Long-term care is expensive. For seniors who don’t have enough savings or long-term care insurance coverage, there are ways to use a life insurance policy to help pay for long-term care. These include selling a policy to create a long-term care benefit plan, setting up a living benefit program with the life insurance policy, surrendering the policy for cash value, and more. Read on for details, plus insights from industry insiders.
“If seniors don’t have a long-term care plan in place, the cash in [their] life insurance policy is a great place to start,” says Sam Price, an independent life insurance broker and owner of Assurance Financial Solutions.
But before figuring out whether a loved one’s life insurance can help cover their long-term care costs, you need to understand what kind of policy they own. Here’s a quick overview:
It’s important to note that nursing homes typically can’t take a life insurance policy payout away from named beneficiaries upon the insured’s death. Check with an elder law attorney to learn more.
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Below you’ll learn how to utilize a life insurance policy to pay for senior care, including assisted living, nursing home care, and more.
With a life settlement, a policyholder sells their life insurance policy to a third party for market value and uses 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 death benefit of $50,000.
It’s best to delay a life settlement until one actually needs 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,” Gurley explains.
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. The administrator then makes payments directly from the bank account to the home care agency, assisted living facility, or skilled nursing community on behalf of the person receiving 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 to receive up to 50% of a life insurance policy’s death benefit while still reserving some death benefits for family. For example, if your loved one has $200,000 in coverage, it could be possible to secure up to a $100,000 living benefit. They don’t lose their entire life insurance and their beneficiaries remain. With the cash advance, your loved one can pay for their medical and senior living expenses.
To qualify for a living benefit program, one 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 credit history won’t be checked. Additionally, there are no out-of-pocket expenses involved. It is important to note a living benefit is essentially a loan against the policy. The entire loan, including any interest, must be repaid or it will be deducted from the death benefit of the policy. Following the death of the insured, the difference between the loan and the death benefit will go to the named beneficiaries.
A living benefit program works with all types of life insurance policies, including the following:
Keep in mind, loan proceeds are not taxable, and interest rates can vary depending on the state. Make sure to check with the loan provider for specific interest rates.
A copy of the insured’s medical records and a recent life insurance policy statement are required to approve the loan. Once approved, funds may be disbursed in as little as three weeks from the date of application. Going forward, life insurance premiums may be waived. Additionally, the policyholder cannot be held personally liable for the loan.
When a policy owner “surrenders” a life insurance policy to the insurance provider, they give up ownership and the death benefit. If the policy has accumulated cash, the insurance company writes a check for the full amount of cash value. In many cases, taxes must be paid 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 your loved one plans to use Medicaid to pay for long-term care, the cash portion of their life insurance policy — or the amount they’d receive when surrendering the policy — can be considered an asset and count against them 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.
If your loved one takes a loan from their life insurance policy’s cash value, they won’t have to pay taxes on it. They can’t take it all, though, or the policy will lapse. However, a policy holder can usually take most of the cash value in a loan that they then pay back to themselves 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 there’s time to plan, your loved one may be better off doing what’s known as a 1035 exchange. This exchange involves using 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 a policyholder to use an existing life insurance policy’s cash value toward a new life insurance policy with long-term care insurance benefits. For example, your loved one 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.”
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