A mature couple smiles at what they see on a laptop screen.

Many people don’t realize how much value lies in their life insurance policy. You may know that cash in a life insurance policy for a lump sum, but did you also know that you can pay for long-term care with a life insurance policy? Learn more about using your life insurance policy to pay for senior care.

Long-term care benefit plans

Some life insurance policies allow you to convert them into something called a long-term care coverage plan. This type of policy is a pre-funded account that will send a monthly benefit to help pay for the policyholder’s long-term care planning. This type of plan (unlike life insurance) is a qualified asset for Medicaid.

When a life insurance policy is converted to a long-term care benefit plan, the ownership transfers from the original policyholder to whoever is acting as the benefits administrator. This means the original/former policyholder won’t have this counted against them in the Medicaid spending down process.

From the time of conversion, the coverage administrator takes on all the responsibility for paying the policy’s monthly insurance premiums. On top of that, the administrator must pay the former policyholder monthly benefit payments, the amounts of which are determined by the policy’s value — these payments can then be used to pay for the former policyholder’s long-term care.

Almost any type of life insurance can be converted to a long-term care benefit plan, including Universal, Whole, Term, and Group. However, the value after conversion is based only on the death benefit (does not factor in cash value).

Types of care covered

The types of long-term care that qualify to be covered by a long-term care benefit plan include services and support for an elderly person’s personal and health care needs. There are two basic types of care provided: Activities of Daily Living (ADLs) and Instrumental Activities of Daily Living (IADLs).

ADLs are functions that the average independent individual performs on their own every day. These can include:

  • Hygiene care
  • Getting dressed
  • Using the bathroom
  • Transferring between bed and chair
  • Helping care for incontinence
  • Eating

ADLs are daily tasks (as opposed to functions) an independent individual would typically do on their own.

Here are some examples of IADLs:

  • Basic housework
  • Money management
  • Taking medication
  • Preparing meals, and cleaning up afterward
  • Shopping (grocery and clothes)
  • Pet care
  • Using the phone and/or computer

Assistance with ADLs and IADLs occurs anywhere from a nursing home to the patient’s own home. Here are where these types of care take place:

An assisted-living facility offers 24-hour assistance, including meals, health care services, basic hygiene, taking medication, and help with ADLs and IADLs.

Home care happens in-home, at the patient’s home, or at the homes of other family members, friends, or volunteers. This can involve ADLs, IADLs, and even hospice care.  

Continuing care retirement communities offer services that can adapt to each resident’s needs as they age.

Nursing homes provide care to those who cannot get care at home or in the community. Nursing homes have everything an aging person would need, from daily living functions to medical care. Many times, they can be replacements for hospital care.

Ways to use life insurance for care

There are four basic ways through which you can pay for long-term care: combination products, accelerated death benefits, life settlements, and viatical settlements.

Combination products

Some people are hesitant to get long-term care health insurance because they’re not sure they will even end up using it, therefore losing money. That’s why some insurance companies have created plans that combine life insurance with long-term care insurance.

The basic idea behind these combination products is that the care policy benefits will be paid one way or another. Usually, the amount of long-term care benefit in the policy is shown by a percentage of the life insurance coverage.

Accelerated death benefits

In some life insurance policies, there’s a feature called an Accelerated Death Benefit (ADB) that lets you get a tax-free advance from your life insurance death benefit. In some cases, you will have to pay an extra premium to take advantage of this, and sometimes the health insurance company simply includes it in your care policy. Then whatever payments you get under the ADB coverage is taken from the amount that will go to your beneficiaries.

There are many different types of ADBs for different purposes. Depending on your policy, you may be able to use your ADB for any of these reasons:

  • A terminal illness
  • A life-threatening diagnosis
  • Need long-term care
  • Confined to a nursing home and cannot perform ADLs

If you have an ADB policy that covers long-term care services, the amount you can use for nursing home care per month is usually equal to 2% of your life insurance policy’s face value. And the amount available for in-home care is usually half of whatever that amount is. Contact your insurance company for the details of your policy.

Before you take advantage of an ADB policy, you may want to consider these things:

  • Policies with an ADB feature, you may not have to do a health screening. So if you have a health issue that could keep you from getting long-term care insurance, you may still be able to get a long-term care insurance policy, thanks to the ADB feature.
  • ADB policy payouts specifically for long-term care are usually limited, more so than the benefits of a long-term insurance care policy.
  • The ADB benefit payments may not be enough to cover your long-term care expenses.
  • Some ADB riders on life insurance policies don’t offer inflation protection, meaning the ADB payment may not cover all of your long-term care expenses. It’s important to discuss such rider issues with your provider.
  • If you’re planning on leaving an inheritance, keep in mind that using your life insurance for long-term care does take away from that inheritance.
  • Utilizing the ADB feature could affect your Medicaid eligibility. It’s best to check with your state’s Medicaid agency about this.

