3 Ways You Can Obtain Life Insurance And Keep Your Medicaid Benefits [We Give You The Answers You Need With Life Insurance Options]

Updated: November 21, 2021 at 8:36 am

Medicaid and life insurance. These together aren’t like peas and carrots. More like oil and water!

You may have heard different information about Medicaid eligibility and life insurance. Frankly, a lot of the stuff you read on the internet is inaccurate.

In this article, we dispel the inaccuracies and tell you what you need to know about how Medicaid works with life insurance. More specifically, we describe how Medicaid/SSI recipients obtain life insurance the right way. We also give you 3 suggestions on life insurance for people on Medicaid.

The quick answer to everything: it really depends on your situation. However, we have helped many Medicaid recipients obtain life insurance, and I am sure we can help you out, too.

It’s important to stress that we are not lawyers and recommend you consult a lawyer in your state for any specific information regarding the laws in your state.
Here is what we will discuss. We start with a discussion about Medicaid and then lead into how Medicaid eligibility affects life insurance ownership.

Let’s start off and discuss Medicaid. Skip ahead if you already have a solid understanding of Medicaid.


What Is Medicaid?

Medicaid is a state-administered program designed to assist and provide low-income adults, children, women, the elderly, and those who are disabled with health coverage.

However, it is more than healthcare coverage. Consider these programs administered by Medicaid (depends on the state):

(1) Autism services

(2) Dental care

(3) Behavioral services

(4) Telemedicine

The states determine the Medicaid services, but must follow mandatory benefits established by the Federal government. The Federal government partly funds the state’s Medicaid programs.

Medicaid Eligibility

Eligibility for Medicaid is not as straightforward as it sounds or should be. The Affordable Care Act, split Medicaid eligibility into 2 groups.

(1) Based on Modified Adjusted Gross Income (MAGI), and

(2) those who are not eligible based on MAGI (ie. Non-MAGI)

Certain individuals fall under the MAGI category. Nursing home eligibility and Medicare beneficiaries under 100% of the federal poverty level fall under the non-MAGI category.

If you are non-MAGI eligible (which is likely), you must meet an income and asset test to qualify for Medicaid.

In 2020, the income test was $2,349 per month and the asset test was $2,000. You may know this level as SSI. SSI, or Supplemental Security Income, is paid in addition to the social security payments you’ll receive from your work credits.

This means if you need government assistance (and nursing home costs paid by Medicaid are considered government assistance), and you have significant assets, you will have to spend down your assets.

Your Assets = Resources

Common Assets

Medicaid calls your assets, “resources”.  Medicaid has a unique list of what is a resource and what is not.

The link shows what assets do not count towards the $2,000 resource limit as well.

What does this all mean if you are non-MAGI eligible?

Here’s an example. Let’s say you have $150,000 in a 401k. You are diagnosed with Alzheimer’s. Your family enrolls you in a nursing home, and they immediately apply for Medicaid to pay. Medicaid says, “Nope. You will need to spend down that $150,000 for us to pay.” This scenario is the infamous “Medicaid spend-down” process.

Of course, this is an easy example. Moreover, there are tax and estate implications without proper planning. These implications are outside the scope of the article. Again, we recommend you speak to a lawyer in your state for answers to specific questions.

Essentially, to qualify for Medicaid, you must be completely destitute, spend-down your assets (if you have any), and really not maintain any assets.

Can you have life insurance, though? We discuss that next.


How Does Life Insurance Affect Medicaid Eligibility?

You may be thinking, “How does life insurance play into the Medicaid process?”

Well, this is how. In a few ways:

  • If you are receiving SSI, or
  • You are eligible through other non-MAGI limits, or
  • You need nursing home care

The first is through receiving SSI. Yes, generally speaking, if you receive SSI, you qualify for Medicaid. Additionally, if you are eligible through a non-MAGI requirement. In these cases, any cash-value life insurance is an asset for Medicaid.

The third is if you need nursing home care. If you have not adequatelyto describe overview of Medicaid and life insurance prepared for custodial care, you’ll need Medicaid. In this case, cash-value life insurance is an asset, too.

In terms of life insurance, Medicaid has no problem with your owning life insurance or any other asset in that matter.

The problem becomes in order to qualify for Medicaid (based on non-MAGI), you’ll need to spend down those assets, typically to $2,000, and/or maintain a low income of less than $2,349/month. Anyone should understand that is poverty level.

Medicaid allows you to keep up to $1,500 in cash value in a life insurance policy. Above that, you need to spend down the cash value.

