A monthly care bill can change the role of a life insurance policy overnight. A policy once intended to leave money to children or grandchildren may now be one of the few meaningful assets available to support care at home, in assisted living, or in a nursing facility. Knowing how to use life insurance for long term care can help a family make decisions from a position of clarity rather than crisis.
The right path depends on the policy, the insured person’s health, the cost of premiums, and whether the family still needs the death benefit. Some policies include benefits that can be accessed while the insured is living. Others may have cash value that can be borrowed or withdrawn. For qualifying policyholders, selling a policy through a life settlement may provide a larger immediate cash payment than simply surrendering it.
Start With the Care Need, Not the Policy
Long-term care is not one expense. It may mean a home health aide a few days per week, around-the-clock assistance, adult day services, memory care, or a skilled nursing facility. The amount of cash needed and how quickly it is needed should guide the conversation.
First, ask what resources are already available. Retirement income, savings, long-term care insurance, veterans benefits, and family support can all affect the gap a life insurance policy may need to fill. Then review the policy itself: its type, face value, premiums, cash value, riders, current beneficiary designations, and whether it is still affordable to maintain.
A policy should not be allowed to lapse before its alternatives are understood. Lapsing typically ends the coverage and may leave the policyholder with nothing. In many cases, there are other options worth evaluating first.
Ways to Use Life Insurance for Long Term Care
Accelerated death benefits
Many life insurance policies include an accelerated death benefit rider, sometimes called a living benefit. This feature may allow the policyholder to receive part of the death benefit early if they are terminally ill, chronically ill, or confined to certain care settings.
The money can help pay for care, but the rules vary substantially by insurer and policy. Some benefits are tied to an inability to perform activities of daily living, such as bathing, dressing, eating, toileting, transferring, or continence. Others require a qualifying medical diagnosis or a limited life expectancy.
An accelerated benefit reduces the amount ultimately paid to beneficiaries. It may also be paid as a discounted amount rather than dollar-for-dollar from the death benefit. Still, for someone who needs funds now and wants to keep some coverage in force, it can be a practical option.
Long-term care and chronic illness riders
Certain policies carry a long-term care rider or chronic illness rider. These riders are designed specifically to provide benefits when the insured needs qualifying assistance or supervision. A long-term care rider may reimburse eligible care expenses up to defined limits. A chronic illness rider may provide a monthly benefit when the insured meets the policy’s health requirements.
The distinction matters. Long-term care riders often have more detailed requirements around covered services and expenses. Chronic illness benefits may offer greater flexibility in how funds are used, but policies differ. Review the actual contract before relying on either benefit for a care plan.
Cash value withdrawals or policy loans
Permanent life insurance, such as whole life or universal life, may accumulate cash value. Depending on the policy, the owner may be able to withdraw some of that value or take a loan against it.
This approach can create liquidity without immediately selling the policy. But it is not free money. Withdrawals and unpaid loans generally reduce the death benefit. Loan interest can accumulate, and a policy that lapses with a loan outstanding may create an unexpected tax consequence. For a family that needs only a limited amount of short-term support, a carefully reviewed withdrawal or loan may be appropriate. For ongoing care costs, it may only postpone a larger decision.
Selling the policy through a life settlement
A life settlement is the sale of an existing life insurance policy to a third-party buyer for more than its cash surrender value but less than its death benefit. The buyer becomes the policy owner, pays future premiums, and receives the death benefit when the insured dies. The former policyholder receives a lump-sum cash payment that can generally be used for any purpose, including home care, facility costs, medical bills, debt, or retirement income.
For many adults age 62 or older, a life settlement can be worth exploring when premiums have become burdensome, coverage is no longer needed, or long-term care costs have become urgent. Policy value depends on several factors, including the insured’s age and health, policy type, death benefit, premium requirements, and the buyer market.
Selling is a permanent decision. Beneficiaries will no longer receive the policy’s death benefit, and the proceeds can affect taxes or eligibility for needs-based public benefits. That does not make a settlement the wrong choice. It means the decision deserves a complete, confidential review before a policy is surrendered or allowed to lapse.
When a Life Settlement May Make Sense
A life settlement is often considered when the policyholder has a meaningful need for cash today and the policy’s original purpose has changed. For example, a retiree may have purchased a large policy to replace employment income or protect young children. Decades later, the children may be financially independent, while the retiree now faces rising care costs and annual premiums that strain a fixed income.
It may also be relevant when an insured person has experienced a serious health decline, has entered assisted living, or needs more care than family members can provide. In these moments, the question is not simply whether to keep a policy. It is whether an asset tied up in a future death benefit could provide more value by supporting the policyholder’s quality of life now.
Not every policy qualifies, and not every qualified policy should be sold. Term policies without conversion value, smaller policies, or policies with low market demand may have limited settlement value. A professional evaluation can establish whether there is a viable market before a family makes an irreversible choice.
Protect Your Family During the Evaluation
Life insurance decisions involve personal medical, financial, and family information. Work with experienced, properly licensed professionals who can explain the transaction, protect confidential information, and clearly disclose how they are compensated.
It is also wise to involve the people who will be affected. The policy owner has the legal authority to decide, but beneficiaries, a spouse, an adult child, a financial advisor, and an attorney may each bring useful perspective. Honest conversations can prevent later misunderstandings, particularly when a policy was expected to become part of an inheritance.
Before choosing a path, request current policy information from the insurer. Confirm the policy’s in-force status, premiums, cash surrender value, loans, riders, and deadlines. Ask whether an accelerated benefit is available and what medical qualifications apply. If considering a settlement, compare the offer against the surrender value and the true cost of continuing the coverage.
An experienced settlement advocate can be especially valuable because a policy’s market value is not fixed. Ardan Group works to secure the Best Value Settlement ℠ by presenting eligible policies to established buyers and negotiating on the policyholder’s behalf. The goal is not to push a sale. It is to help policyholders understand whether their policy can produce meaningful funds for the needs they face.
Consider Taxes, Benefits, and the Full Financial Picture
Funds received from life insurance can be treated differently depending on the method used and the policyholder’s circumstances. Accelerated death benefits for qualifying terminally or chronically ill individuals may receive favorable tax treatment, but exceptions and limits can apply. Policy loans, withdrawals, surrender proceeds, and life settlement proceeds can also have tax implications.
Needs-based programs require special attention. A lump-sum payment may affect Medicaid eligibility, Supplemental Security Income, or other benefits. Families should discuss a potential transaction with a qualified tax professional, elder law attorney, or benefits advisor before completing it. This is particularly important when Medicaid may be needed to help fund nursing home care.
The most useful question is not, “Can this policy pay for care?” It is, “Which choice gives this person the most security, dignity, and flexibility over the months and years ahead?” A careful review now can turn an overlooked policy into a source of options when those options matter most.