Borrowing, accelerating or selling a policy to pay for care

When care costs arrive and a permanent life insurance policy is sitting in a drawer, three doors open. You can borrow against the policy's cash value, accelerate part of the death benefit through a rider, or sell the policy to a third party. Each turns a promise to pay your family later into money for care now. They differ sharply in how much money they can produce, what they cost, how they are taxed, and what is left for the people you named as beneficiaries.

The right door depends on facts that are specific to the policy and the person: how much cash value there is, whether the policy carries a chronic illness or long-term care rider, how old and how sick the insured is, and whether the family wants any death benefit to survive. This post puts the three side by side with one hypothetical policy, shows the arithmetic, and ends with a decision list and questions to ask.

One hypothetical policy used throughout

Everything below uses a single invented policy, so the options can be compared fairly. The numbers are round illustrations, not market data.

• Permanent policy with a $200,000 death benefit.
• Cash surrender value of $50,000 (the cash surrender value).
• Premiums paid over the years total $40,000, which is the cost basis for tax purposes in this example.
• The insured needs paid care that costs $3,000 a month. The family expects it to last 24 months, or $72,000 in all.
• The policy has no loan today. Assume a 6% loan interest rate and a chronic illness rider that the insured has already qualified for under the contract's definitions.

The care need of $72,000 is the target. We will see how far each option goes toward it.

Door one: borrow against the cash value

A policy loan lets you borrow from the insurer with the cash value as collateral. There is no credit check, no application beyond a loan form, and no required repayment schedule. Money usually arrives within days. The life insurance policy loans: how they work and what they risk guide covers the mechanics.

How much it can produce. Only as much as the contract allows, which is commonly a high percentage of the cash surrender value. Say the cap is 90%. That is $50,000 x 0.90 = $45,000. At $3,000 a month, $45,000 covers 15 months of the 24-month need. The loan cannot reach the full $72,000, because there is not enough cash value behind it.

What it costs. Interest. If you do not pay it, the insurer adds it to the loan, and from then on interest compounds. The table shows what happens to a $45,000 loan at 6% if nothing is ever repaid.

The calculations: $45,000 x 1.06^5 is about $45,000 x 1.338, or about $60,200. And $45,000 x 1.06^10 is about $45,000 x 1.791, or about $80,600. The death benefit shrinks by the balance each time.

The danger. If the loan balance grows past the cash value, the policy can lapse. In this example the cash value is $50,000 today, and an unpaid $45,000 loan at 6% grows past $50,000 in a little under two years ($45,000 x 1.06^2 is about $50,560) unless the cash value has grown at least as fast. A lapse with a loan outstanding can create a taxable amount equal to the loan above basis, even though the family receives nothing. In this example, a lapse with an $80,600 loan would mean $80,600 minus the $40,000 basis, or $40,600 of income, with no cash to pay the tax. Overloan protection riders exist for some policies; see life insurance policy loans: how they work and what they risk and ask the insurer about the specific contract.

Taxes. A loan from a policy that is not a modified endowment contract is generally not taxed while the policy stays in force. A loan from a modified endowment contract is taxed gains first and can carry a 10% additional tax before age 59½, which applies only to younger owners.

What beneficiaries keep. Most of the policy, provided it stays in force. The death benefit is reduced by the loan and unpaid interest. Premiums must keep being paid, or funded from the policy, which is one more thing to watch.

Door two: accelerate the death benefit

An accelerated death benefit pays part of the death benefit early, while the insured is alive, if the insured meets the rider's trigger. There are two broad kinds, and they are easy to confuse.

• A terminal illness rider pays when a physician certifies that death is expected within a stated period, with 24 months the federal tax definition and some contracts using 12.
• A chronic illness or long-term care rider pays when a licensed health care practitioner certifies that the insured cannot perform at least two of six activities of daily living for at least 90 days, or needs substantial supervision because of severe cognitive impairment. See chronic illness riders vs long-term care riders.

For a person who needs care but is not expected to die soon, the second kind is the relevant one.

How much it can produce. The rider usually pays a monthly benefit up to a stated limit, from a pool that is a share of the death benefit. In the example, the insured qualifies and the rider pays $3,000 a month for 24 months, or $72,000. That meets the whole need in the example, and it does so without a loan balance or interest.

What it costs. The death benefit is reduced by what is advanced. In the simplest case the reduction equals the dollars paid: $200,000 minus $72,000 leaves $128,000. Some riders discount the advance, charge for the rider, or treat the advance as a lien that earns interest, so the reduction can be larger than the cash received. Ask the insurer for the written statement of how the payment affects the death benefit, the cash value and premiums. Rules also include an elimination period before payments start, so the first months may not be covered.

Taxes. Federal law treats accelerated amounts paid to a chronically ill insured as death proceeds, which means they are generally excluded from income, if they are for qualified long-term care services and the contract meets the statute's requirements. For per diem or similar payments that do not reimburse actual costs, a federal limit applies, which is $430 a day in 2026. At $3,000 a month, or about $100 a day, the example sits well under that limit. A tax professional should confirm how this applies to a specific policy.

