The Arbor Company Senior Living Blog

When Does Life Insurance Cover the Cost of Senior Care?

Mar 7, 2017 1:00:00 PM / Chris Harper Chris Harper

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Seniors often choose to let life insurance policies lapse once they’ve settled comfortably into retirement. But considering that life insurance and senior care costs have been increasingly tied together, that could be a mistake.

Life insurance was originally intended to protect against lost income if a policyholder was to die prematurely. Over the years, a second act has evolved for life insurance, and it’s all about managing out-of-pocket senior care costs.

Whether it’s converting a life insurance policy into a long-term care benefit plan, purchasing a combination product, using an accelerated death benefit to pay for long-term care, or various life settlements, there are multiple ways to cover the cost of senior care with life insurance.  

Converting Life Insurance into Long-Term Care Benefit Plans

Many in-force life insurance policies can be legally converted into a long-term care benefit plan that covers the cost of senior care. These benefit plans make tax-free payments directly to assisted living, skilled nursing, memory care, or hospice care providers.  

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Long-term care benefit plans apply to term, universal, whole, and group life insurance policies with a death benefit of $50,000 to $1 million. All health conditions are accepted, and there are no wait periods, care limitations, premium payments, or requirements that policyholders be terminally ill.

Even better, long-term care benefit plans work with Medicaid, so qualifying seniors could immediately switch to Medicaid coverage once a benefit plan is drawn down. These plans also preserve a funeral benefit, and any remaining balance at the time of the policyholder’s death is paid to a beneficiary.

Converting life insurance into long-term care benefit plans has become a critical part of financing senior care. In Florida alone, nearly 5,000 seniors were eligible to convert a life insurance plan and could see up to $157.4 million in net benefits each year, the Florida Health Care Association found.

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Combination Products

If you’ve talked to loved ones about purchasing long-term care insurance (LTCI), odds are that they voiced doubt that they’d eventually need senior care. In one study, 66 percent of people said LTCI would give them peace of mind—yet fewer than 10 percent of Americans had purchased it for that very reason.

That disconnect has led to the rise of life insurance combination, or hybrid, products in recent years. Combination products combine long-term care benefits with life insurance or an annuity. If a policyholder needs senior care, the benefit will be paid over a set period, typically 24 to 48 months, in the form of a long-term care benefit. If not, the policy will pay out as a standard death benefit.

Combination products are an attractive option because a benefit will be paid regardless of your or your loved one’s circumstances. But combination products are often designed with a single premium (the average premium was $70,000 in recent years), making them cost-prohibitive. And health screenings are required, so your loved one would have to be in relatively good health in order to qualify for a combination plan.


Accelerated Death Benefits

Adding an accelerated death benefit (ADB) to a life insurance policy can be a great alternative to LTCI or costly combination products. ADB riders enable policyholders to convert a death benefit into a long-term care benefit that can immediately cover the costs of senior care.

ADBs vary, but a circumstance like prolonged need for long-term care services, being confined to a nursing home, or needing help with activities of daily living like dressing or eating often triggers a cash advance of a benefit. Typically, an ADB will pay a monthly benefit equal to a percentage of a policy’s total face value. For example, two percent of a $200,000 policy would equate to $4,000 per month for long-term care costs.

It’s important to note, however, that ADB riders on life insurance policies usually don’t come with inflation protection, which means an ADB payment might not be enough to cover future long-term care needs. Also, using an ADB might impact your loved one’s Medicaid qualifications, so it’s a good idea to look at guidelines in your individual state first.

Life and Viatical Settlements

Life insurance settlements enable certain people to sell a life insurance policy for current cash value to help pay for long-term care. Typically, only 74 and over and men 70 and older qualify for life settlements.

One of the benefits is that the process does not require health screenings, so policyholders can be in good or poor health at the time of sale. One of the biggest drawbacks, however, is that sale proceeds will likely be taxable.

Like a life settlement, a viatical settlement enables a policyholder to sell a life insurance policy to a third party at its present cash value. But unlike life settlements, viatical settlements are tax-free and restricted to policyholders who are terminally ill and have a life expectancy of two years or less.

Adding It Up: When Does Life Insurance Cover the Cost of Senior Care?

Life insurance and senior care have become increasingly connected over the years. Today, many seniors convert life insurance policies into long-term care benefit plans to enable them to pay for senior care costs. Some have turned to LTCI, and some have turned to combination products to ensure that a benefit is paid regardless of their senior care needs. Still, others have turned to life settlements and viatical settlements to convert life insurance into liquid cash that can be used to pay for senior care costs. Regardless of which path you or your loved one take, there are plenty of options to use life insurance to cover the cost of senior care.

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Topics: Senior living

Chris Harper

Chris Harper

As the vice president of communications for The Arbor Company, Chris is responsible for digital marketing, public relations, technology and design.

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