Life insurance Policies and Medicaid Eligibility

When applying for Medicaid for yourself or on behalf of your spouse, it can be easy to forget that life insurance is an important asset that can impact financial eligibility. Generally speaking, term life insurance is an exempt resource and doesn’t count toward the Medicaid resource limits (the $2,000 resource limit for the applicant and, if the applicant is married, the Community Spouse Resource Allowance, often referred to as the CSRA). However, whole life insurance policies (life insurance which has no term limit and has a cash surrender value) are generally not exempt and will count toward the resource limit because these types of policies accumulate a cash value that can be accessed by the owner. That said, some whole life insurance policies will be considered exempt if they fall within certain narrow parameters. More specifically, life insurance policies that have a death benefit of $1,500 or less are exempt. But policies with a death benefit in excess of $1,500 that have a cash surrender value of any amount are not exempt and will count toward the resource limits. For the latter type of policy, it is the cash surrender value of the policy that gets counted as a resource. For example, if you own a life insurance policy that pays $100,000 to the beneficiary on the death of the policy holder and has a cash surrender value of $20,000, it is the $20,000 that gets added to your total countable resources (which must remain under the Medicaid resource limits).

There are three common options available for dealing with life insurance policies that may be putting you or your spouse over the resource limits. The simplest option is to cash in the policy and spend the cash received to get below the resource limit (for example, by spending on exempt resources like a new car, home repairs, home furnishings, medical care etc.). The next option, transferring the policy to a new policyholder, involves either selling or gifting the policy. There’s no transfer penalty if you sell the policy for fair market value (that is, you sell the policy for at least its cash surrender value). Selling the policy allows the new policyholder to keep the policy effective and take over responsibility for making premium payments. Gifting the policy also allows a new policyholder to take over responsibility and keeps the policy effective, but it may result in a transfer penalty that could disqualify you or your spouse from receiving Medicaid services for some period of time. Some gifts are permissible (for instance, there’s no penalty for gifting to a spouse, to a blind or disabled child, or for gifting to a qualifying special needs trust established for someone who is disabled and under 65) but most gifts risk triggering a transfer penalty. The third option, taking out a loan on the cash value, will reduce the face value and cash surrender value of the policy (meaning they count less against your resource limit) while also allowing you to retain the policy. In this scenario, you would likely need to keep paying premiums and would need to keep an eye on the cash surrender value as it grows so that it does not once again cause you to exceed the applicable resource limits.

It is strongly advisable to speak with an estate planning attorney so that all options can be explored before taking action with an existing life insurance policy.