Long-term care is expensive. The median annual cost in 2020 for assisted living facilities was $51,600, according to recent research by Genworth. A private room in a nursing home was more than double that cost. These high costs are often covered by savings or retirement income and sometimes prompt people to purchase long-term care insurance.
However, if you don’t have enough savings or long-term care insurance, you can still use your or a loved one’s current life insurance policy to help pay for long-term care. “If seniors don’t have a long-term care plan in place, the cash in your life insurance policy is a great place to start,” says Sam Price, an independent life insurance broker and owner of Assurance Financial Solutions.
Before you figure out whether your life insurance can help you cover long-term care costs, you need to understand what kind of policy you own. Here’s a quick overview:
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. Any type of life insurance — permanent with cash value, group insurance offered through an employer, even term life — can be used. However, most companies specializing in these transactions require a minimum of $50,000 in a death benefit.
If you’re going to do a life settlement, it’s best to wait until you actually need long-term care, says Nicole Gurley, owner of Gurley LTCI, a brokerage company specializing in long-term care funding solutions. “Generally, the shorter the life expectancy, the larger percentage of the death benefit will be paid to the insured,” says Gurley.
For example, if someone with a $100,000 death benefit is 90 years old and needs long-term care, they could sell the policy and possibly receive as much as $60,000 of the death benefit. That amount is deposited in an FDIC-insured, irrevocable bank account and professionally managed by a licensed benefit management company specializing in the payment of long-term care benefit plans on behalf of the person needing care. The administrator then makes payments directly from the bank account to the home care agency, assisted living facility, or the skilled nursing community providing long-term care.
A living benefit program is a lump sum payment that’s available to people who meet specific medical criteria. A living benefit program makes it possible for you to receive up to 50% of your life insurance policy’s death benefit while still reserving some coverage for your family. For example, if you have $200,000 in coverage, it could be possible to secure up to a $100,000 living benefit. You don’t lose your entire life insurance and your beneficiaries remain. With your cash advance, you can pay for your senior living expenses.
To qualify for a living benefit program, you must have a life insurance policy with a death benefit of at least $100,000 in most cases. There is no other asset required, and your credit history won’t be checked. Additionally, there are no out-of-pocket expenses. It is important to note a living benefit is essentially a loan against your policy. The entire loan, including any interest, is ultimately repaid from the death benefit of the policy. Following the death of the enrollee, the difference between the loan and the death benefit will go to your beneficiaries.
A living benefit program works with all types of life insurance policies, including term, universal, whole, and group policies. Keep in mind, your loan proceeds are not taxable, and your interest rate can vary depending on the state. Make sure to check with your loan provider for your specific interest rate.
When applying, you’ll need a copy of your medical records along with a recent life insurance policy statement to approve your loan. You can expect to receive your loan in as little as three weeks from the date of application. Going forward, your life insurance premiums will be paid for you. Additionally, neither you nor your family can ever be held personally liable for the loan.
When you “surrender” a life insurance policy to the insurance provider, you’re giving up ownership and the death benefit. If the policy has accumulated cash, the insurance company writes you a check for the full amount of cash value. In many cases, you must pay taxes on that amount — but not always.
“If the cumulative premium amount paid over the life of the policy is more than your current cash value, there are generally going to be no taxes,” says Price. “However, if you’ve had the policy for several years and the cash value has grown beyond the premiums paid into the policy, then you’re going to owe taxes on the gain.”
Many companies differentiate between “cash value” and “surrender value,” so those amounts may differ in the policy’s early years. Insurance companies may penalize a policyholder who surrenders a policy early on. Also, if you plan to use Medicaid to pay for long-term care, the cash portion of your life insurance policy — or the amount you receive when you surrender the policy — can be considered an asset and count against you for Medicaid eligibility.
“Generally, permanent policies with cash value can count toward Medicaid eligibility when the death benefit is more than $1,500,” says Price.
Term life insurance, which has no cash value, won’t count toward Medicaid eligibility.
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You won’t have to pay taxes on cash received from your life insurance if you take a loan from the policy’s cash value. You can’t take it all, or the policy will lapse. However, you can usually take most of the cash value in a loan that you pay back to yourself with interest.
“If your health care needs are more than the money you have in the policy, you’re going to surrender the policy because you need every dollar,” says Price. “However, if your needs are less than the amount of cash value, then a loan might make more sense. That way, you can keep some portion of the death benefit in place.”
If you have time to plan and want to avoid paying taxes on any funds you may potentially receive from your current life insurance policy’s cash value, you may be better off doing what’s known as a 1035 exchange. This exchange allows you to use one insurance policy’s cash value towards a new policy without first cashing out and risking tax exposure.
A tax-free 1035 exchange also allows you to use an existing life insurance policy’s cash value toward a new life insurance policy with long-term care insurance. For example, you could use the cash value to fund premiums on a hybrid policy, which includes life insurance, long-term care benefits, and even living benefits for costs related to strokes, cancer, or illnesses that long-term care insurance may not cover.
“Sometimes, that’s a convenient way for people to fund long-term care insurance because the premium is not coming out of household income,” says Gurley. “You just take the cash value in an old policy and move it to a new policy that offers long-term care benefits.”
*Disclaimer: This information has been prepared and is only intended for educational and general informational purposes. This is not an authoritative guide. The information and content provided here are not intended to be relied upon for making personal, safety, insurance, medical, legal, or other decisions. Before you make any decisions about using your life insurance policy to help fund long-term care, make sure you consult a qualified life insurance or financial adviser for your specific long-term care needs.
Genworth. “Cost of Care Survey.”
National Academy of Social Insurance. “Designing Universal Family Care.”