Turn a Life Insurance Policy Into Cash for Care Today

The Policy Nobody Thinks to Use

When families start looking for ways to pay for home care, they think about savings, retirement accounts, maybe selling the house. Almost nobody thinks about life insurance. But your parent's life insurance policy may be one of the most valuable tools available right now.

There are four ways to convert a life insurance policy into cash for care. Each works differently, and the right choice depends on the policy type, your parent's health, and how quickly you need funds.

Option 1: Policy Loans (Fastest, Simplest)

If your parent has a whole life, universal life, or variable life policy with accumulated cash value, they can borrow against it. This is the simplest option and can provide funds within days.

How It Works

• Borrow up to 90-95% of the policy's cash value
• No credit check, no income requirements, no application process
• Interest is charged on the loan (typically 5-8%), but you don't have to make payments
• The loan balance plus interest is deducted from the death benefit when the insured passes
• If the loan balance exceeds the cash value, the policy may lapse (and create a taxable event)

Best For

Families who need cash quickly, want to keep the policy active, and have a policy with significant cash value. A $250,000 whole life policy purchased 20-30 years ago could have $75,000-$150,000 in cash value available to borrow.

Option 2: Accelerated Death Benefit Rider

Many life insurance policies include an accelerated death benefit (ADB) rider -- sometimes called a "living benefit" -- at no extra cost. This lets you access a portion of the death benefit while the insured is still alive.

How It Works

• Available if the insured is terminally ill (life expectancy under 12-24 months), chronically ill (needs help with 2+ ADLs for 90+ days), or in some policies, for any long-term care need
• Typically allows access to 25-100% of the death benefit, depending on the policy
• The amount accessed is deducted from the death benefit
• Proceeds for terminal illness are generally tax-free
• Processing time: 2-4 weeks

Best For

Families whose loved one has a qualifying condition and whose policy includes this rider. Check the policy documents or call the insurance company. Many families don't realize they have this option because the rider was included automatically.

Option 3: Life Settlements (Sell the Policy)

A life settlement is the sale of a life insurance policy to a third-party investor. The buyer takes over premium payments and eventually collects the death benefit. In return, your parent receives a lump-sum cash payment now.

How It Works

• Payout: Typically 20-40% of the face value (a $200,000 policy might sell for $40,000-$80,000)
• Eligibility: Generally 65+ with a policy face value of $100,000 or more
• Processing time: 2-6 weeks from application to payment
• Policy types: Works with term (if convertible), whole life, universal life
• Tax treatment: Proceeds above the cost basis (total premiums paid) are taxable as ordinary income

When It Makes Sense

When your parent no longer needs the death benefit -- perhaps the surviving spouse is already taken care of, the mortgage is paid off, or the children are financially independent. Instead of letting a policy lapse or surrendering it for the cash value (which is almost always less than a settlement), selling the policy puts real money toward care.

Reputable Life Settlement Brokers

Work with a licensed life settlement broker who shops the policy to multiple buyers to get the best price:

• Welcome Funds -- welcomefunds.com -- One of the largest settlement brokers, licensed in all 50 states
• Coventry Direct -- coventrydirect.com -- Major buyer, offers free policy appraisals

Never accept the first offer. A broker who represents your parent's interests (not the buyer's) will typically negotiate a payout 20-30% higher than a direct offer.

Option 4: Viatical Settlements (The Hidden Gem)

A viatical settlement is a special type of life settlement for people who are chronically or terminally ill. Because the life expectancy is shorter, the payout is dramatically higher -- and the tax treatment is often far more favorable.

How It Works

• Payout: 25-90% of the face value (compared to 20-40% for standard life settlements)
• Eligibility: Chronically ill (needs help with 2+ ADLs for 90+ days) or terminally ill (life expectancy under 24 months)
• Processing time: 2-8 weeks
• Tax treatment: Often 100% tax-free under HIPAA Section 101(g) of the Internal Revenue Code for chronically and terminally ill individuals

Why This Is a Game-Changer for Dementia Families

Here's why viatical settlements are what we call a "sleeper" funding source: many people with Alzheimer's or dementia qualify as chronically ill because they need help with 2 or more ADLs. That means a parent with dementia who has a $300,000 life insurance policy could potentially receive $75,000-$270,000 in tax-free cash to pay for years of home care.

