Ask the Expert: Will a Life Insurance Policy Affect my Mother’s Medicaid Eligibility?

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Q. My mother never thought about life insurance until later in life.  Ever since her friend Theresa died without it, she has been insistent about getting a policy for herself.  She is weighing her options and hasn’t decided between “term” or “whole” life insurance.  She has an extensive family history of diabetes and Alzheimer’s.  If she needs long-term care down the road, would purchasing life insurance now disqualify her from being eligible for Medicaid in the future?
A. Life insurance can be problematic when attempting to qualify for Medicaid.  Currently, to be eligible for Medicaid, an individual cannot have more than $2,000 in countable assets. You mentioned that your mother hasn’t decided between “term” or “whole” life insurance. If a Medicaid applicant has term life insurance, it doesn’t count as an asset and won’t affect Medicaid eligibility because this form of life insurance does not have an accumulated cash value. Term life insurance is purchased for a specified term and remains in effect as long as the premiums are paid each month.

However, if she decides on term life insurance and is approved for Medicaid down the road, it may be difficult to pay the monthly premium for the insurance since a Virginia resident can only keep $40 of their income each month while on Medicaid.  If this becomes the case, she could either transfer ownership of the term life policy to someone else if that person is willing to make the payments on the policy, or cancel the policy altogether.  If she decides to transfer the policy or keep paying the premium each month, she should pay careful attention to the beneficiary designation on her policy. If her estate is listed as a beneficiary, Medicaid can recover their costs from the proceeds of the policy upon her death.

Whole Life insurance, on the other hand, offers level premiums and life insurance protection for as long as your mother lives, provided that premiums are paid as required to keep the policy in force. These policies will charge her 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 mother’s premiums can decrease over time. Eventually, in some cases, the interest earned can pay the premiums for her.  So she won’t be paying any more premiums, but she’ll still be covered for the rest of her life.

For Medicaid, if a person owns whole life insurance with a face value of less than $1,500, this is considered exempt and will not count against that person’s $2,000 Medicaid resource limit.  Besides this one small exception, all other whole life insurance policies owned by a Medicaid applicant that include cash value are countable assets to that individual and will count toward that person’s $2,000 Medicaid resource limit. For example, suppose your mother has a whole life insurance policy with a $1,500 death benefit and a $700 cash surrender value (the amount she would get if you cash in the policy before death). The policy is exempt and won’t be used to determine her applicant’s eligibility for Medicaid. However, if the death benefit is $1,750 and the cash surrender value is $700, the cash surrender value of $700 will be counted toward her $2,000 asset limit.
If your mother purchases a life insurance policy that may disqualify her from Medicaid, she has a few options. Before making any decisions, she should consult with a Certified Elder Law Attorney, such as Evan H. Farr, for appropriate and compliant spend-down strategies.

She could:

• Cash in the policy: Your mother can request that the insurance company send her the cash value of the policy. When the check arrives, she can spend down excess assets. This will eliminate the death benefit and cancel the policy. Again, be sure to consult with a Certified Elder Law Attorney, such as Evan H. Farr, before doing so.
• Change ownership of the policy into the name of her spouse, if she is married, or a special needs trust if she has 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 $115,920.00.  If the policy is transferred to a special needs trust there is no penalty assessed for the transferring of assets.
• Irrevocably assign the insurance policy to a funeral home in exchange for exempt pre-paid funeral services: If done correctly, this will convert the cash value from a countable asset to a non-countable asset since it is going to pay for your funeral expenses. However, there are very specific requirements that must be met by the funeral home when selling Medicaid-exempt prepaid funeral plans, and many funeral homes don’t have the necessary Medicaid knowledge.
 Take out a loan on the cash value: This reduces the cash value and the death benefit, but keeps the policy in place.
• Convert a life insurance policy into a long term care benefit plan at its fair market value and extend her spend down period by covering the cost of care while preserving a portion of the death benefit until exhausted.
Most people are aware that, in order to qualify for Medicaid benefits, an applicant must meet strict state-imposed income and resource restrictions. The handling of life insurance policies is just one facet of Medicaid qualification. A Certified Elder Law Attorney such as Evan H. Farr can help your mother design and implement a personalized comprehensive plan for Medicaid qualification. To discuss strategies specific to her situation, your mother should call 703-691-1888 to make an appointment for a consultation at The Fairfax Medicaid Protection Law Firm of Evan H. Farr, P.C.


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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.