Can Nursing Homes Take Your Life Insurance From Your Beneficiary?

A lengthy nursing home stay can be expensive, and if you don’t qualify for Medicaid, you may need to draw down your assets to pay for it. You may choose to leave a life insurance policy behind to help your loved ones cover final expenses and replace some of the assets that were used to fund nursing care. But can nursing homes take your life insurance from your beneficiary? The short answer is no, a nursing home cannot lay claim to your life insurance policy if you’ve taken the necessary precautions.

You may want to consider working 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 a spouse require nursing home care, there are multiple ways to pay for it, depending on how long of a stay is required. Generally, the options for paying for nursing home care include:

Personal savings or investments
Medicaid
VA benefits (if you’re an eligible veteran or the spouse of a veteran)
Long-term care insurance
Life insurance with a critical illness or long-term care rider
Annuities
Loans, including home equity loans

Each option has pros and cons. Using personal savings or investments to pay for nursing care, for example, can mean leaving a smaller financial legacy for your loved ones. Long-term care insurance can cover your nursing care expenses, but buying a policy can be expensive.

A life insurance policy with a long-term care rider may be more appealing since you can get both a death benefit and funds to pay for long-term care if needed. Annuities can provide you with a steady income to pay for long-term care, though again, the cost is a consideration. Taking out a loan is another option, though it does mean taking on debt with interest.

Most nursing homes accept Medicaid for patients who are unable to fund their nursing costs out-of-pocket or through private insurance. Medicaid is a government program that’s administered at the state level. Eligibility is based on your income and financial resources.

Medicare can also pay for nursing care, but only if you need short-term rehabilitative care. If you require long-term nursing care, Medicare won’t cover any of those costs.

Can Nursing Homes Take Your Life Insurance From Your Beneficiary?

A nursing home cannot take your life insurance policy if you have one or more named beneficiaries. If you pass away, the nursing home that was responsible for your care cannot attempt to claim any of the death benefits from your policy as long as you named a beneficiary to receive it.

Your beneficiary would be able to decide how the money from the policy should be used. That might include paying final expenses, paying off a mortgage debt or covering day-to-day living expenses.

However, you could hit a snag if you have a life insurance policy, but your estate is the beneficiary. In that case, a nursing home might be able to make a claim against your estate for any money owed toward your cost of care.

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 you don’t want to use other assets to pay. There are four ways that you could use life insurance to pay for long-term care and they are:

1. Life Settlement

A life settlement simply means selling your life insurance policy for cash. This option might be available to you if you have a permanent policy that accumulates cash value and meet the insurance company’s minimum age requirements.

Choosing a life settlement could provide you with cash to cover long-term care costs. However, you might pay taxes on the proceeds of the sale. You’re also eliminating the death benefit for your beneficiaries.

2. Viatical Settlement

A viatical settlement is similar to a life settlement, in that you’re selling the policy. However, your ability to qualify for a viatical settlement hinges on being diagnosed with a terminal illness or within the final two years of your life expectancy.

Again, there’d be no death benefit left behind for your loved ones. The amount you’d receive through a viatical settlement depends mainly on the policy’s death benefit, your life expectancy and the premiums the buyer must keep paying.¹

3. Accelerated Death Benefit Rider

An accelerated death benefit rider is an add-on to a life insurance policy that allows you to tap into your death benefit during your lifetime. You could 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 require long-term care, your policy could pay out benefits toward those costs.

Once you pass away, your beneficiaries would be able to collect a death benefit. While this type of life insurance may come with higher premiums, you could get the best of both worlds if you’re concerned about nursing home care creating a financial burden for your loved ones.

Does Life Insurance Affect Medicaid Eligibility for Long-Term Care?

As mentioned, Medicaid can help to pay for long-term care expenses should a nursing home stay be necessary. If you have a life insurance policy, that may affect your ability to qualify for care.

