Understanding life insurance is critical to providing seniors with peace of mind in their later years. While everyone should have life insurance to help pay for their final expenses and care for their families, certain life insurance policies may affect a senior’s Medicaid eligibility. Fortunately, older adults can use several Medicaid planning strategies to protect their eligibility and keep their life insurance benefits.
The type of life insurance you have can affect Medicaid eligibility
First, you must determine what type of life insurance you have. There are three major categories of life insurance: whole life, term, and burial insurance.
Whole life insurance
Whole life insurance covers the policyholder for their entire life and pays out a monetary benefit to the policyholder’s beneficiaries after their death. Life insurance policies have both a face and a cash value: The face value of an insurance policy is the amount the insurance company will pay to beneficiaries when the policyholder dies. The cash value is the amount of money continuously accrued during the policy’s life. The cash value of a whole life insurance policy can affect an applicant’s Medicaid eligibility.
Term life insurance
Term life insurance covers a policyholder for a set period. For example, the policyholder may have a policy that covers them for 25 years, and if the policyholder does not die within that term, the policy is canceled. Due to its limited application, a term life insurance policy does not affect Medicaid eligibility.
Burial insurance
Burial insurance is a type of whole life insurance used solely to cover burial or cremation services for the policyholder. Since burial insurance can be used for only this purpose, the policy’s value is not counted toward the Medicaid asset limit.
Using Medicaid spend down to qualify for Medicaid
Having your life insurance policy disqualify you from Medicaid coverage can be frustrating. Fortunately, you can become eligible for Medicaid using several common Medicaid planning strategies, including Medicaid spend down.
Medicaid recipients cannot own more than a specific amount of assets. Spend down helps reduce an applicant’s overall asset value to make them eligible for coverage. A Medicaid applicant can use the money gathered from selling or transferring assets on home additions or modifications, long-term care, credit card debt, or unpaid medical bills to reduce their final asset count.
Knowing this, a life insurance policyholder has several options to receive benefits from their policy without losing Medicaid eligibility:
Cash out the policy
A life insurance policyholder can cancel the policy and collect the cash value. The Medicaid applicant can then use the money on home modifications, paying off debt, and other spend-down-eligible expenses.
Transfer the policy
A life insurance policyholder may transfer ownership of their policy to a spouse, child, or funeral home. If a person is married and their spouse does not need Medicaid coverage, the individual can transfer their life insurance policy into the non-recipient spouse’s name. If that person is unmarried, they can transfer the policy into their adult children’s names. This transfer lowers the cash value of the policy. The policyholder can also transfer the policy directly to the funeral home that will handle their services after they pass away.
Remember, a whole life insurance policy continues to collect cash value. A transfer of the policy does not stop accrual, so keep an eye on the cash value to remain Medicaid eligible.
Seek a life settlement for the policy
A policyholder may seek a life settlement, which is selling their life insurance policy and transferring ownership to a third party. The third-party takes over paying the premiums and becomes the beneficiary. In exchange, the policyholder gets a lump sum of cash from the policy, which they can then spend to become eligible for Medicaid.
Seek a viatical settlement if appropriate
People with life-threatening or life-shortening health conditions can use viatical settlements on life insurance policies. The policyholder will receive a lump-sum payout, and the buyer becomes the policy owner after it is sold; therefore, the buyer collects the face value of the policy after the original policyholder’s death.
The settlement value of a life insurance policy depends on these factors:
- •The state where the policyholder lives.
- •Age and health of the policyholder.
- •Age of the policy.
- •Amount of the monthly or annual premium.
- •Death benefit amount.
- •Insurer rating.
Get Medicaid planning assistance
It is important and helpful for people to seek Medicaid planning assistance as they create a plan for their future. Speak to an experienced estate or Medicaid planning attorney for the best advice.
