Life Insurance Proceeds: Impact On Medicaid Eligibility

Life insurance policies can affect your eligibility for Medicaid. This is because Medicaid has strict income limits, and life insurance policies can be counted as assets. Term life insurance does not count as an asset as it does not accumulate a cash value, whereas whole life insurance does accumulate a cash value that the owner can access, and so is counted as an asset. If the total face value of all life insurance policies an applicant owns is less than or equal to $1,500, then these policies are considered exempt. However, if the total face value exceeds $1,500, then the total cash surrender value of the policy will count toward the $2,000 asset limit for a single person.

Medicaid eligibility requirements

Medicaid is a joint federal and state program that provides health coverage to Americans, including children, pregnant women, parents, seniors, and individuals with disabilities. It is the largest source of health coverage in the United States.

To qualify for Medicaid, applicants must meet strict income limits and, in some cases, resource limits. In most states, applicants cannot have more than $2,000 in assets. Each state's Medicaid program has an income threshold that applicants must be under to qualify for health insurance.

Financial Eligibility

The Affordable Care Act established a new methodology for determining income eligibility for Medicaid, known as Modified Adjusted Gross Income (MAGI). MAGI considers taxable income and tax filing relationships to determine financial eligibility. MAGI-based eligibility does not allow for income disregards that vary by state or eligibility group, nor does it allow for an asset or resource test.

However, certain individuals are exempt from MAGI-based income counting rules, including those whose eligibility is based on blindness, disability, or age (65 and older). Eligibility for these individuals is generally determined using the income methodologies of the Supplemental Security Income (SSI) program.

Some Medicaid eligibility groups do not require a determination of income by the Medicaid agency. Coverage may be based on enrollment in another program, such as SSI or the breast and cervical cancer treatment and prevention program.

Non-Financial Eligibility

In addition to financial criteria, individuals must meet certain non-financial eligibility criteria to qualify for Medicaid. These include:

• Residency: Applicants must be residents of the state in which they are receiving Medicaid.
• Citizenship: Applicants must be either citizens of the United States or certain qualified non-citizens, such as lawful permanent residents.
• Age, pregnancy, or parenting status: Some eligibility groups are limited by age or by pregnancy or parenting status.

State Flexibility

States have the option to establish a "medically needy program" for individuals with significant health needs whose income is too high to qualify for Medicaid under other eligibility groups. These individuals can become eligible by "spending down" their income above a state's medically needy income standard on medical and remedial care expenses.

Additionally, states have the flexibility to choose coverage groups beyond those traditionally covered under the state plan. They may also implement waivers to provide Medicaid to populations beyond those covered by the state plan.

Life insurance as an asset

Life insurance is a necessity for most people, but only some types are classified as an asset. An asset is a concrete thing of monetary value that you own at a given moment in time. In the context of life insurance, an asset refers to something that can benefit you financially while you are alive.

Term life insurance, which only pays out to your dependents in the event of your death, is not considered an asset. Whole life insurance, on the other hand, is considered an asset because it accumulates a cash value that the owner can access while they are alive. This cash value is also considered an asset in divorce proceedings or mortgage underwriting.

The death benefit of a term life insurance policy is not an asset because it cannot be accessed by the policyholder during their lifetime. However, proceeds from a term life policy might become an asset if the policy is sold for a profit or if the beneficiary inherits a large enough amount that it becomes subject to estate or gift tax.

When applying for Medicaid, it is important to consider whether your life insurance policy will be counted as an asset, as this may affect your eligibility for benefits. Most states have an asset limit of $2,000 for Medicaid qualification, and whole life insurance policies with a face value of more than $1,500 are counted towards this limit.

Life insurance proceeds and Medicaid benefits

Impact of Life Insurance on Medicaid Eligibility:

The type of life insurance policy and its value can influence eligibility for Medicaid. Medicaid has strict income limits, and most states require applicants to have less than $2,000 in assets to qualify. Life insurance policies with a cash value component, such as whole life insurance, are considered assets and can affect Medicaid eligibility. However, small whole life insurance policies with a face value of less than $1,500 are typically exempt and won't impact eligibility.

