Can Life Insurance Help Pay For Senior Care?

By Joyce Logan, Founder, Ruby Care | Guest Contributor

When a parent or spouse needs more care, the financial questions can feel just as overwhelming as the care decisions. Families begin looking at monthly income, savings, long-term care insurance, veterans benefits and possibly the value of the home.

One resource is easy to overlook: a life insurance policy that may have been purchased many years ago.

Most people think of life insurance only as money left to loved ones after someone dies. Depending on the type of policy, however, it may have value that can be used while the policyholder is living. That money could help with home care, assisted living, memory care or another long-term care expense.

Sometimes the answer is no. A basic term policy usually does not build cash value. Sometimes the answer is yes, but using the policy comes with tradeoffs. Money taken from a policy today can reduce what beneficiaries receive later, and certain transactions can affect taxes or Medicaid eligibility.

Before assuming the policy is useful, or useless, it is worth finding out exactly what you have.

Start by calling the insurance company

Ask the insurance company for a current policy statement and an in-force illustration. An in-force illustration shows how the policy is performing today and what may happen if the owner takes a loan, makes a withdrawal or changes the coverage.

You will want to know:

Is the policy term, whole life, universal life or another type of permanent coverage?
What are the current death benefit and cash surrender value?
Are there outstanding loans or unpaid interest?
Does the policy include a long-term care, chronic illness or accelerated death benefit rider?
What must happen before those benefits can be used?
How would each option affect the amount left to beneficiaries?
What could cause the policy to lapse?

The Texas Department of Insurance life insurance guide explains the differences among common policies and how cash value, loans, withdrawals and accelerated benefits may work.

Check for benefits that may already be included

Some policies have a long-term care rider or another type of living benefit. These riders may allow the insured person to use part of the death benefit while still living.

A long-term care rider may begin paying when the policyholder meets the policy’s definition of needing care. That often involves needing help with activities such as bathing, dressing, eating, transferring or toileting, or having a qualifying cognitive impairment. An accelerated death benefit may have different requirements, such as a terminal illness or another condition named in the policy.

Every policy is different. Some reimburse approved expenses after they are paid. Others provide a set monthly amount. There may be a waiting period, a limit on how much can be used and restrictions on where care is provided. The National Association of Insurance Commissioners offers a helpful explanation of long-term care riders and accelerated death benefits.

The most important question is simple: If benefits are used now, how much life insurance will remain later?

Borrowing or withdrawing from cash value

If the policy has accumulated cash value, the owner may be able to borrow against it or take a partial withdrawal. These options can provide money without immediately giving up the entire policy.

A loan accrues interest. If it is not repaid, the balance generally reduces the death benefit. Too much borrowing can also put the policy at risk of lapsing. The NAIC’s life insurance roadmap advises policyholders to understand the real cost of a policy loan, including the interest and the effect on beneficiaries.

A withdrawal does not normally have to be repaid, but it reduces the value of the policy and may reduce the death benefit. Taxes may apply when withdrawals exceed what the owner paid into the policy. The insurance company should provide a written illustration showing how a proposed loan or withdrawal would affect the policy over time.

Surrendering the policy

The owner may also decide to surrender, or cancel, a permanent policy and receive its net cash surrender value. This can produce a lump sum for care, but the life insurance coverage ends and beneficiaries receive no death benefit from that policy.

The amount paid may be less than expected after surrender charges, outstanding loans and interest are deducted. Part of the proceeds may also be taxable. The Texas Department of Insurance recommends considering the tax and financial consequences before making this decision.

Before surrendering a policy, ask the insurer to compare the net surrender value with other choices, including a smaller withdrawal, a policy loan or reduced coverage. Once a policy is surrendered, replacing it later may be difficult or much more expensive because of age or changes in health.

Selling the policy through a life settlement

A life settlement is different from surrendering a policy. Instead of returning it to the insurance company, the owner sells it to a third party. The buyer takes over the premiums and eventually receives the death benefit. The policyholder receives a payment now.