What beneficiaries keep. The remaining death benefit, which is $128,000 in the simplest case.

Catch. The rider may not exist. Not every policy has one, and a rider attached after issue may cost extra. The first step is to read the policy and call the insurer. The accelerated death benefit riders: how they work and how they're taxed guide explains the terminal version, and claiming an accelerated death benefit: from diagnosis to payment walks through how a claim is made.

Door three: sell the policy

A life settlement is the sale of an existing policy to a third party for more than its cash surrender value and less than the death benefit. The buyer pays the premiums from then on and collects the death benefit at the insured's death. Buyers price mainly on the insured's life expectancy, the death benefit and the premiums needed to keep the policy in force. A policy on an older or sicker insured can attract offers well above the surrender value. A policy on a younger and healthier insured may attract none.

How much it can produce. An offer. Say an offer of $75,000 arrives, which is more than the $50,000 cash surrender value and less than the $200,000 death benefit. That $75,000 covers the whole $72,000 need in the example, with $3,000 to spare, and arrives in one lump sum after the transaction closes.

What it costs. The policy. After the sale, the buyer holds the death benefit and your beneficiaries receive nothing from this policy. In the example, the family gives up a $200,000 benefit for $75,000 now. There are also broker and provider fees, and a health records process that shares your medical information with providers and buyers.

Taxes. The sale is taxable in part. Under the framework described in IRS Revenue Ruling 2009-13, as updated by Revenue Ruling 2020-5, gain is the sale price minus basis, and basis is generally the premiums paid without reduction for cost of insurance charges. In the example, the gain is $75,000 minus $40,000, or $35,000. In general terms the part up to the cash surrender value over basis is ordinary income and the rest may be capital gain: $50,000 minus $40,000 is $10,000 of ordinary income, and the remaining $25,000 may be capital gain. Terminally or chronically ill sellers may qualify for different treatment under section 101(g); see viatical settlements for the terminally or chronically ill. Because loans, withdrawals and partial sales change the numbers, a tax professional should model it.

Safeguards. State insurance departments regulate life settlements. Providers and brokers must be licensed in most states, sellers receive written disclosures, and a rescission period lets the seller cancel under conditions. The NAIC model gives up to 60 days from signing or 30 days from payment, and states set their own. Verify the license number with your state insurance department.

What beneficiaries keep. Nothing from this policy.

The three doors side by side

For every option, money in the bank can affect eligibility for means-tested benefits, and the NAIC model requires disclosure about that. The medicaid eligibility and life insurance cash value guide describes the framework, including the 60-month look-back on gifts. Anyone who thinks Medicaid may be needed should speak with an elder law attorney before any of these steps.

Putting it together: a decision list

1. First, read the policy for a chronic illness or long-term care rider and call the insurer. If the insured qualifies, acceleration often produces the most money for the least cost and keeps part of the death benefit for the family.
2. If there is no rider and the need is short and modest, a loan may fit. Pay the interest if you can, and track the loan against the cash value every year.
3. If the need is large, the insured is older or in poor health, and the family does not need the death benefit, get offers. Compare at least several bids and know the policy's surrender value first.
4. If the family wants to leave a death benefit, favor options that keep the policy alive, and weigh how much of it each option leaves.
5. If cash value is large and the policy is no longer wanted for any other reason, compare all three with surrender. should you sell, surrender or keep a policy you may no longer need? covers that wider comparison, and the keep, surrender or sell your policy? lets you try your own numbers.
6. If Medicaid is a realistic possibility, stop and get legal advice before moving money.

The options can also be combined. A family might take a loan for the first months while a settlement is being arranged, or accelerate a portion of the benefit and keep the rest.

Questions to ask before you commit

• What exactly does my policy allow: loan limit, rider triggers, monthly maximum, elimination period?
• How much will each choice reduce the death benefit, in dollars?
• What are the fees, interest rate and any discount, and are they guaranteed?
• How is the money taxed, according to a tax professional who has seen the contract?
• How will the money affect Medicaid or other benefits?
• What does my family receive in each case, and do they agree with the choice?
• For a sale: is the provider and broker licensed, what is the broker paid, and is the payment held in escrow until the insurer confirms the transfer?

Key takeaways

• A policy can fund care three ways, by loan, by acceleration or by sale, and the amounts, costs and tax results differ.
• In the worked example, a $200,000 policy with $50,000 cash value could produce about $45,000 by loan, $72,000 by a chronic illness rider, or a $75,000 sale offer, leaving the family a reduced benefit, $128,000 or nothing respectively.
• A loan left unpaid compounds and can lapse the policy, creating a taxable amount with no cash behind it.
• Check for a chronic illness or long-term care rider first, because acceleration often keeps part of the death benefit for the family.
• A sale is taxable in part, ends the beneficiaries' claim on that policy, and needs a licensed provider, so get several offers and professional tax and legal advice.