Life Insurance and the Medicaid Application

Posted on: July 30th, 2012
Life Insurance and the Medicaid Application
Life insurance can be problematic when attempting to qualify for Medicaid.  To be eligible for Medicaid, an individual cannot have more than $2,000 in countable assets.  A whole life policy with a face value of $1,500 or less is considered exempt and will not count against that person's $2,000 asset limit.  Thus, besides this one small exception, all other life insurance policies owned by a Medicaid applicant that include cash value are available assets to that individual and will count toward that person’s $2,000 asset limit. 

Term Life Insurance
Term life insurance does not accrue cash value and is therefore exempt for Medicaid qualification purposes.  Term life insurance is purchased for a specified term and remains in effect as long as the premiums are paid each month.  If your bank, Federal or State retiree programs, or employer pays for term life insurance coverage on your behalf then it is not considered a countable resource for Medicaid qualification purposes and you don’t have to worry about making payments to keep the policy in force.
If, on the other hand, you are the one making payments on the policy, it may be difficult to pay the monthly premium since a person can only keep $50 of their income each month once they are approved for Medicaid.  Therefore, you can either transfer ownership of the term life policy to an individual, if that individual is willing to make payments on the policy, or cancel the policy altogether.  If you decide to transfer the policy or keep paying the premium each month be sure to check the beneficiary designation on your policy because if you or your estate is listed as a beneficiary, Medicaid can recover their costs from the proceeds of the policy upon your death.   
Whole Life
Whole Life insurance offers level premiums and life insurance protection for as long as you live, provided that premiums are paid as required to keep the policy in force.  These policies charge you a fixed premium each year, one that's typically higher than term insurance.  The advantage of whole life insurance is that, while part of the premium covers what term insurance would cost, the excess resides in an account that pays interest and accumulates a cash value.  As this "accumulation account" grows, your premiums can decrease over time. Eventually, in some cases, the interest earned can pay the premiums for you.  So you won't be paying any more premiums, but you'll still be covered for the rest of your life.

Since whole life insurance policies accumulate cash value that is accessible to the policy owner, it is counted as an available asset to a Medicaid applicant.  Thus, if a Medicaid applicant has a $10,000 whole life policy with an accumulated cash value amount in the policy of $3,000, that person would not qualify for Medicaid.  So what options do Medicaid applicants have? 

Planning Strategies
Option #1  
Take a loan out on the cash value, thereby reducing the cash value by the amount of the loan, and using the proceeds from the loan to spend down in a Medicaid compliant fashion.  Be sure to consult with an experienced Elder Law Attorney for appropriate and compliant spend-down strategies.    This option is particularly attractive if there is a large disparity between the death benefit and cash value amount because taking a loan out on the cash value will preserve the death benefit.  The downside to this strategy is you will have to pay interest on the loan amount. 
Option #2
Irrevocably assign the insurance policy to a funeral home.  Doing so will convert the cash value from a countable asset to a non-countable asset since it is going to pay for your funeral expenses.  This option has to be done within reason and should not be implemented if the death benefit is greater than your expected funeral costs since the state can be a residuary beneficiary on excess proceeds.  This option is especially attractive for insurance policies that are “paid up” because you don’t have to keep making payments on the policy to keep it in effect.  If, on the other hand, the policy still requires premiums to be paid, you will have to make arrangements to pay those premiums yourself from the $50 you receive each month or have someone else continue to make the payments for you. 

Option #3
Surrender the policy completely, take the cash surrender value and fund an irrevocable funeral trust and/or spend-down the surrender value in a Medicaid compliant fashion.

Option #4
Change ownership of the policy into the name of your spouse or a special needs trust if you have a disabled son or daughter.  Transferring ownership can be done quicker than cashing the policy out but if the policy is transferred to a spouse, the spouse must count the cash value amount towards the overall spousal resource allowance of $113,640.  If the policy is transferred to a special needs trust there is no penalty assessed for the transfering of assets.  
Written by Landon Sandberg from Iowa Senior Planning
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