The offer is generally less than the death benefit and may be more than the policy’s surrender value. Age, health, policy size and future premiums all influence what a buyer is willing to pay.

Texas requires life settlement companies to be licensed. The Texas Department of Insurance’s guidance on selling a life insurance policy recommends comparing offers and warns that the proceeds may affect taxes, Medicaid and other public assistance. Selling also means the original beneficiaries will no longer receive the policy benefit.

Exchanging the policy for long-term care coverage

For someone planning ahead, another possibility may be a direct Section 1035 exchange. This allows certain life insurance policies to be exchanged for a qualified long-term care insurance contract without recognizing a gain at the time of a qualifying exchange.

This is not the same as taking cash out. The policy’s value moves into different coverage intended to help with future care. The new policy may require health underwriting and can have its own premiums, waiting periods, limits and fees. Outstanding policy loans or money received during the exchange can also create tax issues.

The IRS instructions for Section 1035 exchanges explain which contract exchanges may qualify. Because these transactions can be complicated, an insurance professional and tax advisor should review the details before the policyholder makes a change.

A Texas Medicaid warning

If Medicaid may be needed now or later, do not change, transfer, surrender or sell a policy without speaking with an elder law attorney who understands Texas Medicaid.

Texas may count the cash surrender value of certain life insurance policies as a resource. Money received from an accelerated benefit or life settlement may also affect eligibility, depending on when it is received, whether it is retained and how it is structured.

Texas has special provisions for certain irrevocable life settlement accounts that are set aside to pay for long-term services and supports. The rules are detailed, and not every account or transaction qualifies. The Texas Health and Human Services Medicaid handbook explains how the state treats cash surrender value, accelerated payments and life settlement proceeds.

Tax treatment can also vary. For example, the IRS guidance for long-term care and accelerated death benefits explains that qualifying benefits may be excluded from income in certain circumstances. A tax professional should review the individual situation rather than assuming the proceeds will or will not be taxable.

Do not look at the policy by itself

Finding money in a life insurance policy is only one part of the decision. The family also needs a realistic picture of the care that is needed and what it will cost.

A policy may provide enough money to help for several months or several years. The answer depends on the amount available, the person’s monthly income, the level of care and whether needs are likely to increase.

Before making a decision, ask:

What care is needed today?
Is home still a safe and realistic option?
Would assisted living or memory care provide more appropriate support?
How much will the preferred care option cost each month?
How long would the policy proceeds last?
Does a spouse or another family member depend on the death benefit?
Could Medicaid be needed in the future?

These are not questions one professional should answer alone. The insurance company can explain the policy. A financial advisor or tax professional can review the financial impact. An elder law attorney can address Medicaid and estate planning. A senior living advisor can help the family understand local care choices and realistic costs.

How Ruby Care helps families

Ruby Care Senior Living Advisors helps Dallas-Fort Worth families understand their senior living options, compare communities, coordinate tours and prepare for the next step. Our guidance is provided at no cost to families. Ruby Care is compensated by participating senior living communities when a client moves into one.

We do not sell insurance or provide legal, tax or investment advice. We can help your family understand the type of care that may be needed and what local options are likely to cost. That information can make conversations with your insurance, financial and legal professionals much more productive.

An old life insurance policy may not be the answer, but it is worth asking the question. Before letting a policy lapse or assuming it can only help after a death, have it reviewed. There may be value available for care today, and families deserve to understand both the benefit and the cost of using it.

Need help exploring senior living options in Dallas-Fort Worth? Contact Ruby Care Senior Living Advisors to speak with a local advisor.

Helpful resources

PLEASE NOTE: This article is for general educational purposes and is not legal, tax, insurance or financial advice. Policy provisions and individual circumstances vary. Consult qualified professionals before changing, selling, borrowing against, surrendering or exchanging a life insurance policy.

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