How Life Insurance Impacts Eligibility for Medicaid Long Term Care
The way life insurance policies work is fairly straightforward: someone pays a premium and a loved one receives a payout upon their death. Whether these life insurance policies can affect Medicaid Long Term Care eligibility, however, is not so straightforward. Medicaid eligibility is complicated and depends on a number of factors including the state of residence and marital status. It is possible that an applicant’s life insurance policy might cause Medicaid ineligibility. Specifically, life insurance policies can be counted as assets and put the policyholder over the financial assets limit, though there are a number of factors at play.
How Life Insurance Affects Medicaid Long Term Care Eligibility
Before we get more specific, here are some very basic points about how life insurance affects one’s ability to receive Nursing Home Medicaid, Home and Community Based Services waivers, and other long term care programs like Aged, Blind and Disabled (ABD) Medicaid:
– To be Medicaid-eligible, an applicant must have assets below a certain amount—usually $2,000 for a single individual.
– Term life insurance policies are exempt, meaning they are not counted toward the asset limit.
– Whole life insurance policies do count toward the Medicaid asset limit, though a certain amount of value—usually $1,500, but see below for state specifics—is exempt.
– A whole life insurance policy’s cash value is considered an asset if its face value is above $1,500. (Terms and variances explained below.)
– Every state’s specific Medicaid eligibility rules are different.
– If one’s life insurance policy puts their assets above the Medicaid asset limit, it is still possible to become eligible using strategies defined below.
Whole Life Insurance: Face Vs. Cash Value
A whole life insurance policy is held until death and has a cash value and a face value (face value is also called “death benefit”).
The cash value increases over time as one pays into the policy in the form of regular monthly or yearly premiums. One can borrow against the cash value of their policy, or close the policy and take the cash value, which is the amount that’s been paid in minus any cancellation fees.
The face value is how much the policy pays out upon the death of the insured person.
In many states, a whole life insurance policy is not counted toward the Medicaid asset limit up to a certain amount. However, this amount is often only $1,500, but in some states, it is higher than that. Put another way: A whole life insurance policy does not count toward the Medicaid asset limit if its face value is less than the exempt amount in one’s state. If the face value is above the exempt amount, then the cash value counts toward the asset limit.
Consider someone who holds a whole life insurance policy with a $1,700 face value (death benefit) and a $700 cash value. If their state’s exempt limit is $1,500, then the fact that the face value is higher than that limit means that the cash value ($700) counts toward the asset limit. If that $700 combined with other assets puts an applicant above the state’s asset limit, then the individual would be considered ineligible for Medicaid (although for some high-need individuals there are other ways to qualify).
Term Life Insurance
Term Life Insurance does not count toward the asset limit. Term life insurance is coverage over a set amount of time, with a predetermined end date that could be as little as one year away, or decades. Term life insurance pays to beneficiaries if the holder dies within the designated period of coverage; otherwise it expires without paying a benefit.
Term life insurance cannot be cashed out, and because it has no cash value it is not considered as an asset when applying for Medicaid.
How Life Insurance Affects Different Medicaid Long Term Care Program Eligibility Requirements
Medicaid programs in every state are different, often with different names, but generally speaking the three types of Long Term Care—for personal care assistance rather than specifically medical care—are called Nursing Home Medicaid, Home and Community Based Services (HCBS) waivers, and Aged, Blind and Disabled Medicaid.
Each Medicaid program is distinct, and qualifying criteria can vary. For this reason, the effect of one’s life insurance policy on financial eligibility is different depending on the program for which one is applying.
Nursing Home Medicaid
Nursing home Medicaid is also called Institutional Medicaid and will cover the entire cost of living in a nursing home. Someone who needs full-time nursing care must qualify financially in order to receive this benefit, meaning their income must be under a certain amount (usually $2,523 per month in 2022, though this figure is different in some states) and assets whose total value is below $2,000 (this number can vary as well).
If an applicant for Nursing Home Medicaid has a whole life insurance policy, the cash value of that policy will be counted toward the asset limit if its face value is above the exempted amount.
Because nursing homes are expensive, Medicaid will require one to pay all their income into the program except for a small personal needs allowance. If one’s estate is named as the beneficiary of a whole life insurance policy, Medicaid will take that as well, upon the beneficiary’s death, in order to recoup some of the costs of care while the individual was alive. This is called the Estate Recovery Program.
