Life insurance can sometimes be used to help pay for long-term care if it has cash value, living benefits, or options to sell, borrow, surrender, or exchange the policy. Each choice can affect taxes, Medicaid eligibility, and the death benefit for beneficiaries, so families should review the policy and consult a licensed financial advisor, insurance agent, tax professional, or elder law attorney before making changes.
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If your loved one has a permanent life insurance policy, it may help pay for long-term care. As families estimate what care may cost, they often review existing financial resources, including life insurance, to help pay for those expenses. The national average annual cost for assisted living is $69,960, and the national average cost of in-home care is $32 per hour, according to A Place for Mom’s proprietary data. [01]
There are several ways to use life insurance to pay for long-term care. Compare the options below to understand whether these options may work for your family.
| Option | Best for | Main trade-off |
|---|---|---|
| Sell the policy | People who need cash for long-term care and whose life insurance beneficiaries don’t need the death benefit | Beneficiaries lose the death benefit; proceeds may affect taxes and Medicaid eligibility |
| Use a living benefit rider | People who are terminally ill or meet policy criteria and need cash for care | The death benefit is reduced; some proceeds may be taxable, depending on the policy and situation |
| Surrender the policy | People who need cash for care or other expenses, and whose life insurance beneficiaries don’t need the death benefit | The policy ends; cash received may affect taxes and Medicaid eligibility |
| Borrow against the policy | People who can repay the loan and whose care costs are less than the policy’s cash value | Unpaid loans and interest can reduce or eliminate the death benefit |
| Use a 1035 exchange | People who want long-term care insurance and whose life insurance beneficiaries don’t need the death benefit | The new policy may require underwriting, include charges, or reduce legacy funds |
A life settlement allows your loved one to sell a life insurance policy for a lump-sum payment that can be used toward long-term care. The payment is generally more than the policy’s cash surrender value but less than its death benefit. A life insurance agent or life settlement broker usually arranges the sale and may charge a commission. [02,03]
After the sale, the buyer becomes the policy owner, pays the premiums, and receives the death benefit when the insured person dies. This means your loved one receives money from the policy now but no longer leaves its death benefit to the original beneficiaries. [02,03]
The amount offered depends on factors such as the policy’s death benefit, premium costs, and the insured person’s age and health. Because offers can vary, families may want to compare multiple offers and review the financial, tax, and estate-planning effects before selling a policy. [02,03]
Whole life, universal life, term life, and some group life insurance policies may qualify for a life settlement, depending on the policy and the buyer’s requirements. [03]
Best for: Families who can no longer pay the life insurance premiums or don’t need the death benefit.
Watch for: This may not be suitable if beneficiaries are relying on the death benefit; the lump sum can affect the policyholder’s taxes and Medicaid eligibility.[03]
A “living benefit” rider on a life insurance policy, also called an “accelerated death benefit,” means that a policyholder who is terminally ill may take part of the death benefit while still alive for their care, which could include a nursing home. Different policies will require certain amounts to be left for the named beneficiary as well as other rules. Policies may allow only certain types of care expenses such as a nursing home. [04]
Some policies include the option of a long-term care rider, which allows the policyholder to use a portion of the death benefit to pay for long-term care expenses. This typically requires the policyholder to meet requirements such as being unable to perform certain activities of daily living (ADLs).[04]
Best for: People who are terminally ill or unable to perform ADLs who need money to pay for nursing care; those with an accelerated death benefit rider who need money for expenses not related to illness as this is typically allowed.
Watch for: Some policies require a person to pay for their care before being reimbursed, which could be a financial burden. In some cases, the portion of a death benefit taken by a policyholder may be subject to income tax. [05]
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Surrendering a life insurance policy means the insurance company pays you the “surrender value” of the policy, which you can then use to pay for long-term care, such as nursing care. The term “surrender value” refers to the policy’s cash value after necessary fees have been paid. But it also means the beneficiary receives no payment, and the cash may be subject to income tax.
“If the cumulative premium amount paid over the life of the policy is more than your current cash value, there are generally going to be no taxes,” says Sam Price, an independent life insurance broker and owner of Assurance Financial Solutions.
However, a cash payment that is more than the cost of the policy must be included as part of the policyholder’s income. It may be taxable and may affect Medicaid eligibility. Check with your state’s Medicaid program or an elder law attorney before surrendering a life insurance policy if Medicaid benefits may be needed.[05,06]
Best for: People who need money to pay for care and other expenses and whose beneficiaries don’t need the death benefit.
