Can a Nursing Home Take Your Life Insurance Policy?

No, a nursing home cannot claim any death benefits from your relative’s life insurance policy, as long as the policy has named beneficiaries. If your aging parent names you and your siblings as policy beneficiaries, the nursing home that provided your parent’s care can’t take that payout from the policy directly.^[01]

However, if your parent names their estate as the beneficiary or chooses not to list a beneficiary at all (to allow assets to be divided by the family after death), a nursing home might be able to make a claim against the estate for any money owed toward the cost of your loved one’s care.

Paying nursing home debt with life insurance benefits

Nursing home care can be expensive, and your loved one may still owe money for their stay upon their death. If your family has incurred nursing home expenses or debt over time, it might be a good idea to use the life insurance benefits to settle that difference and eliminate the financial burden.

If your loved one has a debt, the nursing home can also file a claim against the estate to attempt to collect the funds. While the nursing home can’t take the money from your family directly, it can request the requisite funds.

Yes, seniors paying for nursing home costs with private funds may choose to use their life insurance policy to free up cash for long-term care. While a nursing home can’t take life insurance as a payment directly, it can accept the liquidated funds that come from selling or surrendering a policy.

Surrendering a life insurance plan at cash value to pay for a nursing home

When a senior “surrenders” their life insurance policy to the insurance provider, they give up ownership of the death benefit. In other words, the policyholder chooses to receive funds now rather than upon their death. So upon their loved one’s death, the originally named beneficiaries won’t receive payment.

A senior can also borrow against their policy in the form of an insurance loan. If the loan is repaid before death, the benefit can still be paid to beneficiaries.

The insurance company will write the policyholder (or their designated financial power of attorney) a check for a part of the cash value of the policy. Keep in mind that although this route frees up money now, it reduces the estate left for the senior’s family members in the long run.

Let our care assessment guide you

Selling a life insurance policy to pay for a long-term care benefit plan

With a life settlement, you sell your life insurance policy to a third party for market value and use the proceeds to fund a long-term care benefit plan. Generally, the shorter the policyholder’s life expectancy is, the higher the percentage of the death benefit that will be paid.

The determined amount is deposited in an FDIC-insured, irrevocable bank account that’s professionally managed by a licensed company that specializes in the payment of long-term care benefit plans on behalf of seniors. In this situation, the nursing home can take your life insurance directly through the administrator of your loved one’s long-term care benefit plan.^[02]

Read related article:Who Pays for a Nursing Home If You Have No Money?

Nursing homes can be expensive, but there are many ways seniors and families can pay for care. Some people rely on personal savings, pensions, and retirement funds, while others use VA benefits or cover aspects of their care with Medicare.

Many people, however, use Medicaid to pay for nursing home care. Medicaid is a government insurance program that’s jointly run by state and federal governments, and it’s designed to help seniors and other adults with disabilities pay for care they otherwise can’t afford. Some people already qualify for Medicaid based on their income and financial situation, while others have to “spend down” their assets to be eligible.

If your loved one plans to pay for nursing home care with Medicaid, it’s important to understand how to spend down assets without incurring a penalty period so they can qualify. You might be surprised to learn that, in some cases, life insurance counts as an asset and can affect Medicaid eligibility. This means a nursing home may not accept your loved one because of their life insurance policy.

There are three common types of life insurance policies. The type of life insurance your loved one has may affect their Medicaid eligibility or the funds available to cover nursing home care.

Whole life insurance

This is the type of policy that comes to mind when most people think of life insurance. It’s also the type that can affect Medicaid eligibility.

Whole life insurance is a permanent fund that an insured person pays into over the course of their life, and that fund accumulates value to be returned as a death benefit once the policyholder dies.

Policyholders can borrow against, cash out, or sell a whole life insurance policy. In other words, the policy can be exchanged for liquid assets if your loved one needs to access the funds while alive. For this reason, the value of a policy may not be exempt from Medicaid’s asset limit and could push their income and assets above the qualifying maximum. Medicaid policies vary based on your relative’s state of residence, so check with a local financial advisor to determine how to proceed.^[03]

Generally, policies are exempt up to a certain, state-specific face value. Face value is not the same as a death benefit payout amount. If the face value is too high, a whole life insurance policy can make your loved one ineligible for Medicaid.

Talk with a Senior Living Advisor

Term life insurance

Term life insurance doesn’t affect Medicaid eligibility. That’s because it doesn’t have a cash value — a payout only occurs if the insured person dies within the given time frame of their policy.

A policy term can be anywhere from one to 30 years. If the policyholder doesn’t pass away during that period, the policy can’t be cashed out or used as money. Because it has no cash value, a term life insurance policy doesn’t affect Medicaid’s asset limit.^[04]

Burial insurance

Burial insurance, often called funeral insurance, won’t affect your relative’s Medicaid eligibility. It’s a limited policy that’s specifically designed to cover the costs of a funeral, in addition to burial or cremation.

Because they can’t be exchanged for cash value and can exclusively be used after a policyholder’s death, burial insurance policies aren’t counted as assets during the Medicaid application process.^[04]

If you’re concerned about how your loved one’s life insurance policy will affect their ability to pay for care, consider contacting a financial advisor who specializes in elder care and estate planning. They can go over the specifics of your relative’s situation and determine the best course of action.

To learn more about how to find care that accepts payments from life insurance policies, contact one of A Place for Mom’s Senior Living Advisors. They’ll walk you through the process of finding a nearby senior living community and help you understand more about the payment process — all at no cost to your family.