A long-term stay in a nursing home can be expensive, and if you don’t qualify for Medicaid, you may have to withdraw your assets to pay for it. You may choose to leave a life insurance policy to help your loved ones cover final costs and replace some of the assets used to fund nursing care. But can nursing homes take over your life insurance policy from your beneficiary? The short answer is no. A nursing home cannot make a claim on your life insurance if you have taken the necessary precautions. We explain more below, but you may also want to work with a financial advisor to help you set up your estate with the right insurance for your retirement and long-term care needs.
Who pays for nursing home care?
If you or your spouse need nursing home care, there are several ways to pay for it, depending on the length of stay. In general, options for paying for nursing home care include:
Personal savings or investments
VA benefits (if you are a qualifying veteran or the spouse of a veteran)
Long-term care insurance
Life insurance with a critical illness or long-term care
Loans, including mortgage loans
Each option has advantages and disadvantages. Using personal savings or investments to pay for nursing care, for example, may mean leaving a smaller financial legacy for your loved ones. Long-term care insurance can cover your nursing care costs, but buying a policy can be expensive.
A life insurance policy with a long-term care rider may be more attractive because you can get both a death benefit and money to pay for long-term care if needed. Annuities can provide you with a steady income that will help you pay for long-term care, but again, cost is a consideration. Taking out a loan is another option, but it does mean taking on debt with interest.
Most nursing homes accept Medicaid for patients who cannot afford their nursing costs out of pocket or through private insurance. Medicaid is a government program administered at the state level. Eligibility depends on your income and financial resources.
Medicare can also pay for nursing care, but only if you need short-term rehabilitation care. If you need long-term nursing care, Medicare will not cover these costs.
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Can nursing homes take over your life insurance policy from your beneficiary?
A nursing home cannot take over your life insurance policy if you have one or more beneficiaries. If you die, the nursing home that was responsible for your care cannot claim the death benefits from your policy, as long as you have designated a beneficiary to receive them.
Your beneficiary can decide how to use the money from the policy. Think of paying the terminal dues, paying off a mortgage debt or paying the daily costs of living.
However, you could run into trouble if you have a life insurance policy but your estate is the beneficiary. In that case, a nursing home may be able to make a claim against your estate for all the money you owe for your healthcare costs.
Can you use life insurance to pay for nursing home care?
It’s possible to use your life insurance policy to pay for nursing home care if you don’t qualify for Medicaid or don’t want to use other assets to pay. There are four ways you can use life insurance to pay for long-term care:
1. Life Arrangement
Life insurance policy simply means that you sell your life insurance policy for cash. This option may be available to you if you have a permanent policy that accumulates cash value and meets the insurance company’s minimum age requirements.
If you choose life insurance, you can get cash to cover the costs of long-term care. However, you may pay tax on the proceeds of the sale. You also eliminate the death benefit for your beneficiaries.
2. Viatic Settlement
A viatical settlement is similar to a life agreement in that you sell the policy. However, your ability to qualify for a viatic settlement depends on being diagnosed with a terminal illness or within the last two years of your life expectancy.
Again, no death benefit is left for your loved ones. The amount of money you can receive through a viatical settlement depends on the cash value accumulated in the policy.
3. Accelerated payment upon death
An accelerated death benefit is an addition to a life insurance policy that allows you to use your death benefit during your lifetime. You can use the money to pay for nursing home care or other end-of-life expenses.
Depending on how much money you withdraw, you may still be able to leave some death benefits for your beneficiaries.
4. Hybrid Policy
A hybrid life insurance policy combines a death benefit with long-term care insurance. If you need long-term care, your policy may pay benefits for those costs.
Once you pass away, your beneficiaries can collect a death benefit. While these types of life insurance policies may come with higher premiums, if you’re concerned about nursing home care placing a financial burden on your loved ones, you can get the best of both worlds.
Does life insurance affect Medicaid eligibility for long-term care?
As mentioned, Medicaid can help pay for long-term care costs if a stay in a nursing home is necessary. If you have life insurance, it may affect your eligibility for care.
Specifically, Medicaid is interested in permanent life insurance policies that accumulate cash value. If your policy has accumulated cash value, it can count as an asset to your eligibility. The amount of cash value you can have without ineligibility depends on your state’s Medicaid rules, but is typically around $1,500.
If the cash value of your policy is above the allowable threshold, you must withdraw some of your assets to qualify for Medicaid. You could do that by:
There’s a catch if you plan on gifting your policy to someone else. There is a five-year Medicaid lookback period where your financial situation is scrutinized. During this period, you may not give away any assets in order to qualify for Medicaid. If you think you need to spend your cash value life insurance policy in order to qualify for help, you’ll need to pay close attention to timing.
It’s also important to note that if you leave your life insurance policy, Medicaid can make a claim against it if your estate is the beneficiary. Medicaid probate recovery programs allow Medicaid to recoup the costs paid for your care from your estate, including life insurance policies.
It comes down to
Life insurance can be invaluable if you want to make sure that your loved ones are financially taken care of after you are gone. If you anticipate that you will need end-of-life care in a nursing home, you may be concerned about what will happen to your policy. The good news is that as long as you’ve made sure there’s at least one beneficiary listed, the nursing home can’t get any death benefits.
Insurance planning tips
Consider talking to your financial advisor about long-term care planning and where life insurance or long-term care insurance might fit into this picture. If you don’t already have a financial advisor, it shouldn’t be difficult to find one. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you are ready to find an advisor who can help you achieve your financial goalsstart now.
Medicare planning and Medicaid eligibility are both important parts of estate planning because you don’t want to accidentally do something that could prevent you from qualifying for benefits. You should consider which ones you may need to meet your retirement needs.
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