A move downsizes your home is one that can bring both joy and relief as you enter later years of life. Leaving behind the large spacious homes you once lived in for the smaller and more compact townhomes, condos, or newer mobile spaces are just two examples of how moving into a smaller living space will mean less room to clean, reduced utility costs, and ending the ongoing cost and physical labor required to maintain your old property. Downsizing also represents a conscious transition away from complexity and towards a simpler way of living which enables older adults to plan their days around relationships, memories and peacefulness as opposed to maintaining properties.
While the act of downsizing may provide significant freedom from the burden of maintaining property, there is another financial benefit of downsizing that is commonly overlooked. Down sizing typically provides a large sum of funds (liquid capital) from the sale of your home. As such, deciding what to do with this new found wealth is a critical part of your estate planning process. Many people who sell their home immediately consider putting the proceeds in some form of retirement account, buying dividend paying stock or just placing the monies in a checking/savings account.
There is however, a very effective and protective alternative strategy to utilize a portion of your new found wealth. By investing all or a portion of the liquid capital generated from selling your home into a final expense insurance policy that has strong benefits you will be able to insure your loved ones against future financial shocks; allow yourself instant access to the funds at a time when they matter most; and create a permanent legacy for your family.
The Reality of Modern Final Expenses
To get a clear understanding as to how effectively pairing down-sizing of a homeowner with an increased purchase of Final Expense Insurance (FEI) works together, we have to identify the increasing cost of last wishes. There are many areas that will cause financial strain to the family after someone has passed, beyond simply paying for a memorial service. A traditional funeral, including the burial, vault and monument can now cost upwards of $10,000 to $12,000. With the addition of all of your final medical bills, outstanding personal debt, estate administration attorney fees and wrapping up all utilities for the estate there may be substantial amounts of money due immediately upon death.
While some families may ultimately have sufficient total family wealth, they often do not have enough liquid cash available at the time of loss. In fact, real estate is considered to be one of the least liquid forms of investment. Therefore, when an elderly person dies owning almost all of his/her net worth in a single-family residence, his/her adult children or surviving spouse can not simply remove a portion of the structure to fund a funeral director’s services or to satisfy a hospital bill.
Additionally, while the children of the deceased may intend to sell the property once the decedent has passed, selling a residential property is a multi-step process which typically includes listing and marketing the property; negotiating offers and closing on the sale; and obtaining an order from a probate court allowing the transfer of ownership and/or distribution of proceeds prior to its being able to be sold. The time frame for completing these steps can vary greatly depending on local customs, complexity of issues involved etc. However, this process is generally lengthier than most would like.
For example, a residential property sale can be delayed anywhere from 6-12 months or longer. While the family waits for the funds derived from the eventual sale of the property they must either utilize their own limited resources such as personal savings accounts, or obtain additional high interest-bearing financing such as credit cards, solely for purposes of managing administrative costs during this time period.
Final Expense Insurance addresses this particular financial shortfall by providing funding outside of the probate process. Upon submission of a valid claim to the FEI company, payment is made via a tax-free cash payment directly to the beneficiary(s), usually within 24-48 hours. As such, it provides an immediate source of funding for the family members to cover any necessary expenditures and allows them to make decisions regarding their family’s affairs without feeling pressured into conducting an expedited/low-benefit sale of their family-owned properties.
The “Found Money” Strategy: Turning Equity into Guarantees
In addition to the fact that a senior may consider using their home sale proceeds to create a “guaranteed” income stream for funeral expenses, the same amount of money used to purchase a life insurance policy will also provide liquidity to cover a variety of other end-of-life costs including nursing home care, in-home assistance, personal care items, transportation and medication.
Using home sale proceeds to create the necessary liquidity to pay funeral expenses creates an opportunity for the senior to use a very small portion of the available funds (e.g., $5,000) to completely fund a final expense life insurance policy. Most major insurance companies now offer single premium permanent life insurance policies or plans with short-term premium payment schedules such as a 10-year level premium policy. The result of using some of the senior’s home equity to purchase a life insurance policy is that they are able to remove all of the risk associated with the possibility of having to fit additional premiums into a fixed retirement budget or worse yet having the policy lapse when it is needed most.
In addition to eliminating the potential negative consequences associated with purchasing a life insurance policy, funding a policy through home equity creates a great example of how one can utilize real estate to re-allocate assets. As we know, real estate markets are often times cyclical, volatile and unpredictable.
By allocating a portion of a senior’s wealth out of a liquid but market dependent physical asset (i.e., their house), into a guaranteed and fixed dollar payout contractual agreement, you are essentially protecting that segment of your client’s wealth from changes in the economy. In essence, you are creating a protected and predictable pool of resources within your client’s overall estate by guaranteeing that those dollars will always be available regardless of whether there is a recession or depression.
The Real Estate Perspective
To better grasp how the dynamic described above plays out in practice, you can examine both property sales and estate preparedness through the lens of professional property buyers working directly with senior homeowner and grieving heirs.
