Life Insurance and Medicaid: How Does That Work?

There are all sorts of notions out there about what kind of assets are ‘countable‘ when it comes to qualifying for Medicaid coverage.  It’s worth understanding some of these limits and rules as Medicaid has become, as one elder law specialty site put it, sort of the default nursing home insurance for America’s middle class.  That would be most of us.

This is a complex subject and consulting a decent elder law attorney would be a good plan if there are considerable assets to manage.  In fact, even if there aren’t considerable assets, professional help is the smart way to go.  There are general guidelines to decipher and then there are specific state rules to take into account  along with annual adjustments and changes, so it can be tough navigating on your own.

We are sticking with life insurance in this discussion.  You probably already know that in order to qualify for Medicaid benefits, a nursing home resident may have no more than $2,000 in ‘countable’ assets (and this may be a bit higher in some states).  The spouse of a nursing home resident  — the so-called ‘community spouse’ — is allowed half of the couple’s joint assets up to $113,640 (2012) in ‘countable’ assets.  Additionally, the community spouse may keep the first $22,728 (2012) even if this is more than half of the joint assets.  Again, this may be higher in some states.  So what does this actually mean?

All a couple’s assets are counted against these limits, unless the assets are ‘noncountable’.  The exempted assets include:

  • Personal possessions, such as furniture, clothing and jewelry.
  • One motor vehicle, regardless of value, just so long as it is used for transportation of the applicant or a member of the household.  The value of an additional car may also be excluded if needed for health or self-support.
  • The applicant’s principal residence, so long as it is in the same state in which the person is applying for coverage. Under the Deficit Reduction Act of 2005 (DRA), the principal residence may be deemed noncountable only to the extent that their equity is less than $525,000.  States have the option of raising this limit to $786,000 in 2012.   And in all states and under the DRA, the house may be kept with no equity limit if the applicant’s spouse or other dependent relative resides there.
  • Prepaid funeral plans, and a small amount of whole life insurance.
  • Assets considered, for one reason or another, to be inaccessible.

Here’s the thing about life insurance owned by the applicant.  Remember, there are different kinds of life insurance.  The important distinction here is between whole life insurance and term life insurance. If the applicant has term life insurance, even if the face value is $100,000, he or she can keep it.  The face value is what the insurance company would pay out to any beneficiaries when the policy owner (the applicant or elder) dies, should the policy still be in force at that time.  A term life policy, by definition, has no cash surrender value.  Since it has no cash value, it is not an asset for its owner.  Of course, it goes away entirely unless the annual premiums keep being paid.

 A whole life policy, by contrast, can build cash surrender value.  The cash surrender value is the amount a life insurance company will pay out if the policy is cancelled.  This cash surrender value is countable, but only if the total face value of all life insurance policies exceeds $1,500.  For example, if your dad owns a $1,000 policy with a cash value of $800, he can keep it.  It will not count towards his $2,000 limit, or towards the limit for married couples.  

If you sort out all the policies and find your elder to be over the limit, what’s next?  Before you go ahead and cancel any life policies, consider this.  If your mom has an existing policy or two and is now in poor health, it may be a good idea to keep those policies rather than cancel them.  Your mother may well be uninsurable now.  By keeping the policies in force, the proceeds she originally intended to go to her beneficiaries will still be there when the time comes.

If the face values exceed the $1,500 limit and the countable assets put her over the limit to qualify for Medicaid, perhaps a good plan would be for you and/or your siblings to purchase the policy or policies  and keep everything in effect by paying the annual premiums.  There are also options to assign a policy to a child as a gift.  This is rather more involved and will cause a penalty period, so it may not be the best choice for everyone.  But it will work as part of a plan that includes other gifting strategies.  Working with a financial professional would be prudent in this situation.

The sum up, the point here is not who benefits from a life insurance policy, but rather who owns the policy at any time.  Exactly what sort of life insurance is owned also matters.  Medicaid’s reasoning about the insurance thing is simple.  If an elder owns a policy with cash surrender value, Medicaid proceeds as if it has already been cashed in and thus counts it as an asset.  After all, the elder could indeed cash it in at any time, from any nursing home, years from now.  Should that ownership pass to a child, however, the elder is not longer able to cancel that plan or cash it in.  It is, therefore, no longer a countable asset.

Special thanks to K. Gabriel Heiser, elder law attorney and author,


2 responses to “Life Insurance and Medicaid: How Does That Work?

  1. Great pragmatic approach to a complex issue!

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