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By Gail Glockhoff-Long
GolderCare Solutions
Benefits Advocate

Life Insurance and Medicaid—Do I have to Cash It Out?

We hear the question all the time – I was told I have to cash-out my life insurance to qualify for Medicaid – is that true? The answer is Maybe – It depends.

The Medicaid basic is you can only have a limited amount of assets ($2,000 Iowa side / $17,500 Illinois side) in your name to qualify for Nursing Home Medicaid. Assets include anything of value including vehicles beyond the one exempt, properties beyond the exempt residence, bank accounts, investments, annuities, the cash value of life insurance, and odd things like extra cemetery plots. Your home and one vehicle are considered exempt from the asset calculation. However, once you sell your home, the sale proceeds are then money and an asset. The value of life insurance is based on the cash value, minus any outstanding loans, minus any surrender charges, plus any dividends equals the surrender value.

Let’s look at a few cases to see what we have to do with life insurance to qualify for nursing home Medicaid.

• Roy has a Term Life policy for $30,000.  It has no cash value and thus does not need to be surrendered.  He will want to make sure the beneficiary is a person and not his estate.  He may also want to transfer the ownership to his wife Mary (exempt transfer and allowed for Medicaid).
• Frank has a $5,000 Term Life policy from his employer and listed his wife Joan as beneficiary. It has no cash value and does not need to be surrendered. However, Frank was widowed years ago and never updated his beneficiary. If he does nothing, there is no living beneficiary so the $5000 will go into Frank’s estate and to the state as part of estate recovery. If he updates his beneficiary, the death benefit could go to his daughter that will be planning his funeral.
• Mike has $75,000 of Whole Life Insurance that has built cash value and also has value from dividends. The surrender value was about $23,000. Surrendering the policy would mean giving up $52,000 that his wife could use after his death.  Mike could transfer the ownership to his wife and not have to surrender the policy. Transfers between spouses is allowed. Mike’s wife was able to claim the full $75,000 death benefit when he died a couple years later.
• Beverly owned a life insurance policy on herself but also owns policies on her 3 children and 4 grandchildren. All 8 policies will count against Beverly as assets if she does no planning. DHS looks at who owns the policy and not whose life is insured. If the policies have cash value and Beverly just gives them to her children, the cash value of the policies would be considered a gift and count against Beverly when she applies for Medicaid. She will need to plan around a potential penalty period. Beverly will need to do some serious planning to minimize penalties on her generosity.
• Julia was single and had a $20,000 whole life policy with a $12,000 cash value.  She wanted to prepay a funeral. She also wanted to transfer ownership of the insurance to a sibling since she would not have enough funds to pay the ongoing premiums. In this scenario, a maximum loan of $11,866 was taken out and the funds used for the prepaid funeral. The sibling bought the policy for the new cash value of $134 (value after the loan). This is a DHS allowable transaction because $134 was paid for a product currently valued at $134.  The beneficiary was changed to the sibling new owner. The sibling paid the premiums going forward. Julia no longer owned the life insurance, so it did not count as an asset at time of applying for Medicaid.
• Jackie owned a whole life policy with a total death benefit of $13,200. The surrender value is $12,950. In this case, it is easiest to just surrender the policy and use the funds for a pre-paid funeral or some other reason. The death benefit and surrender value are almost the same. The small difference is not worth the time and effort involved in the extra steps of transferring ownership. This would be a surrender case.

As you can see, there are a lot of variables to be considered when life insurance is involved with Medicaid qualification.  You need to know all the insurance options as well as the Medicaid rules.

Now that you have resolved the life insurance issues for your family member in nursing care, remember to take time to look at your own insurance. For a couple, the standard is to name your spouse as the primary beneficiary. If your spouse is on Medicaid and you pass before them, your life insurance proceeds go to your spouse and they are kicked off Medicaid for being over asset. Someone will have to start all over again to qualify them. It happens all too often. Plan ahead. Do not list anyone on Medicaid as a beneficiary of your life insurance.  Take a look at your Will also. You do not want your Will to leave things to the person on Medicaid for the same reason.  That additional asset could disqualify the person from Medicaid that is paying for their nursing home care. Medicaid planning is more than just an application.

GolderCare has been assisting seniors with Medicaid qualification in the Iowa and Illinois since 2008.  You can contact GolderCare at 309-764-2273 or www.goldercare.com.