Watch for: Cash received from surrendering a permanent or whole life policy can be taxable and may affect a person’s Medicaid eligibility, depending on their state’s limits. Term life insurance policies generally don’t have cash value, so ask your state’s Medicaid office how the policy is treated.[04,06]
Taking a loan on a whole or permanent life insurance policy can provide cash to pay for long-term care without surrendering the policy, but it does reduce the policy’s cash value. If the loan isn’t repaid, the death benefit will be lowered or eliminated.
A loan can only be taken from a permanent life insurance policy, such as universal life, variable life, and whole life policies., Before doing this, ask your insurance company to explain how the loan, as well as future premiums and interest, will affect the policy.
For some people, surrendering their policy may be a better option than borrowing from it. “If your health care needs are more than the money you have in the policy, you’re going to surrender the policy because you need every dollar,” says Price. “However, if your needs are less than the amount of the cash value, then a loan might make more sense. That way, you can keep some portion of the death benefit in place.”
Interest will be added to the amount of the loan and if the loan is not repaid, there may be tax consequences on the owed amount.[07]
Best for: Individuals who are confident they can repay the loan and whose financial needs for care are less than the cash value of the policy.
Watch for: This might not be a good option for people whose financial needs for care are greater than the cash value of the policy or who may not be able to repay the loan.
A 1035 exchange may allow your loved one to use the cash value of an existing life insurance policy or annuity to purchase another qualifying policy with long-term care benefits. The funds transfer directly to the new policy, which can help avoid taxes that might apply if your loved one cashed out the original policy first. [08,09]
“Sometimes, that’s a convenient way for people to fund long-term care insurance because the premium is not coming out of household income,” says Nicole Gurley, owner of Gurley LTCI, a brokerage company specializing in long-term care funding solutions. “You just take the cash value in an old policy and move it to a new policy that offers long-term care benefits.”
A 1035 exchange generally requires advance planning because your loved one must qualify for the new policy. Before making an exchange, compare the policies’ benefits, premiums, fees, eligibility requirements, and surrender charges. A financial or insurance professional can also explain how the exchange may affect taxes and existing coverage. [09]
Best for: People whose beneficiaries aren’t relying on the death benefit and who want to exchange a life insurance policy, which may have tax consequences, to pay for long-term care insurance.
Watch for: The new policy may require underwriting or include new charges. This option may not be appropriate for people whose beneficiaries are depending on the death benefit. Also, not all insurers accept a 1035 exchange. [09]
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Changing a life insurance policy can have financial consequences, so before doing so, consider these questions:
Estimating when your loved one will need long-term care can provide an idea of how much care will cost. This will help you determine whether using a life insurance policy could be part of planning for that care, and how much it could cover.
If leaving money to beneficiaries is a priority, consider how each option may affect the policy’s death benefit. A loan against the policy allows your loved one to keep the coverage, but any unpaid loan balance and interest will generally reduce the amount beneficiaries receive. A large loan may also put the policy at risk of lapsing.
Receiving cash from a life insurance policy counts as a financial asset, which could make a senior ineligible to receive Medicaid, depending on their financial situation.
Follow these steps if you’re interested in changing a life insurance policy to pay for long-term care.
First, find out what type of life insurance policy your loved one has in place and review the policy documents carefully to determine whether and how it can be used for cash.
Estimate how much long-term care might cost for your loved one based on their medical and lifestyle needs. Contact senior living communities in your area to find out average entrance fees and monthly payments or home health care agencies to learn about their fees for in-home care.
A financial or legal professional, such as an attorney who specializes in elder law, can guide you in the decision to use a life insurance policy to pay for the type of long-term care your loved one needs. They may also suggest other resources to pay for that care that would allow the life insurance policy to remain intact.
Your loved one may be able to take a loan against a policy to help pay for long-term care and leave the remaining cash value intact. If they’re terminally ill, they may use a living benefit to receive part of the policy’s value for care.
If your loved one sells or surrenders their insurance policy or exchanges it for a long-term care insurance policy, their beneficiaries may not receive the original death benefit.
A Place for Mom Proprietary Data. (2026). A Place for Mom proprietary data.
U.S. Securities and Exchange Commission. (2011, January 20.) Life settlements.
Financial Industry Regulatory Authority. (2023, July 31) What you should know about life settlements.
National Association of Insurance Commissioners. Life Insurance.
Internal Revenue Service. Publication 554, 2025 Tax Guide for Seniors.
Centers for Medicare & Medicaid Services. Eligibility policy. Medicaid.gov.
Internal Revenue Service. Topic no. 431, Canceled debt – Is it taxable or not?
Legal Information Institute. Cornell Law School.26 U.S. Code § 1035 – Certain exchanges of insurance policies.
Financial Industry Regulatory Authority. (2023 January 23). Should you exchange your life insurance policy?
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