How to Pay for Senior Living with Life Insurance Conversion

Apr 20, 2022
life insurance conversion

When young adults purchase a life insurance policy, it is generally with the intent of providing financial protection for their families if they pass away. But some life insurance policies have an added benefit that may help older adults pay for senior living after families are grown and on their own. That is life insurance conversion, which is essentially taking cash out of the policy to help pay for senior living costs. Here are some important things to know about life insurance conversion.

Different policy types, different options

There are many types of life insurance policies, but the two most common are whole life and term life and whole life.

Whole life insurance policies are permanent, span the entire lifetime of the policy holder and have fixed premiums. Whole life insurance is considered the most expensive type of life insurance, but it does have the benefit of cash value and thus offers the option for life insurance conversion to cash. More about whole life insurance can be found in the article, “Whole Life Insurance Explained.”

Term life insurance, which covers the policyholder for a pre-defined period of time, generally from one to 30 years, is often chosen to provide a death benefit during the time it takes to raise a family. Unlike whole life, term life policies have no cash value so are ineligible for a cash conversion. However, if the policy has a term conversion rider, it can be converted to a whole life policy when it expires, potentially allowing for a cash conversion. Find out more about term life insurance conversion in the article, “Converting a term life policy to a whole life policy.”

Less common and more complicated are universal life insurance policies, which do have cash value, but that value is based on investments (and market fluctuations) as are the premiums. Because there are different types of universal life policies experts recommend working with your life insurance agent to assess cash value and whether or not withdrawing cash is in your best financial interest.

Whole life insurance conversion options

Many people purchase whole life insurance not only for the death benefit but also because it provides a financial cushion. Once the policy has actually accrued a sizeable cash value that cash can be accessed in different ways:


Older adults who have paid into a whole policy for decades may choose life insurance conversion via a loan against the accrued cash value, often at a favorable interest rate (as specified in the policy). This type of loan is tax-free while the policyholder is alive.

Unlike many loans, paying off a whole life insurance loan is not mandatory. But the downside is that an unpaid loan, especially one taken out early on, may not only reduce the death benefit but will also accrue interest which if unpaid, is added to the loan. While it is possible to use life insurance dividends to pay off small loans, it likely won’t help with large loans that will continue to compound interest over time. For older policyholders who no longer need the death benefit, a loan can provide the cash they need to make senior living a reality.

Cash withdrawal

Another option is to make a cash withdrawal which is generally tax-free unless the amount withdrawn is greater than the amount that has been paid into the policy. In this case, the amount withdrawn will be taxed as income. Again, this will also lower the death benefit which is often not a big concern to policyholders in retirement.

Policy surrender

Finally, life insurance conversion by cashing out the policy is an option. Keep in mind, however, that the cash surrender value is not the death benefit but is an amount that is defined in the policy, and will incur fees for canceling the policy, as well as payment of any unpaid loans.  Although a policy can be surrendered at any time, the longer the policy is in effect, the more the cash surrender value will be. Life insurance conversion through surrender may also require payment of taxes on any amount received that is over the amount paid in.

For more about life insurance conversion for cash, check out the article, “How to Get Cash From Your Life Insurance Policy.”

In all cases, it is wise to consult with your life insurance agent or other financial professionals when considering life insurance conversion.

Ganton’s Countryside is a fun and vibrant senior living community with all the comforts of home and much, much more. For more information about Countryside, please call Margaret Nagel at (517) 206-5000 or download our brochure to learn about our care levels, cost, and amenities.

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