How Life Insurance Impacts Eligibility for Medicaid Long Term Care

Summary
It’s common for Medicaid Long Term Care applicants to own life insurance policies, so understanding how those policies impact Medicaid eligibility is important. To be eligible for Medicaid, you need to meet certain financial requirements, including an asset limit. Depending on their type and value, life insurance policies can be counted toward that asset limit, which can vary depending on which Medicaid Long Term Care you’re applying for, your state of residence and your marital status.

Life Insurance Policies and the 3 Types of Medicaid Long Term Care

There are three types of Medicaid Long Term Care that are relevant to seniors – Nursing Home Medicaid, Home and Community Based Services (HCBS) Waivers and Aged, Blind and Disabled (ABD) Medicaid.

Nursing Home Medicaid covers all the basic expenses associated with a nursing home, including room and board. HCBS Waivers provide long term care at the recipient’s home so they don’t have to live in a nursing home. Applicants for both these programs must meet medical as well as financial requirements. ABD Medicaid applicants don’t have to meet any medical requirement, they only need to meet the financial requirements to be accepted into the program and have general healthcare coverage. But in order to receive long-term care benefits through ABD Medicaid, applicants/recipients need to show a need for that care.

Life insurance policies can impact eligibility for all three programs because all three require applicants to meet an asset limit in order to qualify, and life insurance policies can count toward Medicaid’s asset limit.

Understanding Asset Limits

In most states in 2024, the individual asset limit for all three types of Medicaid Long Term Care is $2,000. This means an individual applicant can only have $2,000 worth of assets or less to be eligible for Medicaid. For married couples with both spouses applying for Medicaid Long Term Care, the asset limit in most states is $3,000 or $4,000. For married couples with only one spouse applying for Nursing Home Medicaid or HCBS Waivers, the asset limit in most states for the applicant spouse is $2,000 and for the non-applicant spouse it’s $154,140, due to the Community Spouse Resource Allowance (CSRA). But the CSRA doesn’t apply to ABD Medicaid, so the asset limit for that program for married couples in most states is $3,000 whether one or both spouses is applying.

However, the asset limits can vary by state. These states, for example, have the following 2024 asset limits for individuals and married couples with both spouses applying for all three types of Medicaid Long Term Care programs: California (no asset limit for either), Illinois ($17,500 and $17,500), Minnesota ($3,000 and $6,000). Asset limits can also vary by Medicaid Long Term Care program. In Florida, for example, the 2024 asset limits for Nursing Home Medicaid and HCBS Waivers is $2,000 for an individual and $3,000 for a couple with both spouses applying, but for ABD Medicaid it’s $5,000 for an individual and $6,000 for a couple with both spouses applying.

Many of your assets will be counted toward the asset limit, including bank accounts, retirement accounts, stocks, bonds, cash and, in certain cases, life insurance policies. However, some assets are exempt, meaning they are not counted toward the asset limit. Your home, in most cases, will be exempt from the asset limit. To learn more about how home ownership impacts Medicaid eligibility, click here.

Life insurance policies can also be exempt from asset limits, depending on the type of policy, its value and your state of residence. We will examine this more closely in the next two sections.

Types of Life Insurance

There are two types of life insurance relevant to this article: term and whole. Term life insurance does not impact Medicaid eligibility. Whole life insurance can impact Medicaid eligibility.

Term life insurance: This type of policy offers coverage for a limited amount of time, anywhere from one year to decades. If the policy holder passes away within the policy’s time frame, it will pay out to the beneficiaries. If the policy holder does not die within the time frame, the policy simply ends and no benefits are paid out. Term life insurance policies do not accumulate any cash value and they can not be cashed out, which is why they are exempt from the Medicaid asset limit.

Whole life insurance: This type of policy covers the holder for their entire life and pays out when they die. Whole life insurance policies accumulate a cash value as the holder pays monthly or yearly premiums, and they can be cashed out by the holder. This is why whole life insurance policies can be counted toward the Medicaid asset limit, and the next section will explain when they are counted and when they are not.

When and How are Whole Life Insurance Policies Counted Toward the Asset Limit

The amount a whole life insurance policy pays out when the policy holder dies is known as the face value. The value a whole life insurance policy accumulates as the holder pays monthly or yearly premiums is known as the cash value.

In most states in 2024, whole life insurance insurance policies with a face value of $1,500 or less are exempt from Medicaid’s asset limit. Some states have higher face value exemption amounts, like Florida ($2,500), Rhode Island ($4,000) and North Carolina ($10,000).

If the face value of your whole life insurance policy (or the combined face values of all your whole life insurance policies) is greater than the face value exemption amount in your state, the cash value of the policy (or the combined cash value of all your whole life insurance policies) will be counted toward the asset limit. For example, Mike lives in Ohio, which has a $1,500 life insurance exemption amount, and he has two whole life insurance policies that both have a face value of $1,000 and cash values of $500. The combined face value of $2,000 puts him over Ohio’s exemption amount, so the combined cash value of the two policies, $1,000, would count toward Mike’s Medicaid asset limit, which is $2,000 for an individual for all three Medicaid Long Term Care programs.

In the next section you’ll find a table that shows the face value exemptions in every state.

State-by-State Table: Life Insurance Exemption Amounts

Whole life insurance policies will not be counted toward Medicaid’s asset limit if they have a face value equal to or less than their state’s life insurance exemption amount. The following table shows the exemption amount in every state and the District of Columbia.

Burial Policies and Other State Variables

In addition to different life insurance exemption amounts, states have other variables that can change how life insurance policies impact Medicaid eligibility. This includes having prepaid burial policies: Some states only allow a burial policy or a life insurance policy to be exempt, but not both; and some states total the face value of life insurance and burial policies when calculating your exemption status.

How your insurance policy is valued as an asset can also change by state. Even if the face value of your life insurance policy is over the state’s exemption amount, some states will only count part of the policy’s cash value as an asset. In Pennsylvania, for example, the first $1,000 of cash value would not be counted toward the asset limit, and in Rhode Island it’s the first $4,000.

Some states, like Missouri, only allow one life insurance policy to be exempt, even if you have several and they have a face value total less than the state’s exemption amount.

How to Become Eligible with Whole Life Insurance

Even if your life insurance policy puts you over the Medicaid asset limit, there are still ways you can become Medicaid eligible. The most common strategy when it comes to reducing assets is “spending down.” Simply put, you would cash out or sell your policy and then spend the proceeds in ways that wouldn’t violate Medicaid rules, such as the Look-Back Period. To learn more about Medicaid spend down, click here.

You could also take out a loan against the life insurance policy, which might lower the face value enough to make it exempt, or lower the cash value enough to put you under the asset limit. If you are married and your spouse is not also applying for Medicaid you could transfer the policy to them and count it toward the Community Spouse Resource Allowance, which you can learn more about by clicking here. Or you could sell the policy to a third party in exchange for long term care services, which is known as Life Care Assurance.

These strategies can be complicated, as are Medicaid’s rules for life insurance policies and eligibility in general, as you just read. So, before attempting any of these on your own, we recommend consulting with a Certified Medicaid Planner or an Elder Law Attorney.