Using Life Insurance to Pay for Assisted Living: 5 Options

Quick answer: You can use life insurance to pay for assisted living in five main ways: accelerated death benefits for a chronic or terminal illness, cashing in a whole or universal life policy’s cash value, borrowing against the policy, selling it in a life settlement, or converting it to a long-term care benefit plan. Each option reduces or ends the death benefit, so compare them carefully.

Many seniors own a life insurance policy they bought decades ago to protect a spouse or children. When a parent needs assisted living, that policy may be one of the largest untapped assets in the family. Using life insurance to pay for assisted living can bridge years of care costs, but each method has tradeoffs for taxes, Medi-Cal eligibility, and heirs. This guide explains all five options, who each one fits, and the questions to ask before making a change.

Can you use life insurance to pay for assisted living?

Yes, in most cases. Whether and how much depends on the type of policy:

• Term life insurance has no cash value. It can only help through an accelerated death benefit rider, a life settlement (if the policy is convertible or the insured is older with a large face amount), or a conversion program.
• Whole life and universal life insurance build cash value, which can be withdrawn, borrowed against, or received by surrendering the policy, in addition to the options above.
• Hybrid life and long-term care policies were designed for this purpose and pay care benefits directly.

Start by calling the insurer and requesting an in-force illustration, which shows the policy’s current death benefit, cash value, loans and riders.

Option 1: What is an accelerated death benefit?

An accelerated death benefit lets the policyholder receive part of the death benefit while still living. Many policies include an accelerated benefit rider, often at no extra cost, that pays when the insured is:

• Chronically ill: unable to perform two of six activities of daily living, or severely cognitively impaired, as certified by a licensed practitioner.
• Terminally ill: typically expected to live 12 or 24 months or less.
• Critically ill: some policies cover specific events such as a stroke or heart attack.

The insurer pays a lump sum or monthly amount, and the remaining death benefit is reduced. For families paying for assisted living in San Diego or memory care facilities in San Diego, a chronic illness rider can work much like long-term care insurance.

Option 2: Can you cash in a life insurance policy for senior care?

Whole life and universal life policies can be surrendered for their cash surrender value, which is the cash value minus any surrender charges and loans. Surrendering ends the policy entirely, and gains above what was paid in premiums may be taxable. Partial withdrawals from some universal life policies are another option that keeps the policy in force with a smaller death benefit.

Surrender is simple, but it usually pays far less than the other options for an older or ill policyholder.

Option 3: How does a life insurance policy loan work?

Permanent life insurance policies allow the owner to borrow against the cash value. A policy loan does not require credit approval, and repayment is flexible. Unpaid loans and interest are subtracted from the death benefit when the insured dies.

The risk is lapse. If the loan balance grows larger than the cash value, the policy can terminate, potentially creating a taxable gain. Ask the insurer for a projection before borrowing.

Option 4: What is a life settlement?

A life settlement is the sale of a life insurance policy to a third-party buyer for more than its cash surrender value but less than the death benefit. The buyer takes over premium payments and receives the death benefit later. Life settlements are typically available for policyholders 65 or older, or younger people with serious health conditions, with larger face amounts.

In California, life settlements are regulated, and providers and brokers must be licensed by the California Department of Insurance. Things to know:

• Proceeds can be significantly higher than surrender value, especially for term policies with no cash value.
• Part of the proceeds may be taxable.
• The family gives up the death benefit permanently.
• Brokers earn commissions, so ask for multiple offers and full disclosure of fees.

Option 5: What is a long-term care conversion?

Some specialty programs convert an existing life insurance policy into a long-term care benefit plan. The policy’s value is placed in a benefit account that pays a monthly amount directly to an assisted living community, board and care home or home care agency. Conversions can be useful for a policy that would otherwise lapse, and they are often treated differently from a cash settlement for Medicaid purposes. Ask an elder law attorney how a conversion would be treated for Medi-Cal in California before proceeding.

How does life insurance affect Medi-Cal eligibility?

The cash value of a whole or universal life policy usually counts toward the Medi-Cal asset limit, which California has reinstated at $130,000 for an individual. Cash received from a surrender, accelerated benefit or life settlement also counts as an asset once received, unless it is spent on care. Term life policies with no cash value generally do not count.

If Medi-Cal may be needed in the future, plan the timing with an elder law attorney. Our Medi-Cal eligibility guide and our article on 10 ways an elder law attorney can help families are good starting points.

Which life insurance option fits your family?

• Your parent has a chronic illness and the policy has a rider: an accelerated death benefit is usually the first choice.
• The policy has significant cash value and heirs do not need the death benefit: a surrender or policy loan may be simplest.
• Your parent is older or ill and premiums are hard to keep paying: a life settlement or long-term care conversion may produce the most money.
• A spouse still depends on the death benefit: consider a partial withdrawal or loan, or other funding sources first.

Whatever you choose, compare the result with the real monthly cost of care. Smaller board and care homes in San Diego often cost less than large communities, which can make policy proceeds last longer. Our guide to assisted living costs in San Diego shows typical prices.

What questions should you ask before using life insurance for care?

• What is the current death benefit, cash value and loan balance?
• Does the policy include an accelerated benefit or chronic illness rider, and what does it pay?
• What would a life settlement offer compared with the surrender value?
• What are the tax consequences of each option?
• How would each option affect Medi-Cal eligibility?
• Who is the policy owner, and is a power of attorney needed to act? See should I be power of attorney for my parents.

Frequently asked questions

Can life insurance be used to pay for assisted living? Yes. Families commonly use accelerated death benefits, cash value, policy loans, life settlements or long-term care conversions.

Does term life insurance help pay for assisted living? Only through an accelerated benefit rider, a life settlement, or a conversion program, because term policies have no cash value.

Is a life settlement taxable? Part of the proceeds may be taxable. Ask a tax professional before selling.

Does life insurance cash value count for Medi-Cal? Usually yes, as a countable asset under the Medi-Cal asset limit.

What is a chronic illness rider? A rider that pays part of the death benefit early when the insured cannot perform two activities of daily living or has severe cognitive impairment.

Can a life insurance company pay the assisted living facility directly? Some long-term care conversion programs pay care providers directly. Most other options pay the policy owner.

Conclusion: using life insurance to pay for assisted living

Using life insurance to pay for assisted living can turn an old policy into years of care funding. Start with an in-force illustration, check for an accelerated benefit rider, compare surrender value with a life settlement offer, and understand the tax and Medi-Cal effects before acting. Combine policy proceeds with other resources described in how to pay for a senior care home, and get a free senior care assessment to match the budget with the right home.