How Life Insurance Can Pay for Long-Term Care

Also keep in mind that some or all of these strategies might not be the right fit for you. “Understand your policy, ask questions, engage your trusted advisor and don’t rush to make any of these decisions,” Ardleigh says. 

Take advantage of your policy’s riders

When you bought your life insurance policy, you might have opted to pay for additional benefits known as riders. Some riders allow you to access your policy’s death benefit while you’re still alive. The amount you receive typically isn’t taxable, but you should double check with your insurance company and accountant, Ardleigh says.

An accelerated death benefit allows you to access some or all of your death benefit if you are certified by a doctor as being terminally ill, which is usually defined as having 12 months or less to live, Ardleigh says. This rider can be available on both term life and permanent life insurance policies and can be paid out in a lump sum or monthly installments.

A chronic illness rider allows you to access your death benefit if a doctor has certified that you have an ongoing illness and need assistance with two of the six activities of daily living (bathing, dressing, eating, toileting, walking, transferring, getting in or out of bed or a chair) or have cognitive impairment that requires supervision. This type of rider is available only on a permanent life insurance policy and usually has a monthly or annual cap on the amount of the death benefit that can be accessed, Ardleigh says. 

A long-term care rider lets you tap your death benefit specifically for long-term care services, says 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 could use an indemnity model that pays a certain amount regardless of care costs or a reimbursement model that will reimburse only for qualified long-term care costs and require receipts for services that are provided.

Access the cash value in a permanent policy

Permanent life insurance policies — whole life, universal life, variable life and variable-universal life — build up cash value in addition to the death benefit they provide. If you have a permanent life policy, there are a couple of ways you can access the cash value.

Borrow against your policy’s cash value: You can borrow up to a certain percentage of your policy’s cash value, but it will reduce the death benefit if you don’t repay the loan. Also, interest on the amount borrowed will accrue and automatically be deducted from your policy’s cash value, Ardleigh says. Your policy could lapse if you don’t closely monitor how the loan and interest is impacting the cash value. “While a loan sounds like a nice option, it comes with a lot of maintenance and effort on your part,” Ardleigh says. 

Make a partial withdrawal: You can take a withdrawal from your policy’s cash value without having to pay interest, Steuer says. However, the withdrawal will reduce your death benefit. And it could erode the future performance of your policy’s cash value and cause the policy to terminate prematurely, he says.

Surrender your policy: You can cancel your policy altogether and receive the cash surrender value. However, you might have to pay a surrender charge that will be a percentage of the accumulated cash value if you aren’t past the policy surrender period, which can be up to 16 years, Steuer says. And a portion of the cash value could be taxable.

Convert to a hybrid policy with a 1035 exchange

Hybrid life insurance policies are designed to 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 life insurance policy, Steuer says. It will need to have accrued significant cash value (at least $50,000), which will be used as a lump-sum premium payment for the new policy. 

The biggest drawback to a 1035 exchange is that it must be done before you need long-term care. It requires medical underwriting, so you must be relatively healthy to qualify. Steuer recommends working with an independent insurance broker who can help you explore your options and get quotes from multiple companies.

Sell your life insurance policy

You can sell a term life or permanent life insurance policy to a third party through what is called a life settlement. You won’t get an amount equal to the full death benefit. But state insurance laws require that you get more than the cash surrender value of your policy. “People get 3, 4,5 up to 10 times more than if they were to surrender it,” says Michael Freedman, CEO of life settlement company Lighthouse Life.

In most states, you can only sell your policy to a licensed buyer, which you can find through the Life Insurance Settlement Association’s online directory. The amount you get depends on your health. “Someone with a short life expectancy will get more,” Freedman says. “Someone in good health will get less.” 

Buyers also consider the type of policy you have, your premium payments and the amount of the death benefit to determine what sort of return they will get on their investment when you die, and they can collect the death benefit. Ardleigh recommends using a life settlement broker that has an auction platform to get multiple bids for your policy.

If you sell your policy, you will get a lump-sum payment that you can use how you want. You’re only taxed on any proceeds that exceed the amount of premiums you paid for your policy, Freedman says. Proceeds are exempt if you are chronically or terminally ill.