Life Insurance and Medicaid

When thinking of assets that are countable by Medicaid, life insurance policies may not be the first to come to mind. Bank accounts, vehicles and investments are obviously assets, but what about your life insurance? The answer depends on the individual policy details.

There are a handful of different types of life insurance, from the accidental death and dismemberment policies that some credit unions offer their members to million-dollar policies that you have to apply to be accepted for. Whatever type of life insurance you have, the important detail when it comes to Medicaid is whether or not the policy carries a cash surrender value.

Not to be confused with the face value, which is the amount of death benefit paid upon the owner’s passing, the cash value is the amount that would be paid if the policyholder opts to surrender the policy early. Medicaid counts the cash value as an available asset. Because the policyowner can access funds, even if it means losing the face value, those funds count towards the asset limit.

Whole life, variable life and universal life are common types of life insurance that may accumulate a cash value. Term life policies on the other hand do not typically include a cash value.

What can be done about a life insurance policy that’s preventing the owner from becoming eligible for Medicaid? One option is to surrender the policy and receive the cash value funds, then spend those funds down to below the asset limit. However, surrendering the policy means that the face value is lost.

Another option is to sell the policy. Just like other assets, a life insurance policy can be sold to a new owner. In this case, the policy would be transferred to another person, but the insured, the person whose life the policy is based on, would remain the same.

In order to avoid a penalty for gifting an asset, the new owner would need to pay the Medicaid applicant a sum that is at least equal to the cash value. The applicant then spends those funds compliantly to bring their total assets below the limit. If not handled correctly, life insurance policies can be a stumbling block in the way of Medicaid eligibility. Whichever way you decide to address your life insurance when applying for Medicaid, keep in mind that life insurance companies are notoriously slow and can be difficult to work with, so plan ahead. Working with an experienced Medicaid Planner is advisable to make sure that everything is dealt with compliantly and that you receive the documentation necessary to prove eligibility, and in a timely manner.