Life Insurance and Medicaid Eligibility

In order to qualify for Medicaid coverage of your nursing home stay, your assets cannot exceed $2,000 if you are single, or $115,920 if you are married. However, not all of your assets are “countable” for these purposes. The biggest exemptions are your home, your car, and your personal property.

Another exemption is life insurance owned by you. The rule states that only the “cash surrender value” of a life insurance policy is countable, but only if the total face value of all life insurance policies on your life exceeds $1,500. (“Cash surrender value” is the amount the life insurance company will send you if you canceled the policy. It’s also known as the “cash value.” The “face value” is what the company would pay out to your beneficiaries if you died, assuming the policy was still in effect.)

So if you have a $1,000 policy with cash value of $800, you can keep it and it will not count towards your $2,000/$106,400 limit.

What if you have a term policy with a face value of $100,000? It’s completely exempt since a term policy by definition has no cash value. Of course, you (or another family member) have to pay the premium each year to keep it in force.

What should you do with existing policies? If you have an existing policy and your health is not good, you may decide to keep the policy rather than cancel it. After all, you may be uninsurable, and if you keep the policy in force, your family members could benefit from the proceeds upon your death.

Assuming the total face values exceed $1,500 and your countable assets put you over the limit to qualify for Medicaid, it could be a good idea to have your children purchase the policy from you and keep it in effect (by paying the annual premiums). You see, it’s not who is insured or who is the beneficiary that matters—it’s who is the owner of the policy. The reasoning for this Medicaid rule is that the owner could simply cash in the policy at any time, and thus it is counted the same as if you already did so. But if your child is the owner, you have no ability to cash in or cancel the policy, so it would no longer count against you.

Another option is to assign the policy to a child, as a gift. This will cause a penalty period so in many cases this is not the best solution. However, as part of an overall plan that includes other gifting, it could make sense.

Recently, some companies have advertised single pay, non-cancelable, no cash value “life insurance.” The idea behind these policies is that if there is no cash value, the policy cannot count against you. They are set up with minimal underwriting (i.e., virtually everyone is guaranteed to qualify to buy one), and the beneficiaries are usually the children.

The problem is that if you purchase an asset over which you have no control—you cannot cancel it, cannot get your money back, cannot even change the terms or the beneficiaries—the Medicaid agency may well deem this to be a gift. If that’s the case, you have not accomplished what you thought you had, i.e., converting cash to a non-countable form, so that you did not have to make a gift of the cash. At the present time (4/13), however, several state Medicaid agencies and at least one state court decision have permitted these arrangements, so in some parts of the country, this technique will indeed work as advertised. What about where you live? As usual, check with an experienced elder law attorney in your area to find out the local rules.

NOTE: For more information on this topic and other Medicaid planning techniques, see my book “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets” (2011 Fifth Edition available here: www.MedicaidSecrets.com).

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Published in: on February 6, 2008 at 7:08 am  Comments (5)  
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  1. My father is in a nursing home and was private pay for the few months while I jumped through hoops to get all the info together for the Medicaid application. I was not POA at the time, so this was a difficult task. He still has a home, which I need to sell. I do hope your info is correct regarding his life insurance. I guess I need to contact Met Life to become owner of his policy and continue paying the premiums so that Medicaid does not take it. I hope I understood this right! I was appointed guardian because the nursing home wanted to get paid the $22,000.00 for the substandard care he has received.

  2. Remember, the cash value is countable if the face value exceeds $1,500, so if your father transfers the policy to you, it will count as a gift for Medicaid purposes and can cause a period of ineligibility depending on its value. It may be possible to borrow against the policy first, then transfer it, since that would reduce the value.

  3. So if I own a policy that has a face value of $25,000 upon death with a cash value accumulated of over 800.00 then I can’t have medicaid. I got medicaid for myself (I’m 38 years old) and without a job, home, or other assets. But I already had this policy out for my mother just in case she died. It’s been in my name for 15 years. I did take out two loans over the past two years (valued at $6K – the loans). The economy killed me and I ‘ve been using these loans till I can get a full-time job. My insurance has been medicaid. Now renewall time arrived and I’m afraid. Did I commit a crime? NY STATE is my place of residence. I’ve been working odd jobs annual income filed in taxes last year was 16K.

    • A single individual can have no more than $2,000 in countable assets if they wish to qualify for Medicaid. If you have a policy with a cash value of $800, then as long as your other countable assets don’t exceed $1,200, you will still be within the $2,000 limit and able to qualify for Medicaid.

      If a person fails to report all of their assets or income to the Medicaid department of their state, and they wind up being granted Medicaid payments based on this false information, they have indeed committed a crime: fraud against the government! This is a serious offense. But as long as you correctly report all of your assets and income, you will never have a problem along these lines.

  4. My uncle lives in North Carolina, and I am his POA. He has had a life insurance policy for many years, with a cash value of over 8K. He is suffering from PSP and is not able to care for himself. Is there a way to change ownership from him to me of his policy and then be eligible for medicaid? He has a debt of over 12K on a house that he used to own that has been transferred to me about two years ago and we need his life insurance to pay off that debt.


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