Can Life Insurance Affect Your Medicaid Eligibility?

When applying for Medicaid assistance, many people often forget about life insurance. But depending on the type of life insurance and the value of the policy, it can count as an asset. This may affect your eligibility for Medicaid benefits.

What Is Medicaid? Am I Eligible?

Medicaid is a public assistance program jointly run by the federal government and each state. It helps provide health insurance benefits to low-income families, seniors, and people who are pregnant or have a disability. It currently serves as the single-largest source of health coverage in the United States.

To qualify for Medicaid, you must meet strict income limits. In most states, you cannot have more than $2,000 in assets. When buying life insurance, consider the type of policy, as it may also affect your eligibility for Medicaid.

Life Insurance Policies and Medicaid

Life insurance policies are usually either term life insurance or whole life insurance.

• If a Medicaid applicant has term life insurance, the policy doesn’t count as an asset. Therefore, it will not affect the applicant's Medicaid eligibility. This is because this form of insurance does not have an accumulated cash value.
• On the other hand, whole life insurance accumulates a cash value that the owner can access. Therefore, the Medicaid program can count it as an asset.

That said, Medicaid law exempts small whole life insurance policies from the calculation of assets. If the policy's face value is less than $1,500, then it won't count as an asset for Medicaid eligibility purposes. However, if the policy’s face value is more than $1,500, the cash surrender value becomes an available asset.

For example, suppose a Medicaid applicant has a whole life insurance policy with a $1,500 death benefit and a $700 cash surrender value. (The cash surrender value is the amount you would get if you cash in the policy before death). The policy is exempt, so Medicaid won't use it to determine the applicant's eligibility.

However, imagine the death benefit is $1,750 and the cash value is $700. In this case, the cash surrender value will count toward the $2,000 asset limit.

What to Do If Your Life Insurance Policy Disqualifies You From Medicaid

If you have a life insurance policy that may disqualify you from the Medicaid program, you have a few options:

• Surrender the policy and spend down the cash value.

• Transfer ownership of the policy to your spouse or to a special needs trust. If you transfer the policy to your spouse, the cash value would then be part of their community spouse resource allowance (CSRA).
• Transfer ownership of the policy to a funeral home. You can use the policy to pay for your funeral expenses, which is an exempt asset. (Learn more about this option in an article about prepaid funeral plans.)
• Take out a loan on the cash value; this reduces the cash value and the death benefit but keeps the policy in place.

Consult an Elder Law Attorney

Before taking any action with your policy, be sure to talk to an elder law attorney. They can assist you in determining what the best strategy is for your financial situation. Find a qualified elder law attorney near you today.

For additional reading, check out the following articles:

• Selling Your Life Insurance to Help Cover Expenses
• Discussing Long-Term Care With Older Adults in Your Life
• Can Medicaid Take Your House?