In other words, having a life insurance policy can affect your Medicaid eligibility. We discuss more next.

Can You Get Life Insurance If You Are On Medicaid Or Receiving SSI?

I receive this question a lot, and the short answer is, yes. As mentioned earlier, you can still purchase life insurance if you are on Medicaid and/or receiving SSI.

However, be careful of what you read and hear elsewhere. Many agents will say that Medicaid has no effect on life insurance. On the one hand, this is right. However, on the other hand (and most importantly), Medicaid will disqualify your assistance if you have too much cash value in your life insurance. They’ll essentially say, “Hey, Mrs. Jones. Sure, you can keep your life insurance policy. But, you’ll disqualify yourself from your Medicaid assistance. What do you choose?”  

Is that what you want? Do you want to disqualify yourself from assistance?

Likely not.

Many agents will say, “Mrs. Jones. No need to worry. The cash value grows slowly. You will have nothing to worry about.”

This is false and risky.

In fact, the cash value – remember, this is considered an asset for Medicaid eligibility – can grow rather rapidly.

Check out this real illustration. It is from a conservative carrier. In other words, their cash value typically grows slower than other carriers. Moreover, it is a guaranteed issue life insurance policy. These policies typically have slower cash value growth.

I highlighted an alarming number. In year 7 of the policy, Medicaid will likely disqualify you from aid. So, unless you die before then, you’ll have a tough decision to make.

to show how life insurance cash value affects medicaid

Is this what you want? Probably not. If you get to this point, the agent who wrote you the policy could be long gone or just tell you that you have other options.

That’s unsettling to us. It is why we don’t put our clients in that position to begin with.

Example To Make Clear

Here’s an easy example that illustrates the cash value. Let’s say you have a life insurance policy that contains $55,000 of cash value. That means you will need to spend down $53,500 before Medicaid pays or qualify for other Medicaid programs. (Moreover, this does not assume other spendable assets you have.)

What does this mean for life insurance? In terms of life insurance, this means your policy is essentially ineffective. You’ll have to terminate your life insurance policy. Or, you can utilize some of the recommendations we describe below.

However, that stinks, doesn’t it? You paid into a policy all those years. Now the life insurance is used for something other than its original intention.

What will your loved ones do for your funeral and final expenses? If like most families, they don’t have $10,000 to $20,000 for a funeral, let alone yours.

What do you do? Not to worry. There are solutions. The fact that you are reading this article now shows you can take care of this now.

Now is a good time to discuss the 3 life insurance options that allow you to keep your Medicaid benefits.


3 Ways To Obtain Life Insurance And Keep Your Medicaid Benefits

We’ve briefly discussed Medicaid and eligibility. Medicaid determines eligibility in 2 ways. Medicaid subjects most people to the non-MAGI test which requires spend-down of one’s assets and limited income.

As you can surmise, Medicaid eligibility and the spend-down process subject life insurance policies that have a cash value. These policies include whole life, indexed universal life, universal life, variable life – any permanent type of life insurance with cash value.

So, what are your options, then? Let’s talk about them next.

#1 Term Life Insurance

As we discussed earlier, term life insurance is an option. Since it contains no cash value, it contains no asset value. There’s a problem, however.

A problem?

Yes. If you know term life insurance, you know that premiums are level for a term. After that, most policies allow you to renew the policy each year at a higher rate.

Look at the example below. Let’s say you are a 35-year-old male non-smoker. A $500,000, 30-year term life insurance policy costs a reasonable $866 per year. Look what happens after age 65…

The shape of the premium spend and the increase is similar to that of a hockey stick! Can you pay that amount after the term ends?

Sure, you may not need $500,000, but you may need some amount of life insurance. Do you want to keep paying a higher amount each year?

No! So, you cancel the policy. Most people do after the term ends. But, you are still alive. What happens when you die after you cancel your policy?

That’s right. Your loved ones get $0.

That’s the problem with term life insurance. It is not ideal for permanent life insurance needs like burial and funeral needs, estate planning, debt payments, transfer situations, etc.

HOWEVER…There Is An Option

We do work with a term life insurance policy that most people on Medicaid/SSI qualify for. Depending on your age, you can purchase up to $150,000 of death benefit.

The great part: it exists for life and your premiums DO NOT go up.

How is that, John, you ask? You just said that term life insurance has level premiums for a term, then increase. Most people can’t afford the increase, so they cancel.

