Paying For Senior Care With Life Insurance

Jul 11, 2016

Paying For Senior Care With Life Insurance

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Paying for long-term care isn’t always an easy option for many seniors, especially with rising costs across the nation. However, this doesn’t mean there aren’t plenty of different methods of paying for your future care – particularly if you already have life insurance.

Life Insurance Options to Pay for Senior Care

A good portion of the expenses of long-term care can be covered with just a standard life insurance policy such as:

  • Combination (Life/long-term care) products
  • Accelerated death benefits (ADBs)
  • Life settlements
  • Viatical settlements

Each of these methods come with their own drawbacks and benefits, so considering the full range of your health needs and financial status will help you make the right decision.

Combination Products

Because seniors can be reluctant to buy long-term care insurance out of fear that they will not use the full amount they’ve invested, some insurance companies have tried to solve this problem by combining their life insurance and long-term care insurance policies.

Ultimately, the policy benefits will be paid in one form or another and are based on the changing needs of the individual. As the senior care industry changes and evolves, it’s projected that these policies will adapt to continue benefiting the policyholder. Simply put, the benefits towards long-term care are often expressed in terms of a certain percentage of one’s life insurance benefits.

Accelerated Death Benefits (ADBs)

Given your particular life insurance policy, you may be able to receive a tax-free advance on your “death benefits” while you are still living. This may require that you pay an additional premium in order to add this feature to your policy, however it may be included to start.

There are generally different types of ADBs, each with a distinct purpose. Your policy type will determine whether you can receive a cash advance on your death benefits considering factors such as:

  • Whether you are terminally ill
  • Have a life-threatening diagnosis
  • Need long-term care for an extended time period
  • Are permanently confined to a nursing facility and require considerable assistance with your activities of daily living.

Typically, the accelerated benefit payment amount is a maximum of 50% of the original death benefit – some policies may allow you to use the full amount however. Monthly benefits toward a nursing home or other care type are typically equal to around 2% of the entire value of your life insurance policy. On the other hand, in-home care may be as much as half of the entire value. Receiving payments through your policy’s ADB feature while you are alive means that the amount will be subtracted from the final amount paid to your beneficiaries following your death.

Before taking advantage of an ADB policy consider the following:

  • ADB features may cover your long-term care now, however it may be wise to check to see whether or not your policy has inflation protection and how these benefits will be accessible in the future.
  • ADB policy payouts for long-term care services are not as comprehensive as a full long-term care insurance policy.
  • ADB payments may be too low and the duration may be too short to adequately cover your long-term care needs.
  • Using these benefits may leave little to no inheritance money for those who survive you.
  • ADB options can affect Medicaid eligibility depending the state in which you are to receive care. 

Life Settlements

With a life settlement plan, seniors can sell life insurance policies for their present values to raise cash for any number of reasons. In most cases, this option is only available to women over 74 years of age and men older than 70. After settling your policy, you can choose how the proceeds will be used to pay for your long-term care services.

Keep in mind that:

  • If you sell your policy, there will be little or no death benefit money left to your heirs.
  • This method doesn’t require any medical screenings, so you can be in any state of health.
  • Depending on your state, the settlement may be taxed.

Viatical Settlements

Essentially, these plans allow seniors to sell their standard life insurance policies to a third party – known as a viatical company – to receive a percentage of the death benefit based on your life expectancy. The result of these settlements is that the third party company will own the policy and become its beneficiary, taking over payment of the premiums. This means that you will receive money to pay for care, however the company receives the full death benefit after you die.

Unlike a life settlement, the money you receive using a viatical settlement in certain states is tax-free if you have a life expectancy of less than two years, or if you are chronically ill.

The main considerations for this option are as follows:

  • Viatical settlements are only available if your life expectancy is two years or less
  • You do not need to satisfy the health requirements for long-term care
  • This option will not pay a death benefit to your heirs
  • Viatical companies approve less than half of their applicants

Although life insurance isn’t always the most ideal way to cover the cost of your long-term care, there are certainly ways of finding enough money for whatever services you need. For many people who haven’t previously invested in long-term care insurance, these methods can be the last resorts in a perilous financial situation. However, with the right advising and planning, you can get the most out of your life insurance plan when it comes to long-term care.

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Frequently Asked Questions

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Annuities can be an important part of your retirement or senior care savings strategy. An annuity is a tax-deferred investment sold by insurance companies. After your invest and watch your principle grow, when you retire you will be able to receive a series of annual payments. These payments could be used to pay for a senior's care. To find out more about annuities, find a financial advisor you can trust and discuss your options.

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