Shayla Dempsey, Co-Founder & Real Estate Investor at Four 19 Properties, routinely sees the extreme levels of pressure experienced by families whose estates lack readily available liquid cash.
She says, “We’ve worked with numerous families over the years to help them find solutions to their very complicated property-related issues. We have seen countless times, the amount of pressure placed upon families when an estate is unable to generate immediate liquidity. When a senior dies with all their wealth invested in one single asset (a house), their family typically finds themselves facing an immediately pressing requirement for cash to cover funeral costs, estate taxes and continuing maintenance on the property.”
Dempsey also adds, “In order to meet these urgent needs, families are commonly required to sell the property quickly, regardless of whether they receive the maximum possible price. Utilizing a portion of the equity generated by downsizing to fund a guaranteed final expense policy is a good way to avoid having to go through such a process. This type of protection will provide the family with instant access to the funds they require to manage their other real estate assets in a thoughtful and strategic manner instead of doing so under duress.”
As stated above, this perspective illustrates an important fact – final expense insurance is not merely used to cover funeral expenses; it acts as a protective shield for the remainder of your portfolio of remaining real estate. The availability of fast cash provides families the opportunity to do what they want with their time – i.e., make whatever repairs/renovations may be required on the property and/or listing your down-sized home(s) / other investment properties at the best possible market price. The personal and professional freedom associated with utilizing home equity is shared by many others within the industry who also illustrate the significant emotional release that occurs once individuals eliminate large financial burdens related to property ownership.
Shannon Beatty, Founder of House Buying Girls, illustrates the enormous sense of clarity and freedom that occurs when selling a principal place of residency later in life. “The act of selling your home forces you to simplify your life and evaluate your resources. While homes are emotionally meaningful structures for us, homes are nothing more than tools designed to support you during a particular stage of your life. When that stage is completed, having too much of your net worth tied-up in a home creates an excessive level of risk. Selling your home and converting that equity into a source of funding that you can use as needed, provides older adults with a great deal of energy and flexibility. Converting the volatility/risk associated with owning a home into a stable form of insurance coverage that will protect your loved ones’ future, removes uncertainty regarding the rate of decline of your home’s value and enables older adults to focus solely on creating a legacy that is safe and protected for generations to come.”
Choosing the Right Post-Sale Policy Layout
Once the decision has been made that part of the down-sized equity will be used to support the final expense insurance coverage, you need to have knowledge of the various types of life insurance policies to match the senior’s unique health and age profile.
Simplified Issue Life Insurance
The most suitable type of life insurance policy for seniors that are generally healthy would be Simplified Issue. This type of policy includes applying by completing a series of detailed medical questions; however, this process does not include the inconvenience of a physical medical examination, nor do they draw your blood. Since the insurance company is at less risk when offering these types of policies, the premiums for them tend to be lower and provide higher face value immediately upon purchasing.
Guaranteed Issue Life Insurance
If an older adult faces long-term serious illness or disease, their application may be rejected by many private health insurance companies; however, guaranteed issue health insurance coverage offers a safety net in these cases. Guaranteed Issue health insurance products do not require medical examinations nor ask health-related questions. In other words, seniors applying are guaranteed acceptance into one of the guaranteed issue health insurance programs provided they fall within the stated age limits (typically ages fifty through eighty-five).
The majority of guaranteed issue health insurance products will have a graded death benefit for at least two years. What this means is if a person passes away due to natural causes, there is a complete refund of all premium payments made, plus accrued interest. The full face amount of the policy becomes fully available after twenty-four months from the date of purchase.
Utilizing Cash Value and Direct Beneficiary Designations
Permanently fully-funded final expense permanent whole life insurance policies contain an accumulation of internal cash value which grows tax deferred. As such, the policy will provide a second layer of financial protection for emergencies in case the senior needs to take out a loan from the cash value portion of the policy at some point while retired due to an unexpected health-related emergency or other form of living expenses.
Ultimately, in order to get the most benefit from this type of plan, it is very important for the senior to make sure their beneficiary designation(s) remain both up-to-date and completely clear. If a senior names a person directly (a spouse or child for example), as opposed to naming the “estate”, then all of the cash will go directly to whomever has been named as a direct beneficiary; thus avoiding any potential probate issues altogether.
Conclusion: A Smaller Footprint, A Larger Legacy
Transitioning to a smaller home should never be seen as going backwards or diminishing someone’s status. The decision to transition to a smaller home is a sophisticated and strategic process of aligning your lifestyle with your wealth. A downsized primary residence provides you with the opportunity to be freed from the time-consuming burden of maintaining a larger property and will help to eliminate all unneeded clutter associated with lifestyle choices.
Seniors are able to create complete balance in their estates by utilizing a portion of the money generated from selling a prior property to increase coverage for end-of-life expenses. A senior will have created a new financial position which will provide their family members with a significant advantage.
When a senior transitions from one phase of life to another (from being a homeowner to transitioning to a facility) they will know that there is always adequate funding available immediately upon need, ensuring that their loved ones are protected, that their remaining family assets remain intact and ultimately that they will have peace of mind.
