Using Life Insurance to Pay for Senior Care

A life insurance policy can sometimes help pay for senior care, not just leave money behind after death. There are four ways of using one to pay for care: an accelerated death benefit, a life settlement, a viatical settlement, or surrendering the policy for its cash value. Each route carries its own tax and benefit consequences, for your heirs and for Medicaid, and those have to be priced in first.1

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 may be an asset a family hasn't touched yet. According to the CareScout 2025 Cost of Care Survey, released in March 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 $315 a day, or about $114,975 a year.2 A private nursing home room is higher still, about $355 a day, or about $129,575 a year.2

Those are medians, and what you actually pay depends on the care needed and where you live.2 A policy that was bought to protect a spouse or pay for a funeral can instead help pay for 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.1

Four Ways of Using Life Insurance to Pay for Senior Care

Accelerated Death Benefit (ADB) Riders

An accelerated death benefit is paid by your insurer on a policy you already own, and whether you can get one depends on the policy offering it. It's a feature included in some life insurance policies. Some older policies may not grant it in their terms, but many insurance companies are making the option available to their policyholders, so ask your agent or insurer whether yours has it. A policyholder is usually eligible only if the option was added before the insured became terminally ill, so don't count on adding it once care is needed.1 Dig out the policy and call the company. If the policy is a VA one and not a private one, our guide to VA life insurance for older veterans explains which VA programs pay an accelerated benefit and which office to call.

Where the feature exists, the accelerated payment is typically capped at about 50 percent of the death benefit. On ADB policies that cover long-term care services, the monthly benefit for nursing-home care is typically about 2 percent of the policy's face value.1 On a $200,000 policy, that formula works out to roughly $4,000 a month. Whatever you receive is subtracted from what your beneficiaries are later paid.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 investor for a lump sum. The payment is generally more than the policy's cash surrender value but less than its death benefit.1 The buyer takes over the premiums and collects the death benefit later.

Settlements are for older policyholders. According to the federal Administration for Community Living (ACL), a life settlement is usually available only to women about age 74 and older and men about age 70 and 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 may be little or no death benefit left for your heirs.1

Viatical Settlement

A viatical settlement is like a life settlement, but it's possible only for an insured who is terminally or chronically ill.1 You still sell the policy for a lump sum, but the tax treatment can be far better.

The money is tax-free only if the insured has a life expectancy of two years or less or is chronically ill, and the viatical company is licensed in the states where it does business. A sale by someone who is neither terminally nor chronically ill doesn't get that treatment. Neither does a sale to a buyer that falls outside the tax code's definition of a viatical settlement provider: a buyer licensed for that purpose in the state where the insured lives or, where that state doesn't require a license, one that meets the alternative standards the statute sets.1 That tax break is the main reason a viatical settlement beats an ordinary life settlement when the insured qualifies. As with any sale, there may be little or no death benefit left for heirs.

Surrendering for Cash Value

Surrendering means cashing the policy in with your own insurer for its cash surrender value. Term policies generate no cash surrender value, so there's nothing to surrender.1

Surrender is the simplest option, but it generally pays less than a sale would. A life settlement payment is generally more than the cash surrender value, so surrendering can leave that difference on the table.1 Surrender when the other routes are closed to you.

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. A terminally ill insured is someone a physician has certified as having a condition reasonably expected to result in death in 24 months or less. Payments to that person are treated as paid by reason of death, so they're excluded from income.1 For a viatical sale, the buyer must also meet the tax code's licensing test described above.

Chronically ill. For a chronically ill insured, the exclusion is narrower. It covers only payments for qualified long-term care costs that insurance or anything else doesn't already pay, and it's capped at the long-term care per-diem limit, which is $430 per day for 2026.1 Anything outside those limits can be taxable.

For the Internal Revenue Service (IRS) reporting rules, see its instructions for Form 1099-LTC. 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. Any of these moves can affect Medicaid and SSI eligibility. The ACL warns that using an accelerated death benefit may affect Medicaid eligibility.1

Under the federal Supplemental Security Income (SSI) rules the Social Security Administration (SSA) applies, a policy counts as a resource at its cash surrender value, not its face value. Policies a person owns on their own life are excluded entirely when their combined face value is $1,500 or less. Term policies are left out of that total because they generate no cash surrender value.1 If a policy isn't excluded, up to $1,500 of resources may still be set aside as burial funds, reduced by the face value of any policy already excluded.1

Accelerated payments hit from the income side too. SSA treats an accelerated death benefit payment as income in the month you receive it, and as a resource if you still have it the next month. That means a draw can cost a month of SSI even when the policy itself never counted.1

Selling or surrendering changes the math fast. Either one turns the policy into countable cash that can push an applicant over the asset limit unless it's spent down.1 A policy that was quietly exempt can become disqualifying cash.

If Medicaid is on the table now or within a few years, don't cash out a policy without modeling the effect first, including how the money would be spent down. Our guide to Medicaid planning strategies explains how the asset limits and the 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. Some older policies may not grant an accelerated death benefit in their terms, but many insurance companies are making the option available to their policyholders.1 Asking whether yours has it can save you a sale you didn't need.

Know who regulates the deal. Many states regulate life settlement providers, but not all do. Confirm with your state insurance regulator that a broker or provider is licensed.1 For a viatical sale, the tax break turns on whether the buyer meets the tax code's licensing test, so that call matters twice.1 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 change what a deal is really worth to you.1 Get both answered in writing before the policy changes hands.

Don't let one offer stand alone. Compare any offer against an accelerated death benefit, 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.