Can Life Insurance Help Pay for Long-Term Care?
If you own a life insurance policy, you likely bought it to provide financial support for your loved ones after you pass away. However, you might not realize that your policy could also offer a safety net if you require long-term care.
“I often tell clients, ‘You may have bought life insurance when your kids were young … Maybe it served you well at the time, but you could repurpose it,’” says Erin Ardleigh, founder and president of Dynama Insurance. She further explains that while it shouldn’t be considered the primary solution, life insurance can provide an alternative for those who lack other means to cover long-term care expenses.
Why You Might Rely on Life Insurance
According to the Department of Health and Human Services, most adults aged 65 and older will eventually need some form of long-term care. This care involves assistance with daily personal tasks like bathing, dressing, and eating. It can be provided at home, in the community, or in a facility.
Despite the existence of insurance products designed to cover long-term care, they are not widely owned. LIMRA reports that only about 3% to 4% of adults over 50 have a long-term care insurance policy. Traditional health insurance and Medicare typically only cover short-term, medically necessary care following a hospitalization, not non-skilled assistance with daily living activities.
Medicaid does cover long-term care, but eligibility is restricted to those with limited income and assets, with requirements varying by state. If you neither have long-term care insurance nor qualify for Medicaid, you may have to self-fund such expenses, drawing from your savings or assets. In this situation, a life insurance policy could be a valuable asset.
Strategies to Access Life Insurance for Long-Term Care
It’s essential to acknowledge that using these strategies will reduce the death benefit, potentially resulting in a smaller payout or none at all for your beneficiaries. As Ardleigh points out, the initial question to ask is whether the death benefit is needed.
Additionally, it’s crucial to understand that some or all of these options might not be suitable for your situation. “Understand your policy, ask questions, engage your trusted advisor and don’t rush to make any of these decisions,” advised Ardleigh.
Utilize Policy Riders
When you purchased your life insurance policy, you might have chosen to add riders, which provide extra benefits. Some riders allow you to access the death benefit while still alive.
- Accelerated Death Benefit: This allows you to receive part of your death benefit if a doctor certifies that you have a terminal illness, typically with a life expectancy of 12 months or less. This rider is available on both term and permanent life insurance policies and can be paid as a lump sum or in installments.
- Chronic Illness Rider: This rider allows access to your death benefit if a doctor certifies that you have an ongoing illness and need help with two of the six activities of daily living (bathing, dressing, eating, toileting, walking, and transferring) or have cognitive impairment. This is available only on permanent life insurance policies and often has a monthly or annual limit on the accessible death benefit, according to Ardleigh.
- Long-Term Care Rider: This rider allows you to use your death benefit specifically for long-term care services, as stated by Tony Steuer, author of Questions and Answers on Life Insurance. You must need assistance with two of the six activities of daily living or have cognitive impairment, such as dementia, to qualify. This rider might use an indemnity model that pays a set amount regardless of care costs, or a reimbursement model that only covers qualified long-term care expenses and requires receipts.
Access the Cash Value in a Permanent Policy
Permanent life insurance policies such as whole life, universal life, variable life, and variable-universal life policies, build up cash value alongside the death benefit. If you have one of these policies, you can access the cash value in a number of ways:
- Borrow against your policy’s cash value: You can borrow up to a certain percentage of your policy’s cash value, but this will reduce the death benefit if you don’t repay the loan. Interest will accrue and be automatically deducted, potentially causing your policy to lapse if not monitored closely. “While a loan sounds like a nice option, it comes with a lot of maintenance and effort on your part,” cautions Ardleigh.
- Make a partial withdrawal: You can withdraw from your policy’s cash value without paying interest, according to Steuer. However, this will reduce the death benefit, could decrease the future performance of your policy’s cash value, and might lead to premature policy termination.
- Surrender your policy: You can cancel your policy altogether and receive the cash surrender value. However, you may have to pay a surrender charge and a portion of the cash value could be taxable.
Convert to a Hybrid Policy with a 1035 Exchange
Hybrid life insurance policies provide both life and long-term care benefits. If you have a whole life insurance policy, you can use a 1035 exchange to convert it into a hybrid policy, according to Steuer. This requires significant cash value (at least $50,000), which will be used for the premium payment of the new policy. However, a downside is that it needs medical underwriting before you need long-term care.
Sell Your Life Insurance Policy
You can sell a term or permanent life insurance policy to a third party through a life settlement. While you won’t receive the full death benefit, state insurance laws require you to get more than the cash surrender value. According to Michael Freedman, CEO of Lighthouse Life, this can be 3 to 10 times more than surrender value. The amount you receive depends on factors such as your health, the policy type, premium payments, and the death benefit. If you sell your policy, you’ll receive a lump-sum payment, and you’ll only be taxed on the amount exceeding the premiums you paid. Proceeds are exempt if you are chronically or terminally ill.