Life settlements

Life settlement plans let you sell your life insurance policy for its face value at the time of sale. Then you can use that cash for whatever you need, including long-term care services.

In most cases, this option is only available to women 74 years and older and men 70 years and older. Before you go with a life settlement plan, consider these factors:

  • Selling your life insurance for long-term care means there may be nothing left for your heirs when you pass away
  • Taking this option does not require any health screens, regardless of your health.
  • The money you earn from the sale may be taxed.

Viatical settlements

Similar to life settlement plans, viatical settlement plans allow you to sell your life insurance policy, except that you must use the proceeds for long-term care. Additionally, this option is only available if you’re terminally ill.

When you take advantage of this option, the viatical company buying your policy pays you a percentage of the death coverage in your life insurance policy (based on your life expectancy). The company then starts paying the monthly health insurance premiums and is the new owner and beneficiary of the policy. This type of settlement is tax-free.

Weighing the options

Now that you know all the options for converting your life insurance policy into some form of financial support for your long-term care, do any of these fit your situation? Is this the right choice for you?

Before making such a big decision, it’s best to first speak with your family, trusted friends, your doctor, and even a local social worker. These people can help you choose the right path for you.

Consider the pros and cons of converting your life insurance policy into a long-term care benefit plan.

Benefits of converting to a long-term care benefit plan

  • No more monthly premiums
  • Any type of in-force life insurance policy can be converted
  • The monthly disbursements for your long-term care are adjustable depending on how many months a person needs funding
  • These monthly disbursements don’t count against your eligibility to qualify for Medicaid
  • A long-term care coverage plan covers any type of long-term care planning (in-home care, nursing home, assisted living and hospice)
  • You’ll have a fund specifically for funeral expenses

Drawbacks of converting to a long-term care benefit plan

  • In most cases (as seen above), the disbursements are only allowed to go to long-term care services — payments go directly to the long-term care provider
  • If you have a life insurance policy of about $10,000 or less, it may be better to keep that policy or cash it in for the cash surrender value
  • If you have a large cash value included in your life insurance policy, you may prefer to take the cash value instead of converting the policy

Choosing a long-term care provider

Once you’ve decided on a conversion option and gone through the settlement process, you’ll be ready to begin your long-term care. But how do you know what long-term care provider to choose? Because the quality of care will vary depending on the provider.

First ask yourself three questions: What kind of services do I need? How will I pay for these services? How can I choose the best quality services?

Then when it comes to what to look for in a high-quality provider, here are some quick tips from the U.S. Department of Health & Human Services:

  • State agencies and accreditors vouch for the provider’s care
  • The provider offers the services you need
  • The provider’s staff is top-notch
  • Fits within your budget

If a potential provider offers all these things, then you’ll be in good hands during your long-term care.

To find more info on the long-term care services in your area, you can contact The Eldercare Locator at 1-800-677-1116 (open weekdays, 9.00 a.m. to 8.00 p.m. EST). You can also visit the Nursing Home Compare website to find a nursing home near you.

Questions to consider

When choosing your long-term care provider, it would be a good idea to ask some questions, both of the potential provider and yourself. Here are some questions you could ask (not every question applies to every type of long-term care):

  • Is the staff enjoyable to be around?
  • Is the atmosphere positive?
  • Do the staff members treat adults with respect?
  • Are the resident/provider’s patients well taken care of?
  • Is the facility generally clean?
  • What kinds of organized activities are offered?
  • Does the provider offer religious services?
  • Are there ever any trips outside of the facility?
  • Can I bring my own furniture and personal belongings?
  • Does the facility offer hospice services too?
  • Would it be safe to live here?
  • Does the facility have all of the necessary licenses and inspections?
  • Have current or former residents complained about this facility/provider?
  • How much will it cost to live here/receive services from this provider?
  • Under what circumstances, if any, would a resident be discharged?
  • And most importantly: Would I want to live here for a long period of time? Do I trust this provider?

Life insurance FAQs

Here are some of the most common questions when it comes to long-term care benefit plans as well as long-term care in general.

1. What is a Long-Term Care Benefit Plan?

A long-term care benefit plan is what you get after converting your life insurance policy. A long-term care benefit plan is a pre-funded account that will disburse a monthly stipend to help pay for the policyholder’s long-term care.

