How life insurance affects your Medicaid eligibility

In order to qualify for Medicaid in most states, you can’t have more than $2,000 in “countable” assets. When calculating their total assets, many people overlook life insurance, which can count as an asset depending on the type of insurance and the value of the policy.

Life insurance policies are usually either “term” or “whole life.” Term policies don’t count as an asset – and won’t affect Medicaid eligibility – because they don’t have an accumulated cash value. On the other hand, whole-life policies usually have a cash value that the owner can access, so they may be counted as an asset.

Medicaid generally exempts “small” whole-life policies – those with a death benefit of $1,500 or less. But if a policy’s face value is more than $1,500, then the policy’s cash surrender value becomes a countable asset.

Example: A whole-life policy has a death benefit of $1,750 and a cash surrender value of $700. Because the death benefit is more than $1,500, the $700 surrender value counts toward the $2,000 asset limit.

If you have a life insurance policy that may disqualify you from Medicaid, you have several options, including:

  • 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 will be counted among the assets that the spouse of a Medicaid recipient is allowed to keep.
  • Transfer ownership of the policy to a funeral home. The policy can then be treated as a pre-payment of funeral expenses, which doesn’t count as an asset.
  • Take out a loan on the cash value. This reduces the cash value and the death benefit, but keeps the policy in place.

Before taking any action, talk with your attorney to find out what is the best strategy for you.

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