Medicaid is a federal and state government program that provides, among many benefits, payment for skilled nursing, rehabilitation and long-term nursing home care. Medicaid eligibility is limited by a term known as countable assets. Life insurance might not count toward the limit. Whether Medicaid takes your life insurance depends upon the type of policy, its cash value, if any, and how you plan prior to applying.
When an individual applies for Medicaid as a source of funding for nursing home care, all of his assets and those of his spouse must be disclosed. Assets fall into two categories, either countable or non-countable. An example of an asset that does not count is a payment toward funeral expenses, also known as a prepaid funeral. The limit for countable assets is $2,000 for an individual and $115,920 for a married couple if only one spouse is seeking long-term care.
Term Life Insurance
A term life insurance policy is like automobile insurance. You pay a premium for a set period of time and you are covered, such as a 10-year term life policy. If you die during the 10 years, the life insurance company pays the face amount of the policy to your designated beneficiary. The policy has no cash value, with the exception of some policies that pay dividends, so it does not count toward the Medicaid limit. Only policies that pay dividends count. You can keep all term life policies, and as long as the beneficiary is an individual and not your estate, the money will pass free of Medicaid restrictions.
Whole Life Insurance
Whole life insurance policies accrue cash value and thus count toward the limit. The only exception is a policy or policies whose total face value does not exceed $1,500. Any other whole life policy whose face and cash value exceeds $1,500 counts and disqualifies an individual. The individual must therefore divest himself of the policy.
Balancing the benefits of life insurance and Medicaid requires careful planning. For example, you can keep term life insurance, but someone must pay the premiums. For whole life policies, one solution is to sell the policy to your children who will continue to pay the premiums. The cash value no longer counts because you do not own the policy. Another option is take out a loan against the cash value to reduce it below $1,500, and then use the loan for a prepaid funeral. If the cash value exceeds the funeral costs, the balance must be expended to get under the limits required to be eligible to receive Medicaid coverage.
- Medicaid.gov: Nursing Facilities
- Pearson Bollman Law: Life Insurance and the Medicaid Application
- Bacon Wilson Attorneys at Law: Life Insurance and Medicaid Planning
- Elder Law Corner: Life Insurance and Medicaid Eligibility
- American Council of Life Insurers. "ACLI 2019 Life Insurers Fact Book," Page 64. Accessed Sept. 24, 2020.
- AllState. "What Is Cash Value Life Insurance?" Accessed Sept. 25, 2020.
- AIG Direct. "Whole Life Insurance." Accessed Sept. 25, 2020.
- Internal Revenue Service. "Life Insurance & Disability Insurance Proceeds." Accessed Sept. 24, 2020.
- Northwestern Mutual. "Pros and Cons of Whole Life Insurance." Accessed Sept. 25, 2020.
- U.S. Securities and Exchange Commission. "Variable Life Insurance." Accessed Sept. 25, 2020.
Robert Alley has been a freelance writer since 2008. He has covered a variety of subjects, including science and sports, for various websites. He has a Bachelor of Arts in economics from North Carolina State University and a Juris Doctor from the University of South Carolina.