If a specific person is named the beneficiary of a Medicaid recipient’s life insurance policy, rather than their estate, it is possible that the money paid out upon death will not need to be recovered by Medicaid, though this will depend on the state in which one resides.
As with other types of Medicaid Long Term Care, Home and Community Based Services waivers are for long-term personal care for older or frail adults, rather than medical care to address a specific illness or injury. HCBS waivers provide benefits in an individual’s home or assisted living community, and while recipients do not need to pay all their income to Medicaid to receive this benefit (unlike Nursing Home Medicaid), they do need to have income and assets below a certain amount in order to qualify.
In 2022, the income limit is usually $2,523 per month, though this varies by state. The asset limit for a single individual is usually $2,000 and $3,000 for someone who is married (again there are state variances), and the cash value of one’s whole life insurance policy will count toward the asset limit if the face value is above the exempt amount.
As with Nursing Home Medicaid, the state will try to recoup the costs of long term care upon a recipient’s death. If one’s estate is named as the life insurance beneficiary, then state Medicaid will take as much of the face value as is necessary to cover the costs of care when the person was alive. If a specific person is named beneficiary, then Medicaid might not recover those funds (it depends on the state).
Aged, Blind & Disabled Medicaid
Aged, Blind and Disabled (ABD) Medicaid is also called Regular Medicaid, and offers services for people who have lost some independence but wish to remain living at home or in an assisted living community. ABD benefits in most states are not as comprehensive as those provided by the HCBS waivers described above, but ABD Medicaid is considered an entitlement, which means any applicant who qualifies financially must receive benefits and will not be placed on a waitlist.
The income limits for ABD Medicaid are usually lower than for other types of Medicaid; applicants for ABD Medicaid must make less than $841 per month in 2022. The asset limits, however, are generally the same as other types of Medicaid in the same state. The figure is often $2,000 for a single individual, and the rules around life insurance policies are the same: The cash value of a whole life insurance policy counts toward the asset limit if the face value is above the state’s exemption limit.
Upon death, the face value or death benefit will be used to pay back Medicaid Long Term Care costs if the policy holder’s estate is named as beneficiary. If the policy’s beneficiary is specifically named, then the state might not seek the life insurance funds to recoup the costs of caring for the policyholder when they were alive.
Life Insurance Exemption Limits by State
The life insurance exemption means that life insurance policies with a face value (also known as the death benefit) below the exempt amount are not considered as assets. Put another way, if one’s life insurance policy has a death benefit value below $1,500, in most states, then it is not a factor in determining Medicaid eligibility.
To find your specific state’s asset and income limits, use our Medicaid Long Term Care Eligibility Requirements Finder tool.
In these states, whole life insurance policies are exempt up to $1,500 in 2022: Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Washington, D.C., West Virginia, Wisconsin, and Wyoming.
In these states, the exempt amount is $10,000 in 2022: Louisiana, Mississippi, North Carolina, North Dakota, and South Carolina.
In Alabama, the exempt amount is $5,000.
In Florida, the exempt amount is $2,500.
Because there can be so much nuance, Medicaid applicants with finances including life insurance are encouraged to contact a professional Medicaid planner before submitting an application.
Next Steps If Life Insurance Puts One Above the Asset Limit
Even if an individual’s life insurance policy pushes them above the asset limit, it is still possible to receive Medicaid benefits including nursing home coverage and HCBS waivers. These are some of the strategies, though remember that the specifics in one’s state of residence might be different:
– Cash out the policy for its face value, and spend down that money using Medicaid-approved strategies. Click here for more on spending down, and the importance of not violating Medicaid’s look-back period. https://www.medicaidlongtermcare.org/eligibility/spend-down/
– Take a loan out against the cash value of the policy, thus lowering its cash and face value and (possibly) getting below Medicaid financial limits. Remember that over time, however, the values will increase again and possibly make one ineligible.
– Transfer ownership of the life insurance policy to a funeral home to pay for burial costs upon death, as funeral expenses are considered exempt by Medicaid.
– Transfer ownership of the life insurance policy to a spouse, which converts the value of the policy into the spouse’s community resource allowance under Medicaid rules. Transfers to other family members, like an adult child, are more complicated and might be considered a gift that would violate Medicaid’s look-back rule.
– Sell the policy in exchange for long term care insurance. Some insurance companies will work with customers to convert their life insurance policies into an insurance product that can cover long-term care until they are eligible for Medicaid benefits. It may also be possible to combine these types of insurance in a way that does not make one ineligible. Click here for more.