Using Life Insurance to Fund Long-Term Care: A Smart Financial Strategy

Long-term care is a crucial consideration for older adults, as nearly 70% of people over 65 will need assistance at some point in their lives. However, the costs associated with long-term care (LTC), whether in-home care, assisted living, or nursing facilities, can quickly deplete savings, leaving many people searching for alternative financial solutions. According to a report from the Office of the Assistant Secretary for Planning and Evaluation (ASPE), 70% of adults who reach age 65 will develop significant long-term services and supports (LTSS) needs including both medical and non-medical aid, such as help with daily tasks (e.g., eating, dressing) and assistance with managing medications and meal preparation before they pass away, underscoring the growing importance of planning for this eventuality.

While many seniors turn to long-term care insurance, it’s not always an option for everyone. If you find yourself without dedicated long-term care insurance, or if your existing policy doesn’t cover enough, you may be able to use your life insurance policy to help pay for care.

As seen in the AARP, there are good strategies on how life insurance can help you pay for long-term care. For those who bought life insurance when their kids were young, now they can repurpose it: 

“That doesn’t mean that a life insurance policy should be your go-to source for covering the cost of long-term care needs. But it might be an option if you don’t have another way to pay for support when a disability, health issue or cognitive decline leaves you unable to manage everyday activities on your own.”

Let’s explore how this can work for you.

Ways to Use Life Insurance for Long-Term Care

There are several ways life insurance policies can help cover long-term care expenses. Below are the most common methods, each designed to provide financial relief when you need it most.

1. Life Settlements: Sell Your Policy for Immediate Funds

A life settlement involves selling your life insurance policy to a third party in exchange for a lump sum. This can provide more cash than simply surrendering your policy to the insurance company, and can be a viable option if you no longer need the coverage or if the premiums are becoming unaffordable.

• Typically available for policyholders aged 65+ with policies valued at $100,000 or more
• The proceeds can be used for home care, assisted living, nursing home costs, or any expenses you choose
• An excellent solution for those who can no longer afford expensive premiums

You can get started here to explore how much your policy is worth and see if a life settlement could benefit you.

Learn more about selling your whole life insurance policy in our comprehensive guide.

According to Fidelity, hybrid life insurance policies, which combine life insurance with long-term care coverage, are a fast-growing option for many individuals looking for both protection and care benefits.

2. Viatical Settlements: Financial Relief for Terminal Illness

A viatical settlement works similarly to a life settlement but is specifically for individuals facing a terminal illness. If you or a loved one has been diagnosed with a life-threatening illness, selling a life insurance policy through a viatical settlement could provide tax-free funds for immediate care.

• Available to individuals with a life expectancy of fewer than two years
• Proceeds are typically tax-free if used for medical or long-term care expenses
• Offers a higher payout than traditional life settlements

To explore this option, you can check out our guide on term life insurance vs. viatical settlements.

According to Aflac, viatical settlements can be a powerful financial tool for individuals diagnosed with serious illnesses, providing them with immediate access to the funds needed for care.

3. Long-Term Care Riders: Accessing Benefits Early

If your life insurance policy includes a long-term care rider, you can access a portion of the policy’s death benefit while you’re still alive to help pay for long-term care services.

• Often added at the time of purchasing life insurance
• Can be used for home care, nursing homes, or assisted living expenses
• Reduces the final death benefit paid to beneficiaries

Adding a long-term care rider provides peace of mind, knowing that you don’t have to wait for your beneficiaries to receive the death benefit to access the funds for care.

According to NerdWallet, these riders are particularly advantageous for those who want both life insurance and access to long-term care without buying two separate policies.

4. Hybrid Life Insurance Policies: Built-In Long-Term Care Benefits

Hybrid life insurance policies combine traditional life insurance with long-term care coverage. If you need care, you can tap into the long-term care benefits. If you don’t need care, your beneficiaries will receive a death benefit.

• Dual-purpose policy providing flexibility for both retirement and future care needs
• Higher premiums but guaranteed benefits
• An option for those looking to plan both for retirement and potential future care needs

Hybrid policies, combining both life insurance and long-term care benefits, are becoming increasingly popular due to the financial security they offer.

Other Options to Consider

Converting Term Life Insurance to Permanent Policies

Most term life insurance policies don’t qualify for life settlements, but many can be converted to permanent policies (like whole life or universal life). This conversion could potentially allow you to sell your term life insurance policy for a life settlement, which can help fund long-term care expenses.

• Check your policy’s conversion options before it expires
• Conversion deadlines often range from age 65 to 75

If your policy is eligible, you may be able to sell your term life insurance policy to access the funds needed for care.

Using a Policy’s Cash Value

For whole life or universal life insurance policies, you may be able to withdraw or borrow against the policy’s cash value to cover long-term care costs.

• Withdrawals reduce the death benefit but can provide tax-free funds
• Loans must be repaid to prevent policy lapse

This is a good option for those who do not wish to sell their policy but still need access to funds for care.

How to Decide the Best Option for You

When considering how to use your life insurance policy for long-term care, take the following factors into account:

• Health Status: Are you eligible for a life or viatical settlement based on your condition?
• Policy Features: Does your policy include a long-term care rider, hybrid policy, or cash value component?
• Financial Needs: Will selling your policy or accessing funds provide enough resources for your care?
• Tax Considerations: Some proceeds from settlements may be taxable. Consulting a financial professional can help clarify your tax situation.

If you’re exploring your options, Lighthouse Life is here to help guide you through the process. We specialize in helping seniors make the best financial decisions for their long-term care needs.

Maximizing Your Financial Options for Long-Term Care

Long-term care insurance is one of the best ways to prepare for future care costs, but many people either do not have a policy or find that their coverage falls short. In such cases, life settlements and hybrid policies can provide much-needed financial relief. At Lighthouse Life, we are committed to helping you maximize your financial options and provide a transparent, easy process.

For a free policy review, get started here to explore how much your policy is worth.