Specifically, Medicaid is interested in permanent life insurance policies that accumulate cash value. If your policy has built up cash value, it can count as an asset toward your eligibility. The amount of cash value you can have without becoming ineligible will depend on the Medicaid rules in your state, but it’s typically around $1,500. This exclusion is based on face value, not cash value: if your policies total $1,500 or less in face value, the cash value doesn’t count at all. Above that, the full cash value counts as a resource.

If your policy’s cash value is above the allowed threshold, you’ll need to draw some of your assets down in order to become Medicaid-eligible. You could do that by:

Cashing out the policy
Surrendering the policy
Transferring the policy to a family member or trust

There is a catch if you plan to gift your policy to someone else. There’s a five-year Medicaid look-back period in which your financial situation is subject to scrutiny. During this period, you’re barred from giving away assets in order to qualify for Medicaid. If you think you’ll have to spend down your cash value life insurance to become eligible for assistance, you’ll need to pay close attention to the timing.

It’s also important to note that if you leave your life insurance policy in place, Medicaid could make a claim against it if your estate is the beneficiary. Medicaid estate recovery programs allow Medicaid to recoup costs paid toward your care from your estate assets, including life insurance policies.

What Happens to Life Insurance During Medicaid Estate Recovery?

After a Medicaid recipient dies, the state may seek repayment for certain long-term care expenses it covered. Whether life insurance is exposed to that process can depend on the policy’s ownership, beneficiary designation and applicable state rules.

When the policy identifies a person as the beneficiary, the insurance company pays that person according to the contract. This treatment can differ from a policy that directs the payout to the deceased person’s estate.

If the estate receives the proceeds, the money becomes part of the assets handled during estate administration. Creditors and government recovery programs may have claims that must be addressed before the remaining property passes to heirs.

An unpaid nursing home balance and a Medicaid recovery claim are also separate obligations. A facility may seek payment for care that was never paid for, while Medicaid recovery involves costs the government previously covered.

Life insurance can create issues before death as well. Permanent policies may accumulate cash value that Medicaid considers when reviewing an applicant’s financial resources. Transferring a policy or its value can also trigger Medicaid’s rules for asset transfers.

Reviewing the policy before long-term care is needed can help clarify these risks. The policy owner, accumulated cash value and beneficiary instructions can all affect Medicaid eligibility and how the insurance payout is handled later.

What Happens If You Cannot Afford Your Life Insurance Premiums?

A long nursing home stay can make it harder to keep paying life insurance premiums. If payments stop, what happens next depends largely on the type of policy you own and how much value it has accumulated.

Term life insurance generally requires continued premium payments to keep coverage in force. If the policy lapses, the death benefit disappears, leaving beneficiaries without the payout the policy was intended to provide.

Permanent life insurance may offer additional options because it can build cash value. Depending on the contract, that value might be used to cover premiums temporarily or support a smaller amount of coverage.

You may also be able to reduce the death benefit to lower the cost of maintaining the policy. This could preserve some coverage while freeing up more of your income for nursing home bills and other expenses.

Using cash value to maintain coverage has trade-offs. It can reduce the value remaining in the policy and may eventually cause the coverage to lapse if the available funds are exhausted.

Before stopping premium payments, check what options the policy provides and how each would affect its cash value and death benefit. This can help you weigh the cost of keeping coverage against the amount you want to preserve for your beneficiaries.

Bottom Line

Life insurance can be invaluable if you’d like to ensure that your loved ones are taken care of financially after you’re gone. If you anticipate needing end-of-life care in a nursing home, you might be worried about what will happen to your policy. The good news is that as long as you’ve taken care to name at least one beneficiary, the nursing home won’t be able to get any of the 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 the picture. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Medicare planning and Medicaid eligibility are both important parts of estate planning, as you don’t want to inadvertently do anything that could hinder you from becoming eligible for benefits. You should consider which you might need to help care for your retirement needs.