Editorial Team · Content Writer
Reviewed by John Brown, CSA®
Updated October 2026 · 11-minute read

When a parent suddenly needs help after a hospital stay—or a spouse’s dementia care becomes more than one person can safely manage—families often ask the same urgent question: How are we going to pay for this?

Life insurance is usually purchased to protect beneficiaries after a death, but some policies may also provide access to money during the policyholder’s lifetime. For Central Texas families trying to pay for home care, assisted living, memory care or other long-term care expenses, that value may be one part of a broader care-funding plan.

The available options depend on the type of policy, its cash value, its riders, the policyholder’s health and the insurer’s rules. Each choice may affect taxes, Medicaid eligibility and the amount ultimately paid to beneficiaries.

Short answer: A permanent life insurance policy may help pay for senior care through a withdrawal, policy loan, surrender, accelerated death benefit or life settlement. Term life insurance generally has no cash value. Before changing or selling a policy, request written figures from the insurer and review the decision with qualified financial, tax and elder-law professionals.

Table of Contents

1. How Central Texas families can use life insurance for senior care
2. Start by identifying the policy
3. Using a policy loan or withdrawal
4. Surrendering the policy for cash value
5. Using an accelerated death benefit or long-term care rider
6. Selling the policy through a life settlement
7. Tax questions families should review
8. Texas Medicaid and life insurance
9. A practical step-by-step review
10. Central Texas planning considerations
11. Frequently asked questions

How Central Texas Families Can Use Life Insurance for Senior Care

There is no single “best” way to use life insurance for care. A Lakeway family covering several weeks of help after rehabilitation may need a different solution than a Burnet couple planning for assisted living or an Elgin family facing years of memory care.

The practical options are:

• borrow against or withdraw from available cash value;
• surrender a permanent policy for its cash surrender value;
• claim an accelerated death benefit or long-term care rider when eligible; or
• sell the policy through a regulated life settlement.

The right starting point is the policy itself.

Start by Identifying the Policy

The first question is whether the policy is term life insurance or permanent life insurance.

Also confirm who owns the policy. The owner controls the policy and its cash surrender value; the owner, insured person and beneficiary may be different people. Medicaid treatment generally follows ownership and access—not simply whose life is insured.

• Term life insurance provides coverage for a stated period and normally does not build cash value.
• Whole life, universal life and other permanent policies may build cash value that the owner can potentially borrow, withdraw or surrender.
• Policies with accelerated death benefit, chronic-illness or long-term care riders may provide benefits while the insured is living if the policy’s eligibility requirements are met.

Do not rely only on an old illustration or the face amount printed on the original policy. Ask the insurer for the current:

• death benefit;
• cash value and cash surrender value;
• cost basis or investment in the contract;
• outstanding loans and accrued interest;
• surrender charges;
• current and projected premiums;
• rider terms and benefit triggers; and
• in-force illustration showing how a loan, withdrawal or benefit claim could affect the policy.

Using a Policy Loan or Withdrawal

Some permanent policies allow the owner to borrow against the policy’s cash value. Others may allow a direct withdrawal.

A policy loan can provide funds without a credit check because the policy value secures the loan. The policy can remain in force, but the loan is not free money. Interest accrues, and an unpaid balance generally reduces the death benefit. A large loan can also weaken the policy and contribute to a lapse.

That lapse risk matters. A policy loan may not create current taxable income in many situations, but a later surrender or lapse with a loan outstanding can produce an unexpected tax bill. Modified endowment contracts can also follow different tax rules, including treatment of certain loans as distributions.

Before borrowing, request a written illustration showing:

• the loan interest rate;
• whether interest is fixed or variable;
• the remaining death benefit;
• the effect on future cash value;
• the premium needed to keep the policy active; and
• what happens if the loan is never repaid.

A loan may help with a short-term expense, but repeated borrowing for ongoing care can exhaust the policy faster than a family expects.

Surrendering the Policy for Cash Value

Surrendering a permanent life insurance policy means ending the coverage and receiving its available cash surrender value after applicable charges and outstanding loans.

After surrender:

• the policy terminates;
• premiums stop;
• beneficiaries no longer receive the policy’s death benefit; and
• part of the proceeds may be taxable.

The IRS explains that when a life insurance policy is surrendered for cash, proceeds above the owner’s investment in the contract generally must be included in income. The insurer may issue Form 1099-R. See the IRS Tax Guide for Seniors and discuss the exact figures with a tax professional.

If a loan is outstanding, ask the insurer to calculate the reportable distribution and estimated taxable gain—not just the net surrender check. Policy value used to extinguish a loan can contribute to taxable gain even when the owner receives little or no cash.

Surrender may be worth evaluating when coverage is no longer needed, premiums are becoming difficult to maintain, or current care needs outweigh the need for a future death benefit. Families should still compare surrender with other choices before acting.

