How To Use Life Insurance To Fund Long-Term Care For A Loved One You're Caring For

Amanda Lambert

Long-term care can be a confusing term due to its various meanings. As your loved ones age, they will most likely have long-term care needs that entail either different senior living options such as in-home caregivers, assisted living, independent senior living, or a nursing home.

The question is how to pay for the type of care that Medicare, Medicaid, and other insurance options don’t cover. Medicare generally covers time-limited home health, hospice, adult day care,  and skilled nursing care for rehabilitation, but the aging process can require hands-on caregiving for years.

Medicare will not provide long-term care coverage for your health care. Other private health insurance is also limited in what they will pay for.

As the cost of long-term care continues to rise and as the primary caregiver, you should be concerned about what it means for your loved one and other family members. Genworth estimates the median monthly cost of assisted living in 2022 to be $4635. Some areas of the country will be much higher. 

Many older adults opted for traditional long-term care insurance policies. These insurance policies can work well for families, but in most cases, there is no reimbursement of premiums paid at the time of death, depending on the type of policy you have. And there is a waiting period before benefits begin. 

Also, there are strict requirements related to meeting the criteria of challenges with activities of daily living. To address the problem of losing premiums paid upon death, estate planners and families consider other ways to pay for the long-term care of a loved one. Life insurance is one way to finance long-term care, and hybrid life insurance and long-term care insurance policies are becoming more popular. 


How Does Life Insurance Pay for Long-Term Care?

There are several ways that life insurance pays for Long-Term Care. The types of policies can be complicated so make sure you understand the pros and cons of all of them.

Life Settlement

A life insurance policy has value and some companies will purchase your life insurance policy. 

At the time of sale, the company agrees to pay a percentage of the policy’s face value over several months. The total amount paid will be less than the policy’s death benefit. The term for this type of conversion is “life settlement.” 

The company that buys your policy is the new owner of the policy and they take over the payment of the policy’s monthly premium. The new policyholder will collect the full amount of the death benefit when the policyholder dies, except for a small amount for funeral expenses that goes to the original policyholder’s beneficiary.

This process “converts” a life insurance benefit into a long-term care benefit. Selling your life insurance policy can free up funds for assisted living or in-home care and alleviate payment of premiums, but you may be taxed on the amount you receive.  

All types of life insurance policies can be converted, but the money must be used for long-term care, such as an assisted living facility. You will not have to go through underwriting to get the benefit which means you can be healthy and still qualify.

Viatical Settlement

A viatical settlement is similar to a life settlement in that you sell your policy to a company. 

The difference is that you must have a chronic or terminal illness with less than two years to live, as determined by a medical exam and statement from your physician. With a viatical settlement, your heirs will receive no death benefit payout.

Accelerated Death Benefits

Accelerated death benefits are similar to viaticals. 

An accelerated death benefit is a provision written into the life insurance policy that allows the policyholder to begin collecting on the value of the policy tax-free while they are still alive if they are diagnosed with a terminal illness.

An accelerated death benefit can also help with the policy that states you need long-term care services for an extended time, are in a nursing home, and are incapable of performing activities of daily living.


Are These Life Insurance Policies Enough to Fund Long-Term Care?

Whether cashing in on a life insurance policy will be enough to fund long-term care is a critical question to consider. 

Think about other sources of income should the policy not be sufficient to cover long-term care costs and maximize any Medicare-covered services such as home health care and hospice.

What is a Hybrid Life Insurance Policy?

Hybrid policies are life Insurance policies that attempt to offer consumers a more flexible approach to financing long-term care needs while leaving a benefit to family members.

Hybrid life insurance policies include:

Linked Benefit Life Insurance

A linked benefit insurance policy is a hybrid policy that links a life insurance policy with a long-term care policy. Typically, the long-term care benefit amount is equal to about five times the premium you pay. 

Long-Term Care Rider on a Life Insurance Policy

When you buy life insurance, you may have the option to add a long-term care rider. The rider pays for in-home care or a senior living facility. The care benefits probably won’t be as robust as a traditional long-term care policy. 

Payments for long-term care decrease the death benefit and can only be used for five years. 

To use the long-term care rider, you need to meet similar criteria as a traditional long-term care policy which requires assistance with two out of six activities of daily living. An elimination period before using benefits may also be required.

Chronic Illness Rider on Life Insurance

When you purchase a life insurance plan, you can add a critical or chronic illness rider. You can then take money from your death benefit to pay for your care, and there is no time limit. 

If you qualify, you can get a lump sum to pay for a care facility or in-home services.

Plan for Long-Term Care Using a Life Insurance Policy

Using one of the many life insurance products to pay for long-term care should be carefully considered in the context of your future estate planning.

Evaluate the financial strength of the companies under consideration. This is your money and you deserve to use it to pay for your care. Not every life insurance company is the same, and you will need to compare policies and companies.

After all, you don’t want your long-term care expenses to bankrupt you or your family.