A nursing home is one way of ensuring that you or your loved ones are well-cared for in old age. Nursing homes provide health services, company, and safety for the elderly.
But nursing homes can also be prohibitively expensive. On average, you can expect to spend $90,000 per year for a nursing homestay. The high cost may discourage you from opting for nursing home care, even if it’s necessary.
If you have a life insurance policy, however, you may be able to use it to pay for the services you need. In this guide, we’ll discuss how you can use life insurance for long-term care, as well as other payment alternatives!
Can Life Insurance Pay For Your Nursing Home?
The main function of life insurance policies is to provide your beneficiary with financial stability through the death benefit (also known as a face value). Typically, the death benefit can only be accessed after you die. Since nursing home care is a cost you’ll be paying while you’re alive, you can’t use your life insurance policy to directly pay for it.
However, there are ways to access the funds in your life insurance policy to pay for nursing home costs. Some life insurance providers offer a long-term care rider that can help you pay for necessary medical care. You can also apply for accelerated death benefits or tap into your life insurance policy’s cash value.
How Life Insurance Can Pay For Nursing Home Care
Your life insurance policies can’t pay for your nursing home costs directly, but you can still leverage your policy to help pay these costs. In this section, we’ll discuss the three most common options that may be offered by your insurance provider.
Long Term Care Riders
Riders are extra benefits offered by life insurance companies that policyholders can add to their existing coverage. These riders are usually provided in exchange for higher premium payments. With a long-term care rider, you’ll be able to deduct a certain amount from the face value every month to fund your long-term care and assisted living.
To qualify for this benefit, you’ll need a certification from medical professionals proving one of the following:
You’re unable to perform at least two activities of daily living.
You suffer a cognitive impairment that needs constant supervision, like Alzheimer’s or dementia.
Accelerated Death Benefits
Accelerated death benefits (ADB) allow a policyholder to loan a certain amount of the policy face value in advance if diagnosed with a terminal illness. This can be used to pay for end-of-life expenses, such as medical or long-term care as well as funeral home costs.
You can qualify for ADB if you suffer from a terminal illness and are expected to die in under two years. You’ll also be eligible to receive your death benefit in advance under the following scenarios:
You contract an illness that reduces your expected lifespan.
You require an organ transplant due to illness.
You live in a hospice to receive long-term care.
Life Insurance Policy Cash Value
Permanent life insurance policies (e.g. whole life, variable life) come with a cash value component that accrues interest. When you have enough in your cash value, you can withdraw from or borrow against it for various needs.
Even if you don’t have ADB or long-term care riders, you’ll still be able to use the cash value in your policy to pay for your nursing home costs. Keep in mind that cash value is a feature of whole life policies – a term life policy wouldn’t have a cash value component.
Disadvantages Of Using Life Insurance For Nursing Home Care
Using your life insurance policy to pay for your long-term care might be convenient, but there are downsides too. In this section, we’ll outline the two main caveats of using your policy to fund your nursing homestay.
It Reduces Your Death Benefit
If you use the long-term care rider on your policy or apply for an ADB, you’ll be reducing your death benefit amount to fund your nursing home care. This may not be the wisest option if you expect to live in a nursing home for a long period of time. With the median costs of care reaching up to $100,000 annually, you’d spend half of a $500,000 life insurance policy in just two years.
A life insurance policy is meant to provide your beneficiary financial stability after your death and pay for your funeral home costs. By taking from the face value of your life insurance policy, you’ll be leaving your loved one less money in the event of your death.
An Active Policy May Disqualify You From Medicaid
Medicaid is a government program that can help you pay for long-term care costs. However, in most states, one of the eligibility criteria for Medicaid is that your assets must not exceed $2000.
If you have a life insurance policy with cash value, the amount in it will count towards your Medicaid eligibility limit. A term life insurance policy is exempt from this since it features no cash value.
To make sure your cash value doesn’t exceed the Medicaid eligibility limit, you can either use it to pay for your nursing home costs or transfer it to your family – typically your spouse. You can also sell your policy at market value to a third party in a life settlement in order to qualify for Medicaid, although you would also lose insurance coverage.
Alternative Payment Methods For Nursing Homes
If you’re unwilling to give up your life insurance policy or reduce your coverage amount, here are some other options you can consider.
Government programs like Medicaid can help you pay for a nursing home. Medicaid is designed to provide long-term care for low-income seniors. Since this service is a form of welfare, you must be considered “impoverished” by Medicaid to qualify for its benefits.
While the numbers may vary, most states require you to have under $2,000 in assets to be a Medicaid beneficiary. Assets calculated by Medicaid include your bank account, stocks, bonds, and any cash value in your life insurance. We recommend that you check your state’s Medicaid policies for information on your asset level limits.
Because cash value counts against your asset limit, you may need to spend the cash value accrued in your whole life or variable life insurance policy to qualify for Medicaid. If you have a term life insurance policy, you don’t have to worry – there’s no cash value with this type of policy.
Another downside to Medicaid is that if you die while receiving Medicaid benefits, the government may take your house as a replacement for your care costs. To make sure this doesn’t happen, it’s important to plan ahead. Before applying for Medicaid, you can add a family member – usually your child or spouse – to the property’s deed five years before you apply.
Another government program that may help you pay for your nursing home is Medicare. While Medicare doesn’t cover any type of long-term nursing home stays, its benefits plan can still pay for other costs you may incur during your nursing homestay. Similar to Medicaid, your Medicare coverage may vary if you travel between states.
Medicare can pay for your prescription drugs as well as hospital fees. In specific circumstances, Medicare may also cover the cost for short-term nursing home stays up to 100 days.
Personal & Family Assets
If you’ve accumulated enough money during your working years and have a sizable savings account, you can pay for your nursing home costs using your personal assets. A savings account isn’t the only source of funds – you can also tap into your home equity to help pay part of your long-term care costs. One more option worth looking into is to ask your spouse or children to help pay part of these costs.
While it’s relatively simple and straightforward in theory, you’ll need to budget better to make this option work. If your annual long-term care expenses don’t exceed 4% of your total assets, then you can comfortably use your personal assets to pay for your nursing homestay.
Long Term Care Insurance
Long-term care (LTC) insurance is a type of insurance designed for seniors aged 65 or older. This insurance provides funds to help pay for their nursing home care.
With a long-term care insurance policy, the insurance company starts paying out benefits in the following circumstances:
The policyholder is unable to do at least two of the six activities of daily living (ADLs) without assistance.
The policyholder suffering from dementia or other cognitive issues.
Much like life insurance, an LTC insurance policy is cheaper when you buy at a younger age. Most experts recommend applying for LTC insurance between the ages of 45 and 55 years old as part of your retirement plans.
As you approach retirement, you should start planning for your long-term care. Good financial planning will allow you to enjoy your twilight years without burdening your loved ones.
While nursing homes can’t directly take your life insurance policy to pay for your care, you can leverage your cash value to pay for it. Other options include adding on a long-term care rider or applying for accelerated death benefits.
If you have questions about using your life insurance policy to pay for your long-term care, Wesley Insurance, LLC is here to help! Our professional team can answer all the questions you may have about financing your nursing home care. Contact us today for more information!