Using life insurance to pay for long-term care

This article is for educational purposes only and does not constitute medical, legal, or financial advice. Every family situation is different, and you should consult with appropriate professionals about your specific circumstances.

The Asset That Might Be Sitting in a Drawer

Your parent has a life insurance policy somewhere. Maybe it's a policy they bought thirty years ago and never thought about again. Maybe it's tied to a job they had decades back. Maybe it's something their spouse bought. Your parent probably hasn't opened the paperwork in years. They think life insurance is meant to pay out when they die, which means it's not relevant to them right now while they're alive and needing expensive care. That assumption is wrong.

Life insurance can sometimes be converted into usable cash to pay for care while your parent is alive. Not all policies allow this, and not all policies have enough value to matter. But many do. Somewhere between 30 and 40 percent of people over age sixty-five have some form of life insurance. Many of those policies have cash value or features that allow them to be used before death. The problem is most people have no idea their policy can be used this way.

This isn't talking about borrowing against a policy or taking out a policy loan. This is talking about actually accessing the death benefit early under certain circumstances, or accessing cash value the policy has built up. The rules are specific and the options depend entirely on your parent's particular policy. But the first step is understanding that options exist. The second step is finding out whether your parent's policy has any of these options.

How Life Insurance Can Help With Care Costs

Some life insurance policies have a feature called accelerated benefits or living benefits. This means your parent can access some portion of the death benefit before they die under specific circumstances. Common circumstances include terminal illness, long-term care needs, and chronic illness. If your parent has a policy with an accelerated benefit rider, and your parent needs long-term care, the policy might allow your parent to access fifty to eighty percent of the death benefit while they're alive. This can be tens of thousands of dollars.

Whole life policies and universal life policies build cash value. Over the years of paying premiums, these policies accumulate a cash value that belongs to your parent. Your parent can borrow against this cash value, taking out a loan using the policy as collateral. The loan needs to be repaid, but it's a source of money available right now. The loan amount is usually available at a relatively low interest rate. Alternatively, your parent can surrender the policy and receive the cash value outright. This means ending the insurance coverage, but in exchange, your parent gets the accumulated cash value.

Term life insurance doesn't have cash value, so borrowing isn't an option. But if your parent has a term policy that's convertible, your parent might be able to convert it to a policy with cash value features. This requires medical underwriting, so your parent would need to be in reasonably good health. But if your parent is healthy enough, conversion is possible.

Some policies have long-term care riders. These are specific riders added to the policy that allow the insured person to access the death benefit if they need long-term care. The details vary dramatically depending on the specific policy and rider, but the concept is clear—the insurance company is acknowledging that their customer might need the money for long-term care before they die.

Life insurance proceeds are usually income tax-free when paid to a beneficiary after death. But if your parent is accessing the death benefit early through accelerated benefits, the money paid out might be taxable. Tax treatment of early payouts varies depending on the method and the policy, so understanding the tax implications is important. Your parent might need to set aside money for tax obligations, or those obligations might be handled through withholding.

Understanding Your Parent's Policy

The first thing you need to do is find your parent's life insurance policy. If your parent is organized, this is sitting in a file. If your parent is like most people, finding it requires searching. Look in filing cabinets, desk drawers, safety deposit boxes, or anywhere your parent might keep important documents. You might ask your parent directly, which might trigger a memory. You might ask your parent's former employer if they had a group policy. You might look through old tax returns to see if life insurance premiums are listed.

If you can't find the physical policy, contact your parent's insurance agent. Your parent might remember who sold them insurance thirty years ago, or there might be information on old correspondence. An insurance agent can search their company's records for policies issued to your parent.

Once you have the policy, read it carefully or have someone read it for you. The policy document tells you what type of insurance it is, what it will pay, what riders are included, and what your parent can do with the policy. This is the document that explains whether accelerated benefits are available, whether the policy has cash value, and what the rules are for accessing money before death.

Key information to identify: the policy type (term, whole life, universal life, variable universal life), the death benefit amount, the monthly or annual premium, whether the policy is paid up or still requires premiums, the cash value if any, what riders are included, and contact information for the insurance company.

If the policy document is unclear or you're not sure how to interpret it, talk to the insurance agent or company. Call the company's customer service line. Explain what you're trying to understand. Ask specifically about accelerated benefits, living benefits, cash value, and surrender options. Get this information in writing so you have documentation of what's possible.

Evaluating Whether This Is a Real Option

Not all life insurance can help with long-term care costs. Sometimes the policy has no cash value and no accelerated benefits. Sometimes the death benefit is small and wouldn't help much even if it could be accessed early. Sometimes there are restrictions on when money can be accessed. You need to realistically evaluate whether your parent's insurance is actually helpful for care costs.

If your parent has a policy with a hundred-thousand-dollar death benefit and accelerated benefits allowing access to seventy percent of that, your parent could access seventy thousand dollars if they meet the criteria for long-term care needs. Seventy thousand dollars covers some care costs for a while. That's meaningful. If your parent has a policy with a twenty-thousand-dollar death benefit, accessing fourteen thousand dollars is helpful but not transformative.

