How Does Life Insurance Policy Ownership Affect Medicaid

Depending on what type of life insurance you have, it may or may not be counted for purposes of qualifying for medicaid. Find out which type counts.

-- By K. Gabriel Heiser, Attorney

In order to qualify for Medicaid coverage of your nursing home stay, your assets cannot exceed $2,000 if you are single, or $101,540 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/$101,540 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. Accordingly, I advise my clients to stay away from this type of product unless and until it has been proven to be effective as advertised.

K. Gabriel Heiser is an attorney with over 25 years experience in elder law and estate planning. Heiser is the author of “How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets,” an annually updated practical guide for the layperson. For more information about this book, visit Medicaid Secrets. Learn how to avoid paying estate taxes on life insurance at life insurance trust.

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