or touch your savings.
· Talk to your financial advisor. Before you make any moves at all, speak with your financial advisor or tax consultant. They can give you the information you need to make a clear, informed decision about handling your life insurance money. They can also set up the cash payment as an income stream for you, invest the money, or otherwise make sure that you get the most out of your decision.
· Get a second opinion. No matter your choice of life insurance, get a second opinion before you sign anything. This includes at the start of the policy and at the point where you choose to take cash out of it. This second opinion allows you to get the input of another expert in the field who might not have as much of a vested interest in your decision; therefore, their opinion may be more objective.
· Inform your heirs. If your family members know you have a life insurance policy and expect a payout from that policy when you pass on, speak to them after you’ve made your decisions on what to do with your policy. Though you aren’t legally obligated in any way to do this, it can allow them to plan accordingly and give you peace of mind.
It’s Never Too Late for Security
Think you’re too old to get a life insurance policy right now? You might be surprised. According to the National Vital Statistics System, the average life expectancy of a person in the United States is 76.1 years.3 Keep in mind that’s the average, so millions of people live much longer than that. Life insurance is a great idea for anyone who wants to leave something behind for their heirs but also to potentially help pay for the costs of long-term care and other expenses that might pop up at the end of your life.
Getting the security you need extends to other products too. Staying safe and healthy is vitally important as you get older; to that end, a medical alert pendant or bracelet could be your best bet. Having an emergency response solution right at your fingertips helps you avoid the dire consequences of waiting far too long for help to arrive when you need it most. When you opt for a medical alarm with GPS and fall detection, you are giving yourself the gift of peace of mind, not only for you, but for your family and friends as well.