If your parent has whole life insurance with cash surrender value of fifty thousand dollars, surrendering the policy gives your parent fifty thousand dollars. That's useful. If your parent has a twenty-thousand-dollar policy with five thousand in cash value, accessing that might help but won't solve major care cost issues.

The process of accessing accelerated benefits or surrendering a policy can take time. It's not instant money. There's paperwork, approval processes, and sometimes medical evaluation. If you need money right now for care, accessing life insurance is not the quick solution. Plan for this timeline.

Surrendering a policy means giving up future death benefits. If your parent surrenders a policy, when your parent dies, that insurance coverage is gone. The death benefit won't go to your parent's heirs or estate. This is a trade-off your parent needs to think through. If your parent needs the money for living care, that's one thing. But if your parent wants to leave an inheritance, surrendering insurance reduces what your parent can leave behind.

Accessing accelerated benefits usually means your parent still has insurance coverage, but the death benefit is reduced. If your parent accesses seventy percent of a hundred-thousand-dollar death benefit, the death benefit drops to thirty thousand dollars. That's less to leave as an inheritance, but some coverage remains.

Borrowing against the policy doesn't change the death benefit immediately, but loan amounts plus interest affect what's available at death. Your parent's heirs might receive less at death because of a loan taken against the policy.

Having the Conversation With Your Parent

Your parent needs to be involved in decisions about their life insurance. This is their policy and their death benefit. Even if you think surrendering the policy or accessing accelerated benefits is the right move, your parent gets to decide. Have this conversation thoughtfully.

Start with understanding whether your parent even remembers the policy. Your parent might be surprised to learn they have a policy. Your parent might have forgotten about it years ago. Refreshing your parent's memory helps them understand what's being discussed.

Explain what options exist. If the policy has accelerated benefits, explain what that means. If it has cash value, explain that your parent can borrow against it or surrender it. Help your parent understand the trade-offs. Accessing the death benefit early means less money for heirs. That might be fine. Your parent's care while alive might be more important than leaving money after death. But it's your parent's choice to make.

If your parent is declining or has cognitive issues, involving other family members in this conversation is important. If your parent is still able to make decisions, your parent should make them. If your parent isn't able to make decisions, whoever has power of attorney or conservatorship authority makes decisions. But ideally, this conversation happens while your parent still can participate.

Ask your parent what their preferences are for money left behind. Does your parent want to leave an inheritance? Is your parent comfortable spending down assets for their own care? These are values questions that help inform what's a good use of insurance.

Understand whether your parent's life insurance is meant to cover any specific obligations. Sometimes life insurance is in place because your parent had dependents or debts they wanted covered at death. That purpose might be outdated now, which means the insurance might be available for other purposes. But you need to understand your parent's original intent.

Working With a Professional

Your parent's specific situation and specific policy determine what options are available. Professional consultation is often worthwhile, especially if your parent's financial situation is complex. An insurance advisor can review your parent's policy and explain options clearly. A financial advisor can help your parent understand how accessing insurance fits into their overall financial situation. An elder law attorney can help if there are questions about how using insurance affects your parent's legal situation or estate plan.

These consultations cost money, but for complex situations, they're worth it. Bad decisions about life insurance can leave your parent with less money for care or can create unexpected tax obligations. Professional guidance helps avoid costly mistakes.

If your parent accesses insurance money for care, documenting what happened matters for tax purposes. Keep receipts, keep statements from the insurance company, keep documentation of what the money was used for. This helps if there are tax questions later.

Consider whether the money should go directly to your parent or whether it should be held in some kind of trust or account. If your parent might qualify for Medicaid, having money in your parent's name might affect Medicaid eligibility. An attorney can advise on whether the insurance money should be structured differently.

The Bigger Picture

Life insurance is one tool among many for financing elder care. It's not the solution for most families. Most people don't have substantial life insurance that can meaningfully help with care costs. But if your parent is one of the people who do have insurance with accessible cash or accelerated benefits, it could be significant.

The first step is simply finding out whether your parent has insurance, what type it is, and whether it has any features that allow access to the money before death. This is information-gathering. You're not committing to anything by learning what's possible. But understanding your parent's complete financial picture, including any life insurance, means you can make better decisions about how to pay for care.

Your parent might have already forgotten about a policy sitting unused. Your parent might not know that the money in that policy could help pay for their care. You might be the person who discovers this option. You might be the person who brings this up to your parent in a way that helps them see another resource they didn't know they had. That conversation could change your family's care situation significantly. The first step is looking for the policy and asking the questions.

How To Help Your Elders is an educational resource. We do not provide medical, legal, or financial advice. The information in this article is general in nature and may not apply to your specific situation. If you are concerned about a loved one's cognitive health or safety, consult with their healthcare provider or contact your local Area Agency on Aging for guidance and support.