The best option for paying for a nursing home is a standalone long-term care policy, not life insurance. Most life insurance benefits pay out after your death and don’t cover nursing homes, though some policies allow you to access funds while you’re alive.
You can also use Medicaid payments to cover the cost of nursing home care, but Medicaid only covers people up to a certain income. [1] There’s often a huge disparity between those who are eligible for government assistance and those who have the means to afford long-term care on their own.
Life insurance terms you should know
Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.
Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.
Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.
Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.
Insured: The person who is covered by the insurance policy.
Policy: The legal document that includes the terms and conditions of your life insurance contract.
Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.
Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.
Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.
Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.
Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.
Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.
Using a long-term care rider to cover nursing home costs
One of the riders you may be able to add to your life insurance is a long-term care rider. This is a policy add-on that covers assisted living if you’re too ill to take care of yourself.
To qualify for the rider, you must be unable to independently perform two of the six activities of daily living (ADL) temporarily or permanently: [2]
Eating
Bathing
Getting dressed
Walking or getting from one place to another
Using the toilet
Maintaining bowel and bladder continence
If you meet the rider’s requirements, the benefit amount paid out to cover the cost of your assisted medical care is taken from your policy’s death benefit. This can leave your beneficiaries with less financial support after your death.
Using the cash value of whole life insurance to cover nursing home costs
If you have a whole life insurance policy, your policy may have accumulated some cash value. The cash value can be used while you’re alive, including taking out a loan against it.
When you take out a loan against the cash value of your policy, you’re not withdrawing from the policy but rather borrowing from it, which means you’re technically borrowing from your insurer and accruing interest on the loan.
You could use this to pay for nursing home expenses, but you probably don’t want to. Assuming you’re using the cash value because nursing home costs would otherwise be unaffordable, it’s unlikely that you would be able to pay the loan back. Like most debts, the amount you still owe doesn’t just disappear when you die.
If you die and haven’t paid back the loan taken against your cash value, it’s depleted from the death benefit paid out to your beneficiaries. Depending on how big of a loan you took and how much interest you accrued — keeping in mind that nursing homes can end up being tens of thousands of dollars — your beneficiaries could receive a diminished benefit or none at all.
The best option: Long-term care insurance
The best way to ensure you have the proper financial support in place for any assisted living costs is by purchasing a standalone long-term care insurance policy.
Long-term care insurance provides the same protections as a long term care rider without detracting from the death benefit. One of the downsides of a long-term care insurance policy is that its cost increases as you age to the point of being prohibitively expensive.
It’s important to lock down a policy as early as possible to get affordable rates.
Can nursing homes take the life insurance death benefit from your beneficiary?
Nursing homes can be paid for in a few key ways.
Long-term care coverage
Private payments
Medicaid
Normally, if you’re paying for nursing home costs out of pocket, there won’t be any leftover payments to the nursing home when you die. The same is true for long-term care coverage, but if your nursing home expenses are covered by Medicaid, the state could, under certain circumstances, seek out restitution after you die. This is called the Medicaid Estate Recovery Program (MERP).
Similarly to creditors collecting debts, the repayment can be collected from your estate. However, creditors cannot come after your life insurance beneficiaries for funds paid out to them by the death benefit — it can only collect the death benefit if it’s paid out to your estate.
When you die, creditors can receive payment from your estate before it’s distributed to anyone designated in your will and testament. If you list your estate as your beneficiary, or if your death benefit is paid out to your estate because your primary and contingent beneficiaries have passed away, the payment collected by Medicaid would then be from your life insurance death benefit.
This is why you should not name your estate as your life insurance beneficiary and keep your policy details up to date after all major life events.
Assisted living can be very expensive, but insurance can cover nursing home costs if you plan ahead and get a long-term care insurance plan. A Policygenius agent can help you find a policy that works for you.
