Long-term care is something most people prefer not to think about until they have to. Yet, more than half of people who reach 65 will need it at some point, and Medicare covers very little of it. A life insurance policy you already own may be one of the most underused tools for funding that care.
Using life insurance to pay for long-term care gives you more options than you might expect. Long-term care insurance with life insurance riders, policy loans, accelerated death benefits, and secondary market sales are all worth considering before you decide how to fund the care you or a family member needs.
Why Life Insurance Is Often Overlooked for Care Costs
Long-term care costs catch many families off guard. Medicare pays for short-term skilled nursing after a hospital stay, then stops short of the custodial care most seniors need month after month. That responsibility falls entirely on the family unless other coverage or assets are in place.
Unfortunately, few families have a plan for how to pay for long-term care when the need arrives. Life Insurance Marketing and Research Association (LIMRA) research found that only 3% of Americans over 50 carry any form of insurance designed to cover the cost of long-term custodial care. Meanwhile, a private nursing home room now costs a median of $127,750 a year, rising 9% in a single year.
A life insurance policy you already own may be one of the most practical assets available to address that shortfall. Most policyholders don’t realize just how many options the policy gives them until care costs are already difficult to manage.
Options Built Into Your Existing Policy
You may be able to access your policy’s value without selling or surrendering it if it includes a long-term care rider, an accelerated death benefit, or accumulated cash value. Just keep in mind that each option below draws from the death benefit in some way, so every dollar you use for care is a dollar your beneficiaries won’t receive.
Here are the main options built into permanent life insurance policies:
Long-term care rider: A rider that combines long-term care insurance with life insurance lets you draw against your death benefit early to pay for qualifying care once a doctor certifies you can no longer perform a specified number of Activities of Daily Living (ADLs). These payments typically cover a monthly percentage of the death benefit. The average cost of life insurance with long-term care rider coverage varies by age, health, and policy terms. Your insurer should have a life insurance with a long-term care rider cost calculator that you can use to get an estimate before you commit.
Accelerated death benefit: This provision lets you access a portion of your death benefit early if you have a qualifying terminal or chronic illness. Caps and terms can vary quite a bit by policy, and older ones may not include this feature at all.
Policy loans and withdrawals: Permanent policies with accumulated cash value let you borrow against that value or withdraw from it without surrendering the policy. Remember that interest also accrues on any outstanding loan balance, which can erode that death benefit entirely after enough time.
1035 exchange to a hybrid policy: You can roll your existing policy’s cash value into a hybrid product designed for both life insurance and long-term care coverage without triggering a taxable event. This path requires underwriting, though, which you must complete before you need care.
Surrendering vs. Selling Your Policy
You generally have two paths available when you no longer need your policy. The first is surrendering a life insurance policy, which returns the cash surrender value your insurer has agreed to pay. The other is selling it on the secondary market through a life settlement, which usually returns much more.
Your health circumstances may actually work in your favor here. A recent diagnosis, a change in life expectancy, a decline in health since the policy was issued, or a new chronic condition can all increase what institutional buyers are willing to pay. According to the Life Insurance Settlement Association (LISA) 2024 Market Data Survey, sellers on the secondary market averaged more than six and a half times their policy’s cash surrender value, roughly $223,000 more per seller than surrendering would have returned.
Most of those policyholders never knew a buyer would have given them more money than their insurer, either. Individual life insurance policies were voluntarily terminated at a 5.8% rate in 2024, according to the American Council of Life Insurers (ACLI) Life Insurers Fact Book 2025. A portion of those owners walked away from coverage a buyer would have paid more money for.
Here’s how the two paths compare with the factors that matter most:
Surrender |
Life Settlement |
|
Who pays |
Your insurer | An institutional buyer on the secondary market |
What you receive |
Cash surrender value | Typically more than the cash surrender value |
Death benefit |
Eliminated | Transferred to the buyer |
Tax treatment |
May be taxable if proceeds exceed premiums paid | May be taxable, but it follows different rules than surrender |
Medicaid impact |
May affect eligibility | May affect eligibility |
Timeline |
Days to weeks | Usually between 60 and 90 days |
Both paths will end your coverage permanently. Surrender is easy but tends to return the least amount of money. A life settlement takes longer, but how much you can sell your life insurance policy for can surprise you if you assumed your insurer’s offer was your only option. Either way, it’s always a good idea to have a CPA review how life settlement proceeds are taxed before you commit to either path, because the tax treatment is not the same.
How to Choose the Right Option for Your Family
No single option works best for everyone. The right path depends on your policy type, your health, how quickly you need funds, and what role the death benefit still plays for your family.
If your policy includes a long-term care rider or accelerated death benefit, and you need ongoing monthly payments instead of a lump sum, those built-in features may be the most efficient starting point. Check your life settlement eligibility before you surrender your policy or if you can no longer afford premiums or the coverage no longer serves its original purpose. A health change that feels like a setback may actually make your policy more valuable on the secondary market.
Whatever path you consider, always involve your family and your existing advisors early. Life Settlement Advisors works in partnership with CPAs, attorneys, and financial planners and has spent more than 26 years helping seniors access the full value of policies they no longer need. Find out if you qualify before making permanent decisions.
