Does life insurance cover the costs of a nursing home?

Nursing homes are a costly expense — about $8,821 a month on average for a private room, or an average of $105,850 annually, according to Genworth’s Cost of Care report. You can use Medicaid payments to cover the high cost of nursing home care, but 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 most life insurance proceeds pay out after your death and don't cover nursing homes, some policies allow you to access funds while you’re alive. 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 family. Instead, you should purchase a standalone long-term care policy.

Using a long-term care rider to cover nursing home costs

Life insurance policies offer supplemental coverage that you can access from the death benefit while you’re alive through 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 covers assisted living 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:

• 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 leaves your beneficiaries with less financial support when you die.

Using the cash value of whole life insurance to cover nursing home costs

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.

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 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.

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.