How Life Insurance Payouts Can Help Cover Long-Term Care Costs

Jul 19

The Gist

Life insurance is essential, especially if you want to make sure your family is not unduly burdened after your death.
There are different kinds of life insurance that have various values, coverage, and benefits.
Some life insurance plans include an option to convert your policy into payments for long-term and end-of-life care.
It’s important to know all your options when shopping for life insurance.

In Short

No one likes to think about death, but unfortunately, it is inevitable. With this inevitability is an opportunity to ensure that your family won’t be hit by exorbitant costs when you pass away or if something were to happen unexpectedly. It may not seem important right now, but a few dollars a month can get you a life insurance policy that could make a huge difference in the future.

One lesser-known benefit of certain policies is using life insurance for long-term care. When it comes to life insurance and long-term care, there are many intricacies and complexities. For instance, some policies allow you to “sell” the value of your policy. Typically this will entail a third party who manages payouts to the facilities that will be providing your care, so your family doesn’t have to keep up with it on your behalf.

It may seem like this only applies to senior citizens, but there are other situations where you may want to consider using life insurance for long-term care. Keep reading to learn more.

What Are the Different Kinds of Life Insurance?

When you’re shopping for life insurance, there are a few types available, so you should understand your options.

Term life insurance: This is the most common kind of life insurance. Typically, this is the type of policy you’ll get as a benefit from your job. While you pay a regular premium, it does not accumulate value. Rather, your policy guarantees a specific payout if you pass away while your policy is active, usually a year’s salary or a set amount from $10,000 to $1,000,000. Because your policy does not build value, if your term expires (for instance if you lose your work benefits or stop paying your premium), your beneficiaries will not receive any payout.
Hybrid life insurance: This is the best type of coverage to get if you think you’ll be using life insurance for long-term care — for instance, if you have a chronic or terminal illness.
Whole life insurance: This type of life insurance coverage takes a portion of your premium and puts it into savings. This means your policy will accumulate cash value. Whole life insurance is the most expensive variety of policy, costing a healthy 35 year old around $500 a month for a $500,000 death benefit. As such, whole life insurance is usually recommended only to high net-worth individuals who have maxed out their other retirement investments.
Universal life insurance: Unlike whole life insurance, whose cash value is guaranteed as a benefit of your policy, universal life insurance carries certain restrictions. Depending on the policy you purchase, you might be limited in your disbursement options — especially if you plan on using life insurance for long-term care.

If you don’t have life insurance, get a quote today by filling out a brief questionnaire to see the best policy options available, including policies that incorporate long-term care.

What Are Some Different Kinds of Long-Term Care?

The most common type of long term care is nursing homes. According to the Centers for Disease Control and Prevention, there are roughly 1.3 million nursing home residents in the U.S.

Other long-term care options include:

Home health care, including rehabilitation, speech, or physical therapy.
Household services like meal prep, house cleaning, and grocery shopping
Adult daycare centers for people with developmental or physical challenges
End-of-life care for people with terminal or chronic illnesses
Assisted living facilities, including communities that offer semi-independent living
Nursing homes and Alzheimer’s special care facilities

Depending on where you live, your options for in-home care might vary, so it’s important to check with your policy provider to see what options are available for using life insurance for long-term care.

Can Nursing Homes Take Your Life Insurance From Your Beneficiary?

In general, no, nursing homes can’t take your life insurance from your beneficiary if you have one or more named beneficiaries. If the beneficiary of your life insurance policy is your estate, things may get a little trickier. That’s where a financial advisor will be able to help navigate the complex process.

For instance, if you’re hoping to use Medicare payments to fund your long-term or end-of-life care, you’ll need to “spend down” your assets and other holdings to get your income down to applicable levels. This may mean putting your assets into trusts, the availability of which might be limited by your state of residence.

Indeed, arranging for long- term or end-of-life care can be a massive undertaking, especially if you’re trying to ensure that there is some money left behind for your surviving family. Unless you have an estate lawyer in your family, we recommend working with a professional.

What Are My Options When It Comes to Using Life Insurance for Long-Term Care?

Long-term care is very expensive — the median annual cost for assisted living in 2021 was $54,000, according to Genworth. Fortunately, if you have been paying into life insurance, you may have the option to convert it to help with your long-term care expenses.

Some options for using life insurance for long-term care are:

Convert your life insurance policy into a life care benefit plan: Also known as a long-term benefit plan, this option allows you to transfer the value of your policy to a third party, usually an insurance company or brokerage. This company or person will then act as a benefits administrator, disbursing regular payments to facilities while setting aside some money for end-of-life expenses, including funeral or cremation costs.
Life settlements: Typically available to women age 74+ and men age 70+, this option allows a policyholder a chance to “sell” their life insurance policy for its present cash value to a life settlement company or broker. This option leaves little-to-no death benefits for your beneficiaries, meaning your family may need to foot the bill for your end-of-life arrangements. Also, you will owe taxes on the payout you receive.
Accelerated death benefits: Some policies offer an option to effectively cash out a portion of your life insurance death benefit to pay for long-term care. Accelerated death benefits are most often offered to people with terminal diagnoses and are capped at 50 percent of your remaining policy value.
Viatical settlements: For people with two years life expectancy or lower, your policy provider might offer this option where you can sell your policy to a third party — tax-free. Less than 50 percent of viatical settlement requests are approved, so this option may not be available given your health situation.

In Conclusion

While it might not be on the top of your mind right now, it’s important to have life insurance. Even more important might be knowing your options for using life insurance for long-term care. A great place to start is by visiting Stride to see what life insurance policies are available to you — a few minutes now could save your family a lot of headaches in the future.

Shauna Gleason