Life Insurance Strategies to Pay for Elder Care
Many Minnesota seniors have a valuable asset they don’t fully realize: life insurance policies. While purchased for death benefits, life insurance can fund long-term care costs during your lifetime through several strategies.
Strategy 1: Policy Loans
If you have permanent life insurance (whole, universal, or variable), borrow against the cash value. Access 90-95% of cash value, pay interest (typically 5-8%), no required repayment schedule. The outstanding loan balance reduces the death benefit: quick access, no credit check, competitive rates. Watch policy performance to avoid lapse.
Strategy 2: Surrendering the Policy
Cash out your policy entirely for immediate funds, eliminating the death benefit. Receive cash value minus surrender charges (typically decrease over 7-10 years). Taxable to the extent proceeds exceed premiums paid. Consider when you need an immediate lump sum, the policy has minimal death benefit, the heirs don’t need the benefit, and the surrender charges are minimal.
Strategy 3: Accelerated Death Benefits
Many policies include riders allowing you to access death benefits while living if terminally ill (typically under 12-24 months), chronically sick and requiring ADL assistance, or have a critical illness. Access 25-95% of the death benefit. Usually, tax-free benefits. This is often the best option when you qualify, as it allows you to access your own benefit without affecting third parties.
Strategy 4: Life Settlements
Sell your policy to a third party for more than the cash value but less than the death benefit. Buyer pays a lump sum (typically 20-50% of the death benefit), assumes premium payments, and receives the death benefit when you die. Qualifications: life expectancy under 15 years, age 65+, policy value usually $100,000+. Receive more than surrender value, but heirs get nothing.
Medical Assistance Planning Considerations
Life insurance affects Medical Assistance (Medicaid) eligibility differently: term life insurance is not counted, regardless of value, and permanent insurance with a face value over $1,500 has its cash value counted as an asset. For married couples, the policy on the community spouse is usually exempt. Don’t surrender hastily without consulting an elder law attorney. Strategic planning may preserve more value.
Real-World Scenarios
- Need home care now: 78-year-old with $250,000 policy, $85,000 cash value. Policy loan of $50,000 covers 12+ months of care, preserves $200,000 death benefit, and keeps other assets liquid.
- Moving to assisted living: 81-year-old widower, $500,000 policy, $120,000 cash value, no heirs. Life settlement might yield $200,000+ versus $120,000 surrender value.
- Couple planning ahead: 76-year-old husband, $300,000 policy, $65,000 cash value, both healthy. Keep policy for now, consider loan if care needed, protects wife with death benefit.
Decision Framework
- Need an immediate lump sum? Consider surrender (no charges), life settlement (if health issues), or accelerated benefits if qualified.
- Death benefit critical to heirs? Consider policy loans (preserves some benefit), accelerated benefits, or keep policy and use other assets.
- Eligible for accelerated benefits? Usually best option: tax-free, easy process, access your own benefit.
Working with Professionals
Life insurance decisions for elder care require professional guidance. Elder law attorneys help with Medical Assistance implications, tax consequences, and optimal timing. Financial advisors provide policy analysis and alternative comparisons. Tax professionals address taxation. Always get help before proceeding.
Common Mistakes to Avoid
Don’t surrender without exploring loans or settlements that might provide better value. Don’t ignore tax consequences of surrenders. Don’t forget to read your policy for beneficial riders. Don’t miss Medical Assistance planning implications. Don’t act without professional advice.
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About Everbright Legacy Law
Everbright Legacy Law helps Minnesota families develop strategies to fund long-term care, including optimal use of life insurance. Our Richfield office serves the Twin Cities with integrated elder law services.
