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Making decisions about life insurance coverage can be complicated, especially for seniors. Life insurance policies can affect Medicaid eligibility and best types of hospital beds for home use the premiums can cut into an elder’s bottom line, preventing them from covering costs of living and elder care.

For many older adults, it may seem like cashing in or abandoning these policies is their only choice, but there is another little-known option that helps pay for long-term care services without jeopardizing the ability to qualify for Medicaid.

How Life Insurance Impacts Medicaid Eligibility

An active life insurance policy is a no-no for seniors who are seeking to spend down their assets to qualify for long-term care Medicaid.

The rules state that if the total face value of all whole life insurance policies an applicant owns is less than or equal to $1,500 (some states set a higher amount), then these policies are considered exempt assets. However, if this total face value exceeds $1,500, then the total cash surrender value of the policy/policies will count toward their $2,000 asset limit. Term life insurance policies do not accumulate cash value and have no effect on financial eligibility requirements for Medicaid.

When money gets tight, some seniors end up abandoning their policies or letting them lapse by ceasing to pay their monthly premiums. Others surrender their plans in order to receive a pre-determined “cash surrender value,” a lump sum of money that varies in value based on how many payments the policy holder has made and what the overall worth of their policy is. Neither of these solutions is ideal, especially if an elder is looking to apply for Medicaid in the near future.

It’s important to note that cashing out a life insurance policy will probably place an applicant over the Medicaid asset limit and they will need to spend down this money carefully in order to reestablish their financial eligibility. If they require long-term care services immediately, they can spend down this money relatively quickly. According to Genworth’s 2019 Cost of Care Survey, the median monthly cost of an assisted living facility is $4,051, while the median cost of a private room in a nursing home is $8,517 per month.

Read: Do Life Insurance Policies Affect Medicaid Eligibility?

There is, however, a third option that most people fail to consider when facing a Medicaid spend down: converting a life insurance policy into a long-term care benefit plan (also called a life care benefit plan).

What Is a Long-Term Care Benefit Plan?

Anyone in possession of an in-force life insurance policy has the ability to transform that policy into a pre-funded financial account that will disburse a monthly benefit stipend to help pay for that individual’s long-term care needs. Unlike life insurance, a long-term care benefit plan account is a Medicaid qualified asset.

The conversion process transfers ownership of a life insurance policy from the original holder to an entity that acts as the benefits administrator. Because the original owner no longer holds the policy, it won’t count against them in the Medicaid spend-down process.

The benefits administrator assumes all responsibility for paying the monthly premiums to the insurance company and agrees to pay the previous policyholder a series of monthly payments based on the value of their policy. These payments can then be used to pay for a person’s in-home care, nursing home care, assisted living or even home modifications. The long-term care benefit is usually worth more than the cash surrender value but less than the face value of the policy.

If this process sounds unfamiliar, you’re not alone. Most people don’t know that the long-term care benefit conversion option exists. It is important to note that a long-term care benefit plan is not the same as a long-term care insurance plan.

“For the last 100 years, anyone who’s owned a life insurance policy has had the right to do this,” notes Chris Orestis, co-founder and CEO of Life Care Funding, a company that specializes in life insurance policy conversions. “The problem is that most people are unaware that this option exists.”

Examples of Using Life Insurance to Pay for Long-Term Care

When you convert life insurance to long-term care benefits, there are many different ways you can use them. Consider the following examples.

Allowing a Senior to Age in Place

Mary (names have been changed) has been taking care of her husband, Bill, who has dementia, in their home. Lately, Bill’s condition has deteriorated to the point where Mary needs regular respite care. Together, Mary and Bill own a life insurance policy worth $20,500. Mary cannot continue to make the payments on this policy and considers letting it lapse. Instead, she ends up converting it into a long-term care benefit plan that pays $350 every month for 15 months—enough money to hire an in-home caregiver to help her take care of Bill for a few hours each week. She is also able to retain $1,025 in the account for future funeral expenses.

Help Covering Senior Living Costs

The Williams family wants to continue paying for their mother to reside in an assisted living community. However, they keep coming up just shy of being able to cover her monthly expenses. Ms. Williams has a life insurance policy worth $27,000, and her children look into how much money their mother would receive if she surrendered the policy. They were disappointed to find that the plan would only yield a few thousand dollars. After hearing about the long-term care benefit plan option, the Williams siblings decided to put their mother’s policy through the conversion process. Doing so resulted in a monthly benefit of $975 for 12 months—enough to make up the shortfall in their mother’s assisted living costs. Ms. Williams also got to keep a funeral benefit of $1,350.