Funding Senior Real Estate Downsizing with Life Insurance Cash Value

Downsizing a large, multi-level family residence is often perceived as a means of reducing maintenance and lowering utility bills in retirement; however, the cost associated with relocating can be substantial. A senior may have built up many years of home equity; however, they are unlikely to possess sufficient liquid assets to pay closing costs, move-in fees, or make an initial down payment on a new property.

Fortunately, some permanent life insurance products allow seniors to access their accumulated cash values without using any borrowed funds which could create debt, and therefore provide a possible solution to assist in the financial transition and facilitate a smoother relocation.

The Financial Friction of Downsizing

Relocation has many long-lasting economic impacts that can be much larger than the original cost of a new residence. Seniors are expected to pay for all of the expenses associated with purchasing a new house. Those expenses include: commission paid to realtor; costs of closings; actual relocation costs (moving); and all renovations/repairs necessary to ensure the senior’s safety while aging in place. The typical residential marketplace today operates extremely fast.

Therefore, it is common for seniors who wish to downsize to their own homes or take advantage of an expensive retirement community to need to provide large sums of money as a non-contingent deposit prior to closing. This process creates a huge amount of pressure for seniors and places them in a very vulnerable situation. They will have two options: sell their cherished family home quickly at a reduced price or borrow from a bank using a high interest loan for a limited period of time to fill the gap.

Unlocking Capital Via Life Insurance Cash Value

The purpose of permanent life insurance policies is two-fold. Primarily, the policy will provide a tax free death benefit to heirs upon your passing. In addition, over time the policy will build an equity that you can tap into for cash at any point in your lifetime. Your equity grows each month as premiums are paid through either a fixed rate of return (guaranteed) or market dividend returns. As such, seniors have complete legal rights to access this cash value if needed throughout their lives.

Because of this, there is less complexity and less risk involved than with traditional bank loan options. Specifically, the process involves little to no credit checks, long underwriting processes or invasive financial disclosure requirements. Instead of dealing with banks, you deal directly with yourself by tapping into an asset that has grown significantly over many years. Therefore, the need for instant liquidity does not require the same level of hassle associated with securing a mortgage.

Jack Donahue, President of Donahue Real Estate Advisors says, “Seniors facing the financial strains of downsizing often overlook the immediate liquidity trapped within their permanent life insurance policies. Utilizing the cash value from a whole or universal life policy allows retirees to bypass the stringent requirements, high interest rates, and rigid monthly repayment schedules of traditional bridge loans or HELOCs”.

He also adds, “Instead of waiting months for their primary residence to sell in a volatile market, seniors can leverage their policy’s equity to secure a down payment or fund structural modifications for a new home instantly. This strategic move preserves their fixed-income cash flow and grants them the leverage to negotiate real estate transactions on their own terms, transforming a stressful move into a controlled financial transition”.

Three Distinct Paths to Access Your Cash Value

Policyholders have three ways to use the cash built up in their life insurance policies; depending upon which option(s) you decide to use will depend on your short- and long-term financial goals and how you plan to manage your estate.

Policy Loans

You may take out a loan from the carrier using the accumulated cash as collateral. Since the cash has been used as collateral for the loan, this does NOT cancel your policy. You are free to repay the loan at any time with interest at a rate that is very competitive (you could also simply pay the interest). There are no restrictions on your ability to repay the loan; you can repay it by making monthly payments, paying just the interest each month, or, if you do not need to repay the loan, it will automatically be subtracted from your death benefit at your passing.

Partial or Full Surrender

If the original death benefit has become an non-essential part of the older person’s legacy strategy–for example, if all adult children are now financially independent then he/she may have the option of taking out a partial or full surrender. The policy owner may take out a partial surrender that will allow him/her to withdraw funds in a tax free manner up to the exact amount of money paid in by the policy owner as premium payments (the cost basis) during his/her life time. A full surrender would cancel the entire policy with payment being made back to the policy owner in a lump sum, less any carrier charges for surrendering the policy, to be used to pay off a mortgage on a new home.

Life Settlements

For seniors over 65 with unwanted policies life settlements are becoming a popular option. The institutional investor purchases the policy from the senior (the policyholder), takes over all future premium payments on that policy, and pays the senior a one-time lump sum payment which is greater than cash surrender value but less than the ultimate death benefit. That single payment can be used immediately to fund a cash-only real estate purchase.

Balancing Real Estate Speed and Financial Protection

Cash is the primary currency in highly competitive residential real estate markets. As such, buyers who have the ability to write offers contingent upon no other conditions than financing will find themselves in significantly better positions to purchase their desired properties at the best possible price. The life insurance cash value provides elderly clients with the same type of flexibility as a “cash” buyer; enabling them to remove much of the uncertainty surrounding coordinating both closings to occur within a reasonable time frame.

A critical consideration, however, when employing this strategy is the effect that it has on the senior client’s asset mix relative to the subject property. By moving equity out of a liquid form (the life insurance) and placing it into an illiquid form (a real estate investment), the senior client is changing the nature of their overall financial situation. Care should therefore be taken by the advisor or agent to ensure that the senior client maintains sufficient “base line” liquidity for ongoing living expenses and potential health care needs subsequent to closing.

Regarding this balance, Jonathan Carcone, Principal of 4 Brothers Buy Houses says, “When seniors downsize, they often find themselves caught in a timing trap: they need the proceeds from their current home to buy the next one, but making an offer contingent on a home sale puts them at a severe disadvantage. Pulling cash value from a life insurance policy eliminates this bottleneck entirely, allowing them to act as cash buyers”.

He further notes, “However, seniors must carefully evaluate how this move redistributes their wealth. While it solves immediate real estate friction, it converts a highly liquid, tax-advantaged financial asset into physical real estate, which is fundamentally illiquid. It is vital to work closely with real estate professionals and financial advisors to ensure that after the downsize is complete, the senior isn’t left ‘house-rich and cash-poor,’ maintaining a comfortable liquidity cushion for future medical or living expenses”.

A Strategic Path Forward

Downsize for the freedom to live your best life, with all the joys and peace that comes from living in an affordable and fulfilling environment. Seniors will have complete control over when they move by treating a permanent life insurance policy as a means to access current funds instead of just providing future death benefits. In turn, seniors will be able to confidently use their own money to purchase their dream retirement home; allowing them to make a seamless transition into retirement.