Converting life insurance to pay for long-term care

1. Check for a living-benefit rider first

Many permanent life insurance policies — and some term policies — already include an accelerated death benefit (or “living benefit”) rider, sometimes at no extra cost. It lets the policyholder receive part of the death benefit while still alive, after a licensed health care practitioner certifies a qualifying chronic or terminal illness — often the same “needs help with two or more daily activities” standard used to trigger long-term care insurance. The payout reduces the eventual death benefit, usually with a discount. Call the insurer directly and ask whether your policy already has this rider before looking at anything else on this page.

2. Consider a policy loan

If it’s a permanent policy (whole or universal life) with built-up cash value, you can typically borrow against that cash value directly from the insurer. The policy stays in force and in the family’s control — the loan (plus interest) is simply subtracted from the death benefit if it’s not repaid before the insured’s death. This is usually simpler and more reversible than selling the policy outright.

3. Selling the policy — life and viatical settlements

If neither of the above applies, it’s possible to sell an existing policy to a third-party settlement company for a lump sum — more than the cash surrender value, but less than the full death benefit. The buyer takes over the premium payments and collects the death benefit when the insured dies.

• Life settlement: the general version of this transaction, typically available to policyholders 65+ with a health condition. Policies below roughly $100,000 in face value are often not worth enough to attract a buyer.
• Viatical settlement: a version specifically for someone who is terminally or chronically ill (commonly defined as a life expectancy of two years or less), which typically pays a higher percentage of the face value than a standard life settlement because the buyer’s payout timeline is shorter.

This is the option that permanently gives up the death benefit. Once the policy is sold, your heirs no longer receive anything from it. Discuss this with the rest of the family before proceeding — it’s often a harder decision to reverse than it first appears.

Taxes and licensing — don’t guess on either

Viatical settlement proceeds for a terminally ill individual are generally tax-free under federal law; for a chronically ill individual, tax-free treatment is generally limited to amounts actually used for qualified long-term care costs, subject to per-diem limits. A standard life settlement is typically taxed differently again. This is genuinely complex — get specific numbers from a tax advisor before you count on a figure. California also requires life settlement providers and brokers to be licensed by the California Department of Insurance — verify any company you’re considering at 1-800-927-4357 (insurance.ca.gov) before signing anything.

One more thing to check

A lump-sum settlement payout can count as a countable asset for Medi-Cal purposes once received. If Medi-Cal eligibility is part of the plan, talk to an elder-law attorney before accepting a settlement — see our Medi-Cal eligibility guide for the current asset limits.