As older Americans slide into retirement, they often grapple with how they will afford the cost of living. For many people, housing is one of the greatest expenses. Home maintenance whether you rent your home or own it, there are things that needs to be done to keep it looking and functioning well. And when you’re on a fixed income, home maintenance can be expensive. While senior homeowners might feel frustrated at how hard home financing options can be to assimilate, one of the overlooked financial tools is one that might help: life insurance.
How Life Insurance Can Facilitate Homeownership
Seniors who have accumulated significant cash value in their life insurance policies may be able to use it in several ways to help fund a home purchase or home improvement. Here are some options to consider:
Using Life Insurance for a Down Payment
“One of the more common ways to use life insurance is by using the cash value for a down payment on a home. This is especially helpful for seniors unable to amass a large amount of cash for a standard down payment, although they do have a significant amount of equity in their life insurance policy”, says Brian Rudderow, Owner of HBR Colorado.
He also adds, “If a senior owns a whole or universal life insurance policy, they may borrow against the cash value of the policy to make the down payment. It may be a cheaper and more convenient alternative to a traditional loan or dipping into retirement funds. Because life insurance loans generally have lower interest rates than standard bank loans, it can be an appealing option.”
Using Life Insurance as Collateral for a Mortgage
Geremy Yamamoto, Founder of Eazy House Sale, says, “Seniors facing difficulties with traditional home loans can greatly benefit from using their life insurance policy as collateral for a mortgage. This option is particularly useful for those with limited income or fewer assets to secure the loan.”
Some lenders, particularly those specializing in senior home loans, will accept life insurance policies with significant cash value as collateral. By doing so, seniors may be able to secure better terms and more favorable interest rates than they would with conventional mortgages.
“In the unfortunate event that the borrower defaults on the loan, the life insurance policy can be liquidated to cover the remaining debt,” Geremy explains. “This makes it a relatively low-risk option for lenders, and consequently, seniors are granted better access to affordable loans. This can be especially helpful when traditional mortgage applications might be denied due to income limitations or credit concerns.”
By utilizing life insurance in this way, seniors can find a pathway to homeownership or maintain their current homes without relying on traditional, often restrictive, financing options.
Withdrawals from Life Insurance Policies
Nathan Dempsey, Financial Advisor at New York Life Insurance Company, says, “For seniors looking to purchase a home, tapping into the cash value of a life insurance policy can be a viable option. While loans from life insurance policies require repayment with interest, withdrawals are permanent and reduce the death benefit, which can be ideal for retirees who are more concerned with their immediate needs than leaving a large death benefit.”
Nathan emphasizes that withdrawals differ significantly from loans. “Unlike loans, withdrawals do not need to be repaid, making them a convenient option for seniors seeking quick access to funds,” he explains. “However, it’s essential to consider the potential impact on the death benefit. If seniors withdraw too much from the policy’s cash value, it could erode the amount left to their beneficiaries.”
Permanent Life Insurance to Avoid Future Payments
Patrick Wehling, Owner of Wehling Insurance Agency, says, “Seniors looking to purchase a home and avoid future premium payments may find converting their life insurance policy into a paid-up policy a valuable option. If a senior has accumulated enough cash value, they can use it to fund a home purchase and then adjust the policy to remain in effect without requiring additional premium payments.”
Patrick explains, “For many seniors who are concerned about their fixed income and the burden of monthly premiums, converting to a paid-up policy can be a great way to maintain their life insurance coverage without the worry of ongoing premium costs.” By utilizing the policy’s cash value for a home purchase and then converting the policy to paid-up status, seniors can secure their homes while avoiding additional financial strain.
Utilizing Life Insurance in a Reverse Mortgage Scenario
Patrick Wehling also highlights that life insurance can play a critical role in a reverse mortgage situation. “For seniors who already own their homes, a reverse mortgage can help unlock home equity to cover living expenses. In such cases, life insurance can be used to pay off the reverse mortgage balance or cover ongoing costs like property taxes and insurance.”
“This ensures seniors can stay in their homes for the long term, without the risk of financial difficulties causing them to lose their property,” Patrick adds. Life insurance in reverse mortgage scenarios can be a lifeline, helping seniors maintain homeownership while securing their financial future.
The Benefits of Using Life Insurance for Homeownership
There are several benefits to using life insurance as a tool for homeownership, particularly for seniors:
Low or No Interest Rates
Loans taken out against life insurance generally have lower interest rates than other types of loans. Because the loan is collateralized by the policy’s cash value, the lender is taking less risk on the individual, which theoretically allows the senior to obtain a more favorable term on the loan.
No Credit Check
Lending against a life insurance policy usually does not require a credit check. Seniors who may have lower credit scores because of low income or previous financial problems may be able to benefit from this.
Flexible Loan Terms
Life insurance policy loans are also more flexible than typical home loans. And since the loan is secured against the policy’s cash value, if a senior’s financial needs change, the repayment schedule and amount can be modified to suit. Furthermore, the loan is frequently not due during the lifetime of the senior.
Increased Access to Homeownership
A life insurance can be an alternative option to a mortgage for seniors who may have issues getting approved for a typical mortgage if their income does not meet the necessary standards. Collateralizing or using a down payment when buying a home with life insurance can enable seniors to purchase a home when no other options exist.
Considerations and Risks
While using life insurance to fund homeownership can offer several advantages, there are also important considerations and risks to be aware of:
Impact on the Death Benefit
The death benefit of a life insurance policy is decreased when borrowing against or withdrawing from the policy. That would mean that the policy’s beneficiaries would end up receiving less money when the senior passes away. Seniors should weigh how using the life insurance policy could impact their estate plans as well as the financial well-being of their loved ones.
Repayment Requirements
While life insurance loans do not have strict repayment schedules, it is still important to pay them back if possible. If a loan is not repaid, the remaining debt will be subtracted from the death benefit. Additionally, interest will continue to accumulate on the loan, increasing the amount owed.
Policy Surrender
If the senior decides to surrender the life insurance policy or if the policy lapses due to non-payment, the senior may lose access to the cash value. This could have significant financial implications, especially if the policy was being used to fund a home purchase or cover ongoing home-related expenses.
Conclusion
Using life insurance as a tool for homeownership is an innovative solution for seniors looking to secure stable housing or even purchase a dream home. By leveraging the cash value of whole or universal life insurance policies, seniors can access funds for down payments, mortgage loans, or home improvements without relying on traditional financing options.
