You did the right thing. You purchased a final expense insurance policy to take care of your burial expenses and leave some money to your spouse or surviving heirs upon your death. And, you feel good about the decision. It is a good one: you don’t want them to worry about paying for a funeral while grieving. Of course, you want to leave a legacy for your family as well.
Several years later, you enter a nursing home. It was a surprise, because you were very healthy. Your spouse and your family spend assets to pay for your care. After spending a significant amount on nursing home costs, your spouse and children decide your assets have reached a limit where Medicaid will start to pay. Per state Medicaid law, you are required to list your remaining assets on the Medicaid application. A few weeks later, your spouse and children receive notice from Medicaid. Expecting for an approval, they are shocked when they learn the application is denied. The cash value in your final expense insurance policy will have to be used to pay for your nursing home care before Medicaid will pay. As a result, your spouse and children become very concerned, wondering what they will do now to pay for your burial expenses.
An All-Too-Common Situation
This can be an all-too-common situation. You have good intentions and purchase a final expense insurance policy to pay for your burial expenses. What you did not realize is that the cash value is taken to pay for your nursing home care before Medicaid will pay. In fact, cash value from any life insurance policy can be taken to pay for nursing home care. This is state Medicaid law: generally, any asset in your name can be used to pay for nursing home expenses. Assets include the cash value in a life insurance policy. Many people do not realize this until it is too late.
The process of using your assets to pay for nursing home care is called Medicaid spend down. Medicaid will pay for care once your assets are “spent down” to a certain state level. Every state has different asset levels. Generally speaking, though, the level is $2,000 of assets. Once this level has been attained, you will be eligible for Medicaid. We know; that practically leaves you destitute. You worked hard for your money. Now it is gone.
That means the CD you bought, the savings accounts – those all could be subject to Medicaid spend down. Social security checks and certainly your retirement savings, too. In some states, the equity in your home can be subject to the Medicaid spend down process, too. There are higher asset provisions for the non-custodial spouse. For instance, some states allow the non-custodial spouse to have between $100,000 and $150,000 in assets.
Ways To Protect Your Assets From Nursing Home Costs
There are ways to legally prevent the nursing home using the assets you worked so long and hard for nursing home services. The first is a traditional long-term care (LTC) insurance policy. We at My Family Life Insurance believe a traditional LTC policy can be one of the best ways to protect your assets from nursing home costs; however, two dilemmas face consumers:
- the high premium expense
- the perceived notion of paying for insurance you won’t use
While we believe many people will need some long-term care in the future, people just don’t want to pay for this type of insurance. Fortunately, there is another type of LTC policy which can help.
The second way is a hybrid LTC insurance policy. In this option, an LTC insurance policy is attached to a life insurance policy or an annuity. While we won’t go into the details (you can find out more here on our page), these can be a solid option as they avoid the “use it or lose it” notion as with a traditional LTC policy. However, they can lack several of the advantages of a traditional LTC policy. As mentioned, you can learn more through our link.
Do This Instead – What Is A Funeral Trust?
An easy way to avoid the Medicaid spend down process is using a funeral trust. Every state allows a maximum amount of money to be contributed to this particular trust (up to $15,000, depending on the state). A funeral trust is simply an irrevocable trust funded with a life insurance policy. In our opinion, a funeral trust is really the simplest way to protect a sum of assets away from nursing home expenses. If you have saved for your burial – or thinking about it now – you already earmarked money anyway. Essentially, you “spent them away”. A funeral trust will officially protect the money, ensuring the money is protected and your surviving family won’t have to pay out of pocket.
The Advantages Of A Funeral Trust
The trust itself and life insurance are very easy to set up. Here are the advantages:
- the trust is easy to set up – a two-page application
- no cost for trust; it is free
- the trust can be used at any funeral home
- the peace of mind that everything is taken care of
- avoid probate
- money to the funeral home within 48 hrs
- avoids 5 yr lookback – immediate exclusion from Medicaid spend down process. This can be extremely useful in “crisis” situations
The Disadvantages Of A Funeral Trust
While we believe the advantages outweigh the disadvantages, the disadvantages are:
- the trust is irrevocable, which means once it is set, it can’t be changed. You can’t access the cash value of the life insurance. Therefore, you can’t change the particulars.
- the money is paid directly to the funeral home. Any excess money is paid back to your estate. As a result, the excess could go through the probate process
What Expenses Are Paid By A Funeral Trust
Many. Including, but not limited to:
- Funeral Home Services
- Funeral Service
- Memorial Service
- Graveside Service
- Death Certificates
- Stationery Packages
- Open/Closed Casket
- Burial Container
- Transportation Equipment & Driver
- Transfer of Deceased
- Cemetary Charges
- Utility/Service Vehicles
Back To The Example
Recall that one of the benefits of a funeral trust is the immediate exclusion from the Medicaid spend down process. In our example, the spouse and family can apply for the funeral trust, even if the spouse is in the nursing home. The family could transfer the cash value of the existing final expense insurance policy to the funeral trust. Once established, the money is protected from nursing home costs.
What Assets Can Be Used To Fund The Trust?
Several types of assets can be used to fund the trust. These assets include: CDs, savings accounts, non-qualified brokerage accounts, cash value from existing life insurance policies (such as a final expense insurance policy). Really, any asset you own could be used to fund the trust. Therefore, it makes sense to
What Is An Estate Planning Trust?
Let’s say you have more assets that you want to protect. For example, you want to leave money to your children, grandchildren, or a charity. You can establish an estate planning trust. The estate planning trust expands the maximum protection, up to $100,000 in most states. The estate planning trust contains similar advantages and disadvantages as a funeral trust. The one big difference: the 5 year Medicaid look-back provision must be met. If not, you could face a penalty or delay of payment by Medicaid for nursing home care.
If you need a full estate planning review, we always recommend that you speak to a qualified attorney specializing in elder law care.
In conclusion, we believe a funeral trust can be a solid foundation to protect assets from nursing home costs. If you would like to learn more, or any of the other alternatives such as a traditional long-term care insurance policy or a hybrid policy, feel free to reach out to us. We can also facilitate a discussion with a qualified attorney who can speak to you in more detail about Medicaid and irrevocable trusts. What are we saying: simply, we, at My Family Life Insurance, are here for you and your family. We know how important money and protection is. We work in your best interest always and have helped many families develop and establish the protection they need to have peace of mind. Feel free to contact us to request a quote or find out more information. We are happy to help you with your specific situation.