Compare that to surrendering the policy for its cash value (often 10-15% of face value) or letting it lapse. The difference can be tens of thousands of dollars.

Tax-Free Under HIPAA

Under HIPAA Section 101(g), viatical settlement proceeds paid to a chronically or terminally ill individual are excluded from gross income. This means:

• No federal income tax on the proceeds
• No capital gains tax
• The full settlement amount goes toward care

This is one of the most tax-efficient ways to fund home care. Consult a tax professional to confirm your parent's eligibility for this exclusion.

How to Decide Which Option Is Right

What You Need to Get Started

Regardless of which option you pursue, gather these documents:

• The life insurance policy (or the insurance company name and policy number)
• Most recent policy statement showing face value, cash value, and premium amount
• Medical records or a letter from the doctor documenting the diagnosis and ADL needs
• Power of attorney (if the policyholder can't manage their own affairs)

If you can't find the policy, check bank statements for premium payments, contact the insurance company, or use the NAIC Life Insurance Policy Locator.

Using Life Insurance Proceeds for Home Care

Once you have cash from any of these methods, you can use it to pay for home care immediately. At A Place At Home's rate of $55/hour, here's what different amounts cover:

• $50,000 covers roughly 909 hours -- about 17 hours/week for a full year
• $100,000 covers roughly 1,818 hours -- about 35 hours/week for a full year
• $200,000 covers roughly 3,636 hours -- about 35 hours/week for two full years

These proceeds can also bridge the gap while waiting for other benefits like VA Aid & Attendance (3-6 month wait) or LTC insurance (30-90 day elimination period).

We Help Families Navigate This

A Place At Home Kirkland serves families throughout Kirkland, Bellevue, Redmond, Bothell, Woodinville, Kenmore, Sammamish, Issaquah, and King and Snohomish County. While we are not financial advisors, we help families understand their care funding options and connect them with licensed professionals who specialize in life insurance conversions for care.

Call us at (425) 553-3775 to discuss how to fund your parent's home care.

Frequently Asked Questions

Can I use my parent's life insurance to pay for home care?

Yes. You can borrow against the cash value (policy loan), access the death benefit early (accelerated death benefit rider), sell the policy (life settlement for 20-40%), or sell it as a viatical settlement (25-90%, often tax-free for chronically/terminally ill individuals).

What is a life settlement?

A life settlement is the sale of a life insurance policy to a third-party buyer for a lump sum, typically 20-40% of the face value. The buyer takes over premium payments and collects the death benefit. Generally available for policyholders aged 65+ with policies worth $100,000 or more.

What is a viatical settlement and how is it different?

A viatical settlement is specifically for people who are chronically or terminally ill. Payouts are much higher (25-90% of face value) and proceeds are often 100% tax-free under HIPAA Section 101(g). This is the most valuable option for families dealing with dementia, Alzheimer's, or cancer.

Are viatical settlement proceeds taxable?

For chronically and terminally ill individuals, viatical settlement proceeds are generally tax-free under HIPAA Section 101(g) of the Internal Revenue Code. Consult a tax professional for your specific situation.

What is an accelerated death benefit rider?

An accelerated death benefit rider lets you access a portion of the death benefit while the insured is still alive if they are terminally ill, chronically ill, or need long-term care. Many policies include this rider automatically at no extra cost.

Will using my life insurance for care affect Medicaid eligibility?

Lump-sum proceeds from settlements become countable assets and could affect Medicaid eligibility. However, if the funds are spent on care immediately, they don't accumulate. Consult a Medicaid planning attorney before converting a policy if Medicaid may be needed in the future.

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