How to Use Your Life Insurance Policy to Pay for Senior Care

Written By: William Rivers
Reviewed By: William Rivers
Published: April 4, 2023
Last updated: December 29, 2023

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. 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. 

  1. Invest Premium Savings from a Term Policy

While permanent policies offer coverage throughout the duration of 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.

  1. 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. 

  1. 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 cancels coverage. Individuals who choose this option will receive a check that includes the cash surrender value of the policy minus the surrender fees. 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.

  1. 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. 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. Seniors can leverage their life insurance policy to unlock years of built-up wealth and get the retirement they deserve. 

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William Rivers is an editor with a master’s degree in Human Services Counseling at Maine State University. He has more than 20 years of experience working in the senior healthcare industry.
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