As a senior, the thought of selling your long-time family home and relocating into a new one can be an exciting, but overwhelming process. Whether you’re downsizing, moving to a retirement community or simply seeking a change in lifestyle, the financial ramifications of such a move can be daunting. However, one resource that’s often overlooked but can help facilitate this transition is life insurance.
In this article, we’ll discuss the role that life insurance can play in helping fund your next move after selling your home, the types of life insurance available to you, and how to integrate them into your overall retirement and estate planning strategies.
The Importance of Financial Planning for Seniors
Before you get into the details of how life insurance can be used for real estate purposes, it’s important to understand why financial planning is particularly important for seniors. As you enter into retirement, many of your sources of income change, and you may no longer have the same level of income that you received when working. Social Security, pensions, or retirement savings may not be enough to pay all of your living expenses, especially if you’re considering a move.
“Selling your home may be an important aspect of that planning, as proceeds from the sale may help pay for your next living situation”, says Peter Colis, CEO of Ethos Life. However, it’s important to make sure that your move is aligned with your financial goals, including making sure that you have enough to cover the costs of moving, any taxes that may be due, and, if applicable, the purchase of a new home or rental property.
Life insurance is one option that can help you fill in any gaps in your finances during this transition. With the right type of life insurance policy, you can have access to a cash value that you can use as a resource to make your move a little easier and not as financially burdensome.
Types of Life Insurance to Help You Finance a Move
Not all life insurance policies are created equal, and seniors should consider what types of life insurance policies are best for their financial needs. There are two primary forms of life insurance that can financially help you as you relocate: term life insurance and permanent life insurance.
Term Life Insurance
Term life insurance will cover a specific number of years, usually 10, 20 or 30 years. While term life insurance doesn’t accumulate cash value, the policy can deliver a substantial death benefit to your beneficiaries, which could be used to help cover debts or other financial obligations. Peter suggests that if you have dependents or a spouse that may be left with the responsibility of your home after your death, term life insurance can help to ensure that they are not left facing financial hardship. However, for the purposes of funding a move after selling your home, term life insurance may not be the best option unless you are still working and need insurance to protect your family.
Permanent Life Insurance
Permanent life insurance policies such as whole life insurance or universal life insurance are more flexible and can accumulate cash value over the years. These policies have lifelong coverage and a portion of your premiums go towards the build-up of a cash value. This cash value is available for your lifetime, either through loans or withdrawals, making it the perfect source of cash for seniors who need extra money for their move.
The two most popular permanent life insurance options are:
Whole Life Insurance: This insurance offers guaranteed life insurance coverage and the cash value increases at the set rate. Whole life insurance is often the most stable insurance, and provides predictable returns. You can borrow against the cash value or you can withdraw it to help fund your move.
Universal Life Insurance: This type of life insurance is more flexible than whole life insurance, as you have an option to adjust your premium payments and the death benefit as your financial needs change. Universal life insurance usually offers the facility to build cash value in your lifetime that you can access during your lifetime.
Using Life Insurance Cash Value for a Down Payment
One of the most common methods for using life insurance to fund your next move is by using the accumulated cash value to help you purchase a new home . If you are downsizing or moving into a more affordable property, your home sale may have raised enough funds to make the purchase but you may need some money for a down payment, closing costs, or even moving costs.
Here’s how life insurance can play a key role in funding your next home:
Cash Value: Accessing cash value depending on the type of policy you have, you may have access to the cash value of your permanent life insurance policy. This may be done by way of a policy loan or withdrawal. Policy loans are often lower interest rates than traditional bank loans and the interest can even go directly to your policy’s cash value.
Supplementing Other Sources of Funds: If the proceeds from your home sale aren’t enough for your next home’s down payment, the cash value from your life insurance can help bridge the gap. By tapping the resource of life insurance as a down payment, you can avoid taking out high interest loans or dipping too far into your retirement savings.
Low-Interest Loans: When you opt to take a loan against your life insurance policy, the interest rate is typically lower than other loan options. This means that you can have access to the money that you need without overburdening yourself with high costs or taking on debt that could strain your financial future.
Using Life Insurance to Pay for Moving
“Moving to a new home isn’t simply about purchasing the property itself”, says Zack Moorin, Founder & CEO of Zack Buys Houses. He also adds says, “there are also costs associated with the physical move, such as the use of moving companies, cost of packing materials, and transportation cost.” If you are moving to a new location, you may need money for travel and for short-term accommodations.
Life insurance can be an important tool in covering these additional costs:
Loans or Withdrawals: In addition to helping with the down payment for a new home, the cash value of your life insurance policy can be tapped for moving related expenses. This may be anything from hiring movers, paying for travel or new furniture for your new home.
Flexible Use of Funds: Unlike specific-purpose loans or grants, the cash value of life insurance can be used for anything, including moving costs, without restrictions.
Estate Planning and Life Insurance for Real Estate Transactions
In addition to using life insurance to pay for your move, it’s important to consider how life insurance fits into your broader estate planning strategy. Life insurance can be a tool for protecting your assets (such as your home) and ensuring that your assets can be managed by your heirs when you pass on.
Estate Taxes and Real Estate: If you’re planning to leave your home to your children or other heirs, life insurance can help cover estate taxes, which may otherwise force your heirs to sell your home to pay for the taxes.
Legacy Planning: Permanent life insurance policies often serve to create a legacy. By leaving a death benefit to your heirs, you can ensure that they are financially equipped to deal with your home’s transfer or sale. This in turn could help them keep the home within the family or sell without the family suffering financially.
Examples of Making a Move with Life Insurance
To better understand how life insurance can benefit a real estate deal, let’s use these two case studies:
Case Study 1: Downsizing to Retirement Community
John and Mary are both in their mid-70s and chose to downsize from their 3-bedroom home in the suburbs to a 2-bedroom apartment in a nearby retirement community. They sold their home for $400,000, but needed $100,000 for a down payment on the apartment. They had an entire life insurance policy with a cash value of $50,000, which they used toward part of the down payment. They took a loan for the rest of the $50,000 so they’d be able to make the transition without having to put their savings in.
Case Study 2 Moving to Be Closer to Family
Helen, a 72 year-old widow, decided to sell her home in Florida and move to Texas to be closer to her children. The money obtained from the sale was sufficient to pay the price of a smaller home, but she also needed money for the moving process. Helen had a universal life insurance policy and the cash value of the policy totaled $30,000. She used this to pay for moving costs, travel, new furnishings for her home.
Conclusion
Selling your home as a senior can be a complicated and emotional process but with a little planning and the right financial tools, it doesn’t have to be overwhelming. Life insurance can be a valuable tool to help pay for your next step in life, whether it’s purchasing a new home, moving costs, or making sure your home is a legacy to your family.
By relying on the cash value of a permanent life insurance policy, you can prevent tapping into your retirement savings, or resorting to high interest debt. As you plan for the next phase of your life, it’s important to consider how life insurance can not only protect your loved ones, but also make your real estate transactions smoother and more financially manageable.
