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It is common for people of all ages, especially elderly individuals, to have a life insurance policy. With this type of insurance, a person generally pays a monthly or yearly premium and upon his/her death, listed beneficiaries are paid an amount of money (also referred to as a death benefit). While this is a wonderful way to ensure surviving loved ones are financially taken care of following one’s death, life insurance policies, depending on the type of policy and the value of it, may impact one’s eligibility for Medicaid and therefore the option to receive public assistance for long term care, be that at home, in assisted living or in a nursing home.
Important Terms and Definitions
In order to make it clear as to which type of life insurance policies are not counted towards Medicaid’s asset limit, and which are, it’s important to understand the difference between cash value and face value.
Cash Value / Cash Surrender Value
Whole life insurance policies accumulate a cash value over time. Policyholders are able to borrow against the cash value of their policy or they can terminate their policy and collect the cash surrender value. When a life insurance policy is terminated, it is referred to as cash surrender value, as the policyholder receives the cash value minus any applicable surrender (cancellation) fees.
Face Value / Death Benefit
The face value of a life insurance policy is also called the death benefit. This is the amount the insurance company will pay the beneficiaries named on the policy upon the death of the policyholder.
Types of Life Insurance and Why It Matters
Not all types of life insurance policies impact Medicaid eligibility in the same way. In brief, there are two commonly purchased types of life insurance policies: term life insurance and whole life insurance. Term life insurance is exempt (non-countable) from Medicaid’s asset limit, while whole life insurance is not exempt. Said another way, whole life insurance is counted towards the asset limit. (Learn more about Medicaid’s asset limit below).
Term life insurance does not impact Medicaid eligibility, as it is not counted towards the asset limit. This type of insurance policy provides coverage for a limited period of time, which may be as little as one year and as great as 30 years, before the policy expires. If the policyholder dies within the designated period of coverage, a death benefit will be paid out to the beneficiaries. If the policyholder does not pass away while the policy is in effect, the policy expires and no benefit is paid out. Term life insurance does not accumulate a cash value, which means the policy cannot be cashed out and has no value to the policyholder. This is why it is exempt from Medicaid’s asset limit.
Whole life insurance provides coverage for the entirety of a person’s life and pays out a death benefit to the beneficiaries when the policyholder passes away. This type of insurance policy accrues a cash value, which means that policyholders are able to take a loan out against the cash value or “cash out” (terminate) their policy altogether. Since policyholders can take cash from their existing policy, it is not exempt from Medicaid’s asset limit. However, this is not entirely true, as these policies are exempt up to a certain face value. (The exemption amount varies by state). Therefore, depending on the face value of one’s whole life insurance policy, it can cause Medicaid ineligibility.
Medicaid’s Asset Limit
In order for a senior to be eligible for long-term care Medicaid, there are functional and financial requirements one must meet. (Learn more about Medicaid eligibility). For the purposes of this article, it’s important to note that Medicaid has an asset limit, which varies by the state in which one lives. For example, Connecticut has an asset limit of $1,600 for a single applicant, New York allows up to $15,150 for a single applicant, and New Hampshire has an asset limit of $2,500 for a single applicant. However, as a general rule of thumb, most states have an asset limit of $2,000 for a single applicant.
It’s important to note that many assets are considered exempt (non-countable) towards the asset limit. As an example, this generally includes one’s home and household items, a vehicle, and personal items. In addition, not all life insurance policies are countable assets, and even those policies that are countable are exempt up to a certain cash value.
Medicaid cannot take your life insurance policy while you are still living. However, based on the face value of your policy, it may be counted towards Medicaid’s asset limit, rendering you ineligible for Medicaid. However, if you are a Medicaid recipient, and the beneficiary of your life insurance policy is your estate, Medicaid may take the proceeds of the death benefit to recover costs it paid for your long-term care. This is called Medicaid estate recovery. That said, it is advised one does not put their estate as the beneficiary of their life insurance policy. Rather, the name of the particular beneficiary in which one wants the proceeds to go should be on the policy, protecting the death benefit from Medicaid in the majority of states.
Exemption of Death Benefit / Face Value
Most states have established that whole life insurance policies are exempt up to $1,500 in face value. However, some states allow a higher face value exemption. California, and Ohio allow up to $1,500 face value exemption, Florida allows a higher exemption amount of $2,500, and North Carolina allows up to $10,000.
If a life insurance policyholder has a face value over the exemption amount, the cash value of the policy is not exempt from Medicaid’s asset limit.
Said another way, if the face value (death benefit) of the policy is over the limit in the state in which one lives, the cash value of the policy will be added to one’s countable assets. On the other hand, if the face value of the policy is under the exemption limit, the life insurance policy is exempt (not counted) from Medicaid’s asset limit.
Bill lives in Illinois and has a whole life insurance policy that has a face value of $1,200 and a $500 cash surrender value. The exemption amount for whole life insurance policies is $1,500 in Illinois. Therefore, Bill’s life insurance policy is not counted towards Medicaid’s asset limit.
Claudia lives in Texas, a state that allows an exemption of up to $1,500 in whole life insurance policies. She owns one policy that has a face value of $1,000 and a cash value of $300 and a second policy that has a face value of $1,500 and a cash value of $700. The combined face value of the policies equals $2,500, putting Claudia over the allowable exemption amount. Therefore, the combined cash value of $1,000 will be a countable asset.
