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Can Medicaid Recipients Own Life Insurance?

— June 8, 2020

Of course, consult your attorney to determine which strategy is best-suited for your individual needs prior to taking any action with a life insurance policy.

As a licensed insurance agent helping low-income seniors with life insurance, I speak with many seniors receiving Medicaid to offset medical expenses.

Since the government provides Medicaid on a means-tested basis, many seniors wonder how life insurance ownership impacts Medicaid eligibility.

In this article, I detail how seniors on Medicaid may own life insurance without putting Medicaid benefits at risk.

Also, I’ll discuss types of life insurance policies best-suited for Medicaid recipients, in addition to describing how to avoid violating a Medicaid means test.

Can Medicaid Recipients Own Life Insurance?

In short, yes.

Seniors receiving Medicaid may own life insurance coverage.

However, things get tricky regarding two factors:

  1. What type of life insurance policy is allowable on Medicaid, and,
  2. How does cash value affect means-testing for Medicaid?

Types of Life Insurance

Most senior Medicaid recipients decide to purchase life insurance or burial insurance to cover final expenses like funeral and cremation costs.

To cover those final arrangements, seniors have two choices: whole life insurance or term life insurance.

Whole life insurance is permanent coverage. It does not cancel at any age as long as premium payments are made in a timely fashion.

Image of a funeral ceremony
Image of a funeral ceremony; image courtesy of Rhodi Alers de Lopez via Unsplash,

Term life insurance is temporary coverage. Term coverage cancels at a future date, with many popular plans cancelling at age 80.

Since death is guaranteed, seniors prefer whole life coverage to pay final expenses, no matter at what age they pass away.

And, the good news is Medicaid does not restrict whole life ownership.

However, the bad news is Medicaid treats a whole life’s cash surrender value as a “cash equivalent” in its means test.

This means if your policy’s cash value is too high, Medicaid may restrict or eliminate benefits.

How to Work Around Cash Value Means Testing

Is there a way to work around Medicaid’s cash value means test?

Thankfully, yes.

First, let’s describe how Medicaid means-tests for better clarity.

Medicaid restricts the recipient’s asset value to $2,000 or less to qualify for Medicaid. Since a policy’s cash value is a cash-equivalent, that is also counted as an asset.

Luckily, there are several ways to bypass the cash value concern.

Option #1: $1,500 or Less In Coverage

A Medicaid recipient’s first option is to own whole life insurance coverage with a face amount of $1,500 or less.

As long as the face amount is $1,500 or less, Medicaid does not consider its cash value in means-testing.

So, if you’re a senior looking for cremation coverage, a $1,500 policy will cover most no-frills “direct cremations” in many parts of the country.

Option #2: Purchasing More Than $1,500 in Life Insurance

What if the Medicaid recipient wants more than $1,500 in whole life insurance coverage to cover a traditional funeral and burial service?

With average funeral costs nearing $10,000, it is likely you’ll need more than $1,500 in life insurance coverage to pay for a funeral service.

Thankfully, Medicaid places no restrictions on the amount of coverage you own. So, if you want more than $1,500 in coverage, that’s fine.

Where Medicaid becomes concerned is when the cash value and other assets are in excess of the $2,000 asset means test.

However, cash value in a life insurance plan purchased in your senior years accumulates slowly.

While I cannot say for certain in your specific case, life insurance cases I’ve written take five to ten years before the policy carries a sizable-enough cash value to warrant concern regarding violating a Medicaid means-test.

What happens if your cash value grows large enough to exceed Medicaid’s asset means test?

You have a few options to consider.

You can spend down the cash value. 

Simply call the insurance company, request a cash value loan on the policy, and spend the money on whatever you desire. 

This reduces the life insurance policy’s asset value, and may help you stay under the Medicaid means test.

Assignment of ownership to family. 

When you take out life insurance, you can assign ownership of the policy to a loved one. 

Assignment of ownership transfers the cash surrender asset value to your loved one, meaning it is not considered in means testing. 

Assigning a different owner other than yourself does not affect life insurance payout.

Transfer of ownership to the funeral home. 

You can take out a life insurance policy and transfer ownership to the funeral home of your choice. Doing so makes your policy exempt from Medicaid means testing.

Surrender the policy.  

You can choose to surrender the life insurance policy in the future and spend down the cash value surrender amount to avoid Medicaid means testing.

Of course, consult your attorney to determine which strategy is best-suited for your individual needs prior to taking any action with a life insurance policy.

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