When your children are young, a large life insurance policy helps ensure that your surviving spouse will have enough money to raise them and send them to college if you die. Once your children are grown, however, you probably don't need as large a death benefit. You may, instead, need money for living expenses in a long-term care community. Life insurance can be used to help fund these expenses.
One way to use your life insurance policy to cover expenses in a senior living community is to buy a long-term care rider, also called an acceleration of death benefits rider. If you already have life insurance, especially a variable or universal policy, you may have a rider already. If not, you may be able to add one. The amount you receive from these policies varies. Typically it is is capped at 50 percent of the death benefit, although some policies will allow you to use all of it. If you never need the long-term care benefits, your beneficiaries receive a tax-free death benefit when you die.
Another way to fund living expenses with life insurance is to buy a lump-sum combination policy that includes life insurance and long-term care insurance. This option may make sense if you can self-fund your long-term care stay but want a safe way to protect your assets from the ups and downs of the stock market. If you need long-term care, you receive a certain amount each year for a set number of years, depending upon the terms of the policy. If you don't, your heirs receive a sum greater than your premium payment as a death benefit.
You also can convert a standard life insurance policy into funding for long-term care. In these programs, the owner sells the life insurance policy to a third party for a specified amount. For example, you may convert your life insurance's face value into monthly installments paid to a senior living facility. The buyer of the policy pays the premiums and collects the death benefit. Another example is a life settlement, in which you receive a lump sum to use however you wish. A viatical settlement is similar but can be used only if you are terminally ill. It pays you the death benefit in a lump sum based upon the number of months you are expected to live.
Consider the pros and cons of each life-insurance option, as well as other options for funding long-term care. Shop around if you plan to use long-term care riders. Price varies, as do the conditions under which you are allowed to use the accelerated death benefit. For example, some require that you be terminally ill and others that you be confined to a nursing home. Conversion isn't an option for everyone. For example, if your life insurance policy is small, you probably are better off keeping it than trying to convert. If a policy has a high cash value, relative to its face value, such as $130,000 cash value on a $150,000 policy, you may be better off taking that cash rather than converting it.
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