Q

Can life insurance cover the costs of a nursing home?

A

You can use life insurance to pay for assisted medical care, but a separate long term care policy is a better way to fund the costs of a nursing facility.

Nursing homes can be a costly expense — about $8,821 a month on average for a private room, or an average of $105,852 annually, according to Genworth’s 2020 Cost of Care survey. If you receive Medicaid payments, you can use it to cover the high cost of nursing home care. However, since Medicaid only covers people up to a certain income, 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.

While life insurance is meant to provide financial protection for your loved ones after you die, some policies allow access to funds while you’re alive and potentially help you pay for a nursing home. But these types of policies aren’t the best options when it comes to securing assisted medical care because they are difficult to qualify for and withdraw from your policy’s pay out to your loved ones.

KEY TAKEAWAYS

  • If you take out a loan against a permanent life insurance policy’s cash value and don’t pay it back, the amount you owe is taken from the death benefit

  • A long term care rider can cover the costs of nursing home care but the payout is withdrawn from the death benefit, making an individual long term care insurance policy a better option

  • Medicaid can seek repayment through your estate if it pays for your assisted living care

Using the policy’s cash value

If you have a whole life policy, your policy may have accumulated some cash value, which is the investment component associated with some permanent life insurance policies. 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 is 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.

policygeniusSymbolCenter

Compare the market, right here.

Policygenius saves you up to 40% by comparing the top-rated insurers in one place.

Using a long term care rider

Life insurance policies offer supplemental coverage that you can access from the death benefit while you’re alive through something called a rider. What types of riders you can add to your coverage depends on your individual policy, but some policies offer a long term care rider, which pays out funds for medical care if you are 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. The following activities are considered activities of daily living:

  • 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 paid out to cover the cost of your assisted medical care is taken from your policy’s death benefit and leaves your beneficiaries without any financial support when you die.

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.

Compare and buy life insurance

Compare and buy life insuranceGET STARTED

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 costs 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 beneficiaries for funds paid out to them by the life insurance 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 is 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 beneficiary have passed away, the payment collected by Medicaid would then be from your life insurance death benefit.

For this reason, it is recommended that you don’t name your estate as your life insurance beneficiary and keep your policy details up to date after all major life events.

Life insurance and nursing homes FAQs

Can you use life insurance to pay for a nursing home?

If you have a permanent life insurance policy with a cash value, the accumulated cash can pay for a long term care facility. However, we recommend using Medicaid or a separate long term care insurance policy to cover the cost of a nursing home.

What happens to long term care insurance when you die?

Long term care insurance (LTC) is meant to be used before you die to cover the costs associated with treating chronic illnesses or other ailments in old age. LTC can be used for at-home care for Alzheimer’s patients, nursing home costs, home health care, homemaker services, respite care, and memory facilities. Unlike traditional life insurance, whatever funds you don’t use are not passed on to your loved ones.

What is not covered by long term care insurance?

Long term care insurance does not cover the cost of surgeries, prescription drugs, or doctors’ visits. These expenses are covered by health insurance or Medicare.

Life Insurance Expert

Nupur Gambhir

Life Insurance Expert

Expertise
Nupur Gambhir is a life insurance editor at Policygenius in New York City. She has researched and written extensively about life insurance since 2019, with specialties in life insurance companies, policy types, and end-of-life planning. Her writing on insurance and finance has appeared on MSN, The Financial Gym, and end-of-life planning service Cake. Previously, she worked in marketing and business development for travel and tech.

Education
Nupur has a B.A. in Economics from Ohio State University.

Life Insurance Expert

Rebecca Shoenthal

Life Insurance Expert

Expertise
Rebecca Shoenthal is a life insurance editor at Policygenius in New York City, specializing in buying life insurance and the ins and outs of life insurance ownership. She's edited business books by the country’s top academics, politicians, journalists, thought leaders and CEOs, including venture capitalist John Doerr’s Measure What Matters, entrepreneur Scott Belsky's The Messy Middle, NYU Stern professor Scott Galloway's The Four, and technologist John Maeda's How to Speak Machine.

Education
  Rebecca has a B.A. in Media and Journalism from the University of North Carolina at Chapel Hill.