Using an Accelerated Death Benefit or Long-Term Care Rider

These provisions are related, but they are not interchangeable:

• An accelerated death benefit advances part of the death benefit after a qualifying event, often a terminal illness or another condition defined by the contract.
• A chronic-illness rider may require certification that the insured cannot perform a specified number of activities of daily living or has severe cognitive impairment.
• Long-term care coverage or a long-term care rider may reimburse covered care expenses or pay an indemnity benefit, subject to the contract's eligibility rules, elimination period and limits.

Not every rider is the same. Some pay a monthly benefit, some reimburse qualified expenses, and some provide a discounted lump sum. Benefits paid during life reduce the amount remaining for beneficiaries and may involve administrative charges.

For federal tax purposes, certain accelerated death benefits paid for a terminally or chronically ill insured may be excluded from income, subject to statutory requirements and, for some periodic chronic-illness payments, limits. The IRS defines chronic illness using functional or cognitive criteria rather than age alone. Review the IRS guidance on accelerated death benefits with a tax professional.

Ask the insurer:

• What event triggers the benefit?
• Is physician or licensed-practitioner certification required?
• Does severe cognitive impairment qualify?
• Is there a waiting period?
• Is the benefit reimbursement-based, indemnity-based or paid as a lump sum?
• What fees or discounts apply?
• How will a claim change the death benefit and cash value?
• Is the rider intended to meet federal qualified long-term care rules?

Selling the Policy Through a Life Settlement

A life settlement is the sale of an existing life insurance policy to a third party. The buyer becomes the policy owner, pays future premiums and receives the death benefit when the insured dies. The seller receives an agreed lump sum.

A completed life settlement permanently changes policy ownership and beneficiary rights, although Texas provides a limited statutory rescission period. Texas law requires disclosure of a right to terminate the contract within 15 days after execution by all parties and receipt of the required disclosures. Rescission requires notice and repayment of the settlement proceeds and specified amounts the provider paid. Review the exact deadline and repayment requirements before signing.

The amount offered varies based on the policy, premiums, death benefit, the insured’s health and life expectancy, and market conditions. The buyer may require access to medical and policy information.

Texas regulates life settlement providers and brokers. The Texas Department of Insurance life insurance guide advises consumers to compare offers and explains that settlement proceeds may affect Medicaid or other government benefits. Licensing information is available through the Texas Department of Insurance.

Before accepting a life settlement:

• verify that the provider or broker is properly licensed in Texas;
• obtain competing offers when practical;
• request a written disclosure of commissions, fees and net proceeds;
• understand who will have access to medical information;
• compare the offer with the cash surrender value and other policy options;
• determine whether beneficiaries still need the death benefit; and
• ask, “What is the rescission deadline, and exactly what must be repaid to cancel?”; and
• obtain tax and Medicaid advice specific to the transaction.

Life-settlement proceeds are not automatically tax-free. Tax treatment depends on the policy, the seller’s basis, the amount received and whether special rules for terminally or chronically ill insureds apply.

Tax Questions Families Should Review

The tax result depends on how policy value is accessed.

Option	General federal tax consideration
Policy loan	Often not current taxable income while the policy remains in force, but exceptions and lapse-related consequences can apply.
Withdrawal	May be taxable depending on the amount, policy basis and whether the contract is a modified endowment contract.
Cash surrender	Proceeds above the investment in the contract are generally taxable.
Accelerated death benefit	Certain benefits for terminally or chronically ill insureds may be excluded, subject to federal requirements and limits.
Life settlement	May produce taxable income; special treatment may apply in limited circumstances.

Request a written basis statement and all available tax-reporting information from the insurer or settlement company. Then have a CPA, enrolled agent or other qualified tax professional estimate the consequences before signing.

Texas Medicaid and Life Insurance

Life insurance can affect Medicaid long-term care eligibility in Texas, but the result depends on the type, ownership, face value, cash surrender value and accessibility of the policy.

For policies owned by the applicant, policies with a combined face value of $1,500 or less per insured person may be excluded under Texas rules. If the combined face value exceeds that threshold, accessible cash surrender value may be counted as a resource. Term policies without cash surrender value are not included in this face-value calculation. Special rules also apply to burial insurance, dividend additions and separately accumulated dividends. Review the current Texas Medicaid for the Elderly and People with Disabilities guidance.

Texas HHSC generally treats accelerated life-insurance payments as income in the month received and as resources if retained into the following month, unless another exclusion applies. HHSC does not treat these payments as a conversion of the policy's resource value. Do not assume that a benefit excluded from federal taxable income is also excluded for Medicaid eligibility.

Texas also has specific Medicaid rules for certain life-settlement arrangements that direct proceeds into qualifying irrevocable accounts for long-term services and supports. Under HHSC Section F-4225.1, these arrangements must satisfy detailed contract and account requirements and undergo HHSC Legal Services review. Ordinary settlement proceeds do not receive this treatment automatically, and merely labeling an account “for care” is not sufficient. Ask a Texas elder-law attorney whether this provision applies before signing a settlement contract or moving funds.

Money received from a loan, surrender or other transaction may also affect eligibility depending on when it is received, whether it remains available after the month of receipt and how it is used.