2. What types of life insurance can be converted into a long-term care benefit plan?

Almost any type of life insurance policy can be transferred into a long-term care benefits plan, including Universal, Whole, Term, and Group. The value of the conversion is dependent on the death benefit of the policy.

3. What types of care can a long-term care benefit plan pay for?

The benefits plan disbursement goes directly to the service provider and covers these types of care:

4. Is a long-term care benefit plan taxable?

Most of the funds converted from a life insurance policy to pay for long-term care are not taxable by the government. However, if you were to sell your life insurance policy (as opposed to converting it), those funds, generally, are subject to be taxed.

On the other hand, if someone has a chronic illness, that person may be exempt from paying taxes from the sale of a life insurance policy.

5. How much will my monthly benefit payment be?

First, the conversion value of your life insurance policy needs to be determined, which is based on a calculation involving the death benefit amount, the annual insurance premium payments, and the health care needs of the recipient.

Once the conversion value is set, the monthly disbursement to cover the long-term care services begins.

6. How long will my long-term care funding last?

On average, the long-term benefit payments last between one and three years. But you and a financial or legal advisor can adjust the monthly disbursements so they meet your exact needs.

7. Does a long-term care benefit plan have funeral benefits?

Yes, every Benefit Plan sets aside a percentage of the death benefit to fund a tax-free funeral benefit.

8. What happens if the participant dies before the long-term care benefit plan is paid out?

If a person dies while they still have leftover funds in their Benefit Account, the rest of the money goes (tax-free) to the listed beneficiaries.

9. When converting life insurance to a long-term care benefit plan, is there a transfer of ownership?

Yes, when you convert your life insurance policy to a Long-Term Care Benefit Plan, you are transferring the ownership to the new administrator. That admin is now responsible for paying your care provider for your long-term care. Fortunately, you will no longer have life insurance to count against you for Medicaid eligibility.

10. Do long-term care benefits plans qualify for Medicaid?

Yes. When you convert into a Long-Term Care Benefit Plan, it becomes an irrevocable account that is solely for paying a long-term care provider.

11. What States allow a conversion of life insurance into a long-term care benefit plan?

Every state in America allows you to convert your life insurance into a Long-Term Care Benefit Plan.

12. Is this type of benefit plan the same thing as a long-term care insurance policy or a policy loan?

No, a Long-Term Care Benefit Plan is not a Long-Term Care Insurance Policy or a Policy Loan. It’s actually a private market exchange of a life insurance policy for a Long Term Care Benefit Plan that’s been pre-paid/pre-funded. Unlike a loan, this is not something you have to pay back.

13. Can a life insurance company keep me from converting my life insurance into a long-term care benefit plan?

If your life insurance policy has been in force for a period longer than two years, it is past the point of contestability, meaning a life insurance company cannot prevent you from converting the policy.

14. Can Medicare pay for my long-term care?

In some cases, yes. If you need skilled services or rehabilitative care, then Medicare may cover the cost. However, Medicare will not cover non-skilled assistance with Activities of Daily Living (ADL), which is what most long-term care services involve.

15. Can the Department Of Veterans Affairs (Va) help pay for long-term care?

The VA can help pay for long-term care services if it involves a disability and for eligible veterans. They also provide different health programs, nursing homes, and in-home care. For more info, you can visit the VA’s website.

16. I’m in good health. Why should I consider long-term care?

You may never need long-term care, but even if you’re not currently in need of it, you may one day. One unexpected accident, sickness, or injury could lead to you needing long-term care, so it’s safest to consider your options before that happens. Trying to deal with all of this after you get ill or hurt would be very difficult.

17. How can I plan ahead?

First, you can look into your options for converting your life insurance into a Long-Term Care Benefit Plan. Understanding whom to talk with and what the settlement process looks like can be very helpful.

There are also some legal documents you should have prepared before you enter long-term care planning:

  • Health care power of attorney: a document that names the person who will be in charge or your medical decisions if you are not able to make them.
  • Living will: a document that records what you wish for your medical treatment toward the end of life. It states what treatment you do or do not want if you become terminally ill, permanently unconscious, or in the last stages of a fatal illness.
  • Do-not-resuscitate (DNR) order (optional): a document stating that you do not want health care providers to perform CPR or other life-supporting procedures if your heart were to stop beating or if you stop breathing.

To prepare these documents, it’s best to first speak with your loved ones and family members. These are definitely difficult things to talk about, but they are necessary. Once you speak with them, you can contact a lawyer to create the documents.