Using Life Insurance to Pay for Senior Care

A life insurance policy can pay for senior care while the insured is still alive, not just leave money behind after death. There are four ways of using one to pay for care: an accelerated death benefit rider, a life settlement, a viatical settlement, or surrendering the policy for its cash value.1 Each one pays differently, gets taxed differently, and hits your heirs and your Medicaid eligibility differently.

This guide walks through all four, plus the two questions that decide whether any of them is a good idea: how the money is taxed, and what it does to Medicaid.

Why Families Tap a Policy in the First Place

Care is expensive, and a life insurance policy is often the largest asset a family hasn't touched. In 2026, the national median cost of an assisted living community is about $6,200 per month, non-medical home care runs about $35 an hour, roughly $80,080 a year at 44 hours a week, and a semi-private nursing home room runs about $9,581 per month.2 A private nursing home room is higher still, about $10,798 per month.2

At those numbers, savings drain fast. A policy that was bought to protect a spouse or pay for a funeral can instead fund a year or two of care now, when it's needed. The tradeoff is real: money pulled out while the insured is alive is money the heirs won't get later.

Four Ways of Using Life Insurance to Pay for Senior Care

Accelerated Death Benefit (ADB) Riders

An accelerated death benefit rider lets a terminally or chronically ill policyholder take an advance on the death benefit while still alive, and that advance is tax-free.1 Many permanent policies already include a rider like this at no extra cost. Dig out the policy and check.

For nursing-home care, the monthly amount you can draw is typically about 2 percent of the policy's face value.1 A $200,000 policy would advance roughly $4,000 a month under that formula. Every dollar you accelerate reduces, or eventually eliminates, what your heirs receive.1

This is usually the first option to check, because you keep the policy with your own insurer and don't sell anything.

Life Settlement

A life settlement is the sale of your policy to a third-party buyer for a lump sum. The price lands above the policy's cash surrender value but below its death benefit.1 The buyer takes over the premiums and collects the death benefit later.

Settlements are generally available to older policyholders. The federal Administration for Community Living (ACL) describes the typical seller as a woman about age 74 or older, or a man about age 70 or older.1 See the ACL's guidance on using life insurance to pay for long-term care for the full picture.

Two things to weigh. The proceeds may be taxable.1 And once you sell, there's no death benefit left for your heirs.1

Viatical Settlement

A viatical settlement is a life settlement made by someone who is terminally or chronically ill.1 The mechanics are the same, you sell the policy for a lump sum, but the tax treatment is far better.

The money is generally tax-free if the insured has a life expectancy of two years or less, or is chronically ill.1 That tax break is the main reason a viatical settlement beats an ordinary life settlement when the insured qualifies. As with any sale, no death benefit remains for heirs.

Surrendering for Cash Value

Surrendering means cashing the policy in with your own insurer for its cash surrender value. Only permanent policies (whole life, universal life) build cash value. Term life has none, so there's nothing to surrender.1

Surrender is the simplest option, but usually the one that pays least. The cash surrender value is, by definition, lower than what a life settlement buyer would pay.1 The policy ends, and the death benefit goes with it. Surrender only when the other routes are closed or the policy is small.

There are also private companies that market arrangements to convert a life insurance policy into a fund that pays care providers directly. These are vendor-marketed products, not a government program. Treat any payout figure a salesperson quotes as a sales pitch, and compare it against an ADB rider or a settlement before signing.

Comparing Your Options

The right route depends on your health, your tax situation, and whether leaving money to heirs matters.1

What Using Life Insurance to Pay for Senior Care Does to Your Taxes

The tax rules for ADB riders and viatical settlements come from one section of the tax code: Internal Revenue Code (IRC) section 101(g).1 It splits people into two groups, and the group decides how much is tax-free.

Terminally ill. Payments to a terminally ill insured are fully excluded from income.1 No cap. The whole accelerated or viatical payment comes out tax-free.

Chronically ill. Payments to a chronically ill insured are excluded only up to the long-term care per-diem limit, which is $430 per day for 2026.1 Anything you receive above that daily cap can be taxable.

The Internal Revenue Service (IRS) spells this out in its instructions for Form 1099-LTC, the form that reports accelerated death benefits and viatical settlements. A life settlement that isn't viatical follows ordinary rules instead, and its proceeds may be taxable.1 Confirm your own treatment with a tax professional before you count on a number.

How Using Life Insurance for Care Affects Medicaid

Here's where a quick decision can backfire. Turning a policy into cash can cost you Medicaid eligibility, because Medicaid is means-tested and that lump sum is countable money.

Under the federal Supplemental Security Income (SSI) rules that most states apply, a whole-life policy's cash surrender value counts as a resource once the total face value of all policies on one person exceeds $1,500.1 Below that $1,500 face-value threshold, the cash value is generally left alone. Term life, which has no cash value, generally doesn't count at all.1

Selling or surrendering changes the math fast. The moment you convert a policy into cash, you've created a lump sum of countable money that can push an applicant over the asset limit.1 A policy that was quietly exempt can become disqualifying cash overnight.

If Medicaid is on the table now or within a few years, don't cash out a policy without modeling the effect first. Spending the proceeds down too quickly, or in the wrong way, can trip the look-back rules. Our guide to Medicaid planning strategies explains how the asset limits and the 5-year look-back work, and Medicaid estate recovery covers what the state can later claim back.

Before You Sell: Cautions

A few rules of thumb before you sign anything.

Check with your own insurer first. Many permanent policies already carry an accelerated death benefit rider, often at no added cost. Confirming that you have one is free and can save you a sale you didn't need.

Know who regulates the deal. Life and viatical settlements are regulated by state insurance departments.1 Your state's department can tell you whether a buyer is licensed and walk you through consumer protections. The National Association of Insurance Commissioners (NAIC) publishes a consumer guide to life settlements worth reading first.

Confirm taxes and Medicaid before you commit. The tax outcome and the Medicaid outcome can each swing the value of a deal by thousands of dollars.1 Get both answered in writing before the policy changes hands.

Don't let a vendor's quote stand alone. Compare any private conversion offer against an ADB rider, a settlement, and a straight surrender. The simplest pitch isn't always the most money.

Learn More

Find personalized help turning a life insurance policy into senior care funding at brevy.com.

The information on Brevy.com is for educational purposes only and is not a substitute for professional legal, financial, or medical advice. Rules vary by state and program and change frequently. Always verify with the relevant agency or a qualified professional. Brevy is not a law firm, financial advisor, or healthcare provider.