What the five-year look-back actually means

Texas applies a 60-month look-back to certain Medicaid long-term care and waiver applications. The issue is not simply that a policy was surrendered or sold. A penalty may arise when assets are transferred for less than fair market value during the look-back period. Spending proceeds for the policyholder’s legitimate care and other needs is different from giving the money away.

Texas HHSC explains the transfer rules in its Overview of Transfer of Assets and Look-Back Policy.

Before changing a policy when Medicaid may be needed, consult a Texas elder-law attorney familiar with Medicaid eligibility. Keep all policy statements, valuations, settlement offers, receipts and records showing how the money was used.

A Practical Step-by-Step Review

1. Gather the complete policy file

Collect the original policy, recent annual statement, rider documents, loan history, ownership records and beneficiary information. Confirm who is the owner, insured person and beneficiary.

2. Ask the insurer for current written figures

Request cash value, surrender value, basis, loan balance, rider eligibility and an in-force illustration. Do not rely on a verbal estimate.

3. Define the care need and timeline

Is the family trying to cover a few weeks of home care after a hospital stay, ongoing assisted living, memory care or a longer nursing-facility need? A short-term cash need and a multi-year care plan require different analyses.

4. Compare net proceeds—not headline amounts

For each option, compare what the family would actually receive after loans, surrender charges, fees, commissions and estimated taxes.

5. Protect needed coverage

Determine whether a spouse, dependent adult, funeral plan or other beneficiary still relies on the death benefit.

6. Check benefits before signing

Review the possible effect on Medicaid, Supplemental Security Income and other means-tested programs. Medicare generally does not pay for ongoing custodial care simply because funds from a life insurance policy are unavailable.

7. Use the right professionals

Depending on the situation, the family may need the insurer, a fee-only financial planner, a tax professional, a Texas elder-law attorney and a Texas-licensed life settlement professional.

Central Texas Planning Considerations

Families across Central Texas often begin researching how to use life insurance for senior care only after a hospital discharge, dementia diagnosis or sudden increase in care needs. A daughter in Bastrop may be coordinating care for a parent in Austin. A spouse in Marble Falls may be comparing home care with assisted living. A family in Harker Heights may be trying to fund memory care after a crisis. That urgency can make the largest available lump sum seem like the obvious choice.

Pause long enough to compare the insurance decision with the actual care plan. A policy option that helps pay for temporary home care after rehabilitation may not sustain years of memory care. Surrendering a policy may remove coverage a surviving spouse still needs. Selling a policy may provide more than its surrender value but eliminate the full death benefit and create tax or benefit consequences.

The most useful question is not simply, “How much cash can we get?” It is, “How will this option support the senior’s care while protecting the people who still depend on the policy?”

Senior Industry Services provides educational information, local resource connections—including elder-law and care-planning resources—and access to the Senior-AI resource tool. SIS does not provide insurance, tax, legal or Medicaid advice; sell life insurance; guarantee providers; or determine eligibility for benefits. Senior-AI is an educational resource and does not replace qualified professional guidance.

Frequently Asked Questions

Can term life insurance be used to pay for senior care?

Term insurance normally has no cash value to borrow or withdraw. However, some term policies may include an accelerated death benefit or conversion option. Ask the insurer what the specific contract permits before assuming it has no living benefits.

Does a policy loan preserve the entire death benefit?

Not necessarily. The policy can remain active, but an unpaid loan and accrued interest generally reduce the amount paid to beneficiaries. Excessive borrowing can also contribute to a lapse.

Are life settlement proceeds tax-free?

Not automatically. A life settlement may create taxable income. Limited exclusions can apply to certain transactions involving terminally or chronically ill insureds, but the facts and federal requirements matter. Obtain tax advice before accepting an offer.

Does cashing in a policy automatically cause a Medicaid penalty?

No. Cash received may become a countable resource, and giving assets away or transferring them for less than fair market value can trigger transfer rules. A surrender for its proper cash value is not automatically an uncompensated transfer. Eligibility consequences depend on ownership, timing, value and use of the proceeds.

Who should review the decision?

Start with the insurer for current policy information. Use a tax professional for tax consequences, a Texas elder-law attorney for Medicaid planning, and a properly licensed professional if evaluating a life settlement.

Sources and Resources

• IRS Publication 525 — Taxable and Nontaxable Income
• IRS Publication 554 — Tax Guide for Seniors
• Texas Department of Insurance — Life Insurance Guide
• Texas HHSC — Medicaid for the Elderly and People with Disabilities Information
• Texas HHSC — Section F-4225.1 Life Settlement
• Texas HHSC — Overview of Transfer of Assets
• Texas HHSC — Look-Back Policy
• Texas Insurance Code Chapter 1111A — Life Settlements

Senior-care content reviewed by John Brown, CSA
Founder, Senior Industry Services
CEO, Oasis Senior Advisors Austin & Central Texas

Reviewer attribution applies to the senior-care context and does not constitute specialist tax, insurance or Medicaid legal review. This article provides general educational information and is not insurance, tax, legal, investment or Medicaid advice. Policy terms, tax rules and benefit requirements vary. Consult the insurer and appropriately qualified professionals before acting.

Find Senior Care Resources in Central Texas →