Other Differences by State
The face value exemption on whole life insurance policies vary by the state in which one resides. While nearly all states use a face value exemption, Missouri is unique in that it instead uses a cash surrender value exemption. (Remember, the cash surrender value is the amount one would receive if they were to “cash” out their insurance policy). However, like many states, the exemption figure is up to $1,500.
That said, some states do allow for a partial exemption even if Medicaid applicants are over the face value limit. Pennsylvania is one such state, as it allows the exclusion of cash value up to $1,000 if an applicant’s policy has a face value over the exemption amount of $1,500.
Many states allow a face value exemption of several smaller life insurance policies as long as the combined face value of the policies is not greater than the exemption amount for the state in which one resides. However, other states, such as Missouri, allow for the exemption of only one whole life insurance policy. (Remember, Missouri uses a cash surrender value exemption rather than a face value exemption).
Some states also have rules about a Medicaid applicant having both a burial account and a life insurance policy. For instance, Illinois allows up to $1,500 cash value of a life insurance policy OR up to $1,500 for a prepaid cancellable burial plan. Georgia allows Medicaid applicants to have as much as $10,000 set aside in a burial account. However, the face value total of any life insurance policies is added to this burial exemption amount. If one reaches the burial exemption amount of $10,000, any remaining cash value of insurance policies is counted as an asset. Said another way, it is not exempt. In Missouri, if a Medicaid applicant has a prepaid funeral plan, he/she cannot have a whole life insurance policy. Said another way, a Medicaid applicant can have one or the other.
What to Do If Your Policy Will Disqualify You
If one has a life insurance policy that may disqualify him/her from Medicaid, there are several courses of action that can be taken. Stated differently, having a policy over the exempt amount does not mean that one cannot qualify for Medicaid. Rather, it means that one needs to implement planning strategies accordingly in order to meet Medicaid’s asset limit. While some people may think that letting a policy lapse by stopping premium payments is the only option, there are other commonly used planning techniques.
Cash Out the Policy
One can cancel his/her life insurance policy, collect the cash value, and “spend down” the cash until the Medicaid asset limit is met in the state in which one resides. For instance, people often use the cash to pay for long-term care, make home modifications to make aging at home easier, and/or pay off debt. Please make note, this option means the life insurance policy ceases to exist and there will be no death benefit for remaining loved ones. Learn more about Medicaid Spend Down.
Take a Loan Against the Cash Value
Taking out a loan against one’s whole life insurance policy will keep the policy effective but will lower the cash value and face value of the policy. If one chooses this option, it’s important to remember that he/she still needs to pay the premiums. In addition, as the cash value increases over time, one may find he/she no longer is eligible for Medicaid. If one opts for this strategy, it’s important the cash value of the policy continues to be monitored.
Transfer the Policy
If the spouse of a long-term care Medicaid applicant does not also require Medicaid, the life insurance policy can be transferred to the non-applicant spouse (also called the community spouse or well spouse). The cash value of the policy would then count towards the non-applicant’s resource allowance. (This is also called the community spouse resource allowance). As of 2018, most states allow the community spouse to retain up to $123,600 in assets.
Another option would be to transfer the policy to a funeral home in order to pay for a non-cancellable burial plan. This is a resource that is exempt from Medicaid’s asset limit.
Please note, other transfers, such as transferring a life insurance policy to an adult child is considered to be a gift and is in violation of Medicaid’s look back rule.
Sell the Policy
When considering life insurance policies and Medicaid eligibility, the owner of the policy is who matters. Said another way, it doesn’t matter who the beneficiary is or who is insured via the policy. Therefore, a Medicaid applicant can have a friend or relative, such as an adult child, niece, or nephew purchase the insurance policy at the cash surrender value, pay the premiums, and keep the policy in effect. (Since the Medicaid applicant would no longer be the owner of the policy, they wouldn’t be able to cancel the policy for the cash surrender value).
Another option of selling a life insurance policy is a life settlement. This is the sale of the policy to a third party, who takes over paying the premiums, as well as becomes the beneficiary. In most cases, people choose this option when they have a life expectancy less than 20 years. Via the sale, the previous policyholder receives a lump sum of cash. Learn more about life settlements here.
That said, the cash from selling a life insurance policy likely would put a Medicaid applicant over the asset limit. Therefore, the applicant would first need to “spend down” the extra assets. Paying for unpaid medical bills and long-term care, home modifications, home additions, etc. are examples of ways to “spend down” assets on non-countable assets. Learn more about Medicaid asset spend down here.
Yet another option is Life Care Assurance, also called a long-term care benefit plan, and is a life insurance conversion. In simple terms, the policyholder sells the policy in exchange for long-term care services. A period of time will be established for which care, such as assisted living or in-home care, will be paid. After this period of paid care, one can apply for Medicaid. Click here for more information.
Medicaid Planning Assistance
As evidenced by the above complexities, the rules in regards to life insurance and Medicaid eligibility vary greatly based on the state in which one resides. Seeking the counsel of a Medicaid professional planner is key to ensuring one knows the rules in the area in which one lives. In addition, if you or a loved one has a life insurance policy over the face value exemption, Medicaid planning techniques are crucial for the best chance of meeting Medicaid’s asset eligibility requirement. Find a Medicaid planner.