Medicaid's Access to Life Insurance Payouts:

Generally, as long as designated beneficiaries are alive and able to file a claim, Medicaid won't have access to life insurance payouts when the policyholder passes away. However, through the Medicaid Estate Recovery Program (MERP), Medicaid may seek repayment from the policy's death benefit under certain conditions. These conditions vary by state but usually include situations where the insured received long-term care, has no living spouse or dependent children, and the death benefit was paid to their estate rather than a designated beneficiary.

Strategies to Navigate Life Insurance and Medicaid:

If you have a life insurance policy that may disqualify you from Medicaid, there are several strategies to consider:

• Surrender the Policy: You can surrender the policy and spend down the cash value to stay within the asset limit for Medicaid eligibility.
• Transfer Ownership: Transfer ownership of the policy to your spouse, a special needs trust, or a funeral home to utilize it for exempt assets, such as funeral expenses.
• Take Out a Loan: Taking out a loan on the cash value can reduce the overall value while keeping the policy in place.
• Consult an Attorney: Before making any decisions, it's advisable to consult an elder law attorney who can provide personalized advice based on your specific circumstances and state regulations.

Medicaid estate recovery

The recovery of these costs has been criticised for several reasons, including that it primarily affects individuals with low incomes, raises little revenue, and is applied unevenly across states. In response, there have been proposals to modify or eliminate estate recovery by both Democrats and Republicans, as well as the Medicaid and CHIP Payment and Access Commission (MACPAC).

The impact of Medicaid Estate Recovery can be significant, as it may result in the family home being repossessed after the enrollee's death. However, there are circumstances under which states may not recover from the estate of a deceased enrollee. These include cases where the enrollee is survived by a spouse, a child under the age of 21, or a blind or disabled child of any age. States are also required to waive estate recovery when it would cause undue hardship, although the specific procedures for this vary.

It is important to note that the rules and policies regarding Medicaid Estate Recovery differ from state to state, and it is recommended to consult an elder law attorney for specific advice.

Protecting your life insurance policy proceeds from Medicaid

Life insurance policies can be a crucial consideration when applying for Medicaid. Depending on the type of life insurance and the value of the policy, it can count as an asset and may affect your eligibility for Medicaid benefits.

Term Life Insurance

Term life insurance does not accumulate a cash value and only pays out if the insured person dies within the policy's timeframe. Therefore, it is not considered an asset and will not affect your eligibility for Medicaid.

Whole Life Insurance

On the other hand, whole life insurance accumulates a cash value that the owner can access. This type of policy can count as an asset for Medicaid eligibility purposes. However, small whole life insurance policies with a face value of less than $1,500 are typically exempt from the calculation of assets.

• Choose the right type of life insurance: If you anticipate needing Medicaid benefits in the future, consider purchasing term life insurance instead of whole life insurance. Term life insurance does not accumulate cash value and is, therefore, not considered an asset for Medicaid eligibility.
• Designate beneficiaries wisely: Ensure that your estate is not the beneficiary of your life insurance policy. Instead, list specific individuals whom you wish to receive your life insurance policy proceeds. This way, even if Medicaid tries to recover funds from your estate, your life insurance proceeds will be protected.
• Transfer ownership: Transferring ownership of your life insurance policy to a family member or a special needs trust can also protect the proceeds from Medicaid. However, keep in mind that transferring ownership may trigger a penalty period, impacting your Medicaid eligibility. Consult with an elder law attorney to determine the best strategy for your specific situation.
• Spend down the cash value: If you have a life insurance policy with a significant cash value that may disqualify you from Medicaid, consider surrendering the policy and spending down the cash value. This option should be carefully evaluated, as it may not be suitable for everyone.
• Use it for funeral expenses: If you or your loved one is in poor health and anticipating the need for Medicaid-covered skilled nursing care, consider keeping the life insurance policy to cover funeral costs. Life insurance proceeds intended for funeral expenses are typically exempt from Medicaid recovery.

Frequently asked questions