Yes. That is with a traditional term life insurance policy.

What happens with this life insurance is that after the level term, say 20 years, the death benefit reduces 50%. Let’s say you have a 20-year term, $50,000 death benefit, which costs $50 per month. In year 21, the policy death benefit drops to $25,000; however, you still pay $50 per month. As long as you continue to pay the premiums, your beneficiary receives the death benefit.

Here’s more good news: while there is an underwriting process, most people qualify for this term life insurance.

Contact us if you have any questions about the term option. If you have specific questions about the laws in your state and eligibility, please contact a lawyer in your state.

#2 Whole Life Insurance…If Structured The Right Way

Whole life insurance is an option.

John. You just said whole life has a negative impact on my Medicaid eligibility!

Yes, that is right. However, a simple solution to this is to have someone else notto show the 3 life insurance options for people on medicaid on Medicaid own the policy. Say a son, daughter, or brother or sister.

Remember, Medicaid looks at ownership. If someone else owns a policy on you, they own the policy. Not you.

The problem is ownership. Most people own their life insurance policies outright. If they need Medicaid, their whole life insurance is subject to the spend-down process.

Now, this is where you should contact a qualified lawyer in your state. However, we discuss a general overview here.

If someone else owns the policy, then that scenario usually keeps you eligible for your Medicaid assistance. Again, speak with a lawyer for specific questions about your state or situation.

As we stated, the issue is ownership. On the life insurance policy, you will be the insured, and someone else will be the owner.

Now, not anyone can be the owner. Typically, an owner should be a trusted loved one like a son or daughter or a sibling.

Carriers look at insurable interest connections for beneficiaries. Insurable interest means the beneficiary will be negatively impacted upon your death. This means the beneficiary should be a loved one, relative, or even a business associate. Death impacts these relationships.

Insurable interest also affects ownership. Most carriers do not allow a stranger to own the policy or some distant relative with no love or business connection.

As long as the owner is not on Medicaid his or herself, then having a loved one own the policy is no problem. Again, please reach out to a lawyer in your state regarding any specific state laws.

#3 What Is  A Funeral Trust?

To solve the Medicaid and life insurance problem, a funeral trust works nicely.

Just as it sounds, it is a trust.

Two popular types of trusts exist. One type of trust allows you to maintain control of the assets in the trust. Because of this control, Medicaid and creditors could legally force you to use the trust value (the life insurance and any other assets) inside the trust to pay off debts, etc, including nursing home costs. These are called revocable trusts.

This isn’t the type of trust used for a funeral trust.

The other type is called an irrevocable trust. A funeral trust is irrevocable. This means the trust protects the trust value from Medicaid, creditors, etc. They can’t get at it, touch it, or force you to use it.

Conversely, neither can you.

Once the money is in there, it’s in there. You can’t borrow from it, you can’t change it, nothing…

But, why would you want to change it? The purpose of the Funeral Trust is to prevent Medicaid or the nursing home to use the cash from your current life insurance policy and other assets.

From that standpoint, the funeral trust serves its purpose and rather nicely.

Just as it sounds, the money pays out for your funeral or burial expenses.

There are no “look-back” provisions, either, with the Funeral Trusts

Most states allow up to $15,000 transferred into the funeral trust.

If that doesn’t seem like much, then there is the Estate Planning Trust.

Estate Planning Trust

As we stated, a funeral trust has no look-back provision. With asset transfers and Medicaid, currently, asset transfers within 5 years of entering into a nursing home are subject to penalties.

discuss differences for life insurance options people on Medicaid

With a funeral trust, once the money is there, the money is protected day 1.

How great is that?

However, what if you want to fund more money above your state’s maximum? Or, what if your state does not allow a funeral trust?

Good news. An Estate Planning Trust exists. It operates similarly to a funeral trust. Same protections. The difference?

  • you can fund up to $100,000 in combination with the funeral trust
  • 5 year Medicaid look-back exists
  • money left over from your funeral goes to your beneficiaries, not your gross estate

Like the funeral trust, this is irrevocable. Once it is done, it is done. But, think back what we said. What are we protecting here? Your life insurance and other assets from Medicaid. If you have money set aside for your children, say in a brokerage account, the money is subject to the Medicaid spend-down process. Remember, life insurance is subject to the Medicaid spend-down process as well, unless you transfer into a funeral trust.

The Estate Planning Trust works the same way. The cost of the trust is free. You just need to be aware of the 5 -year Medicaid look back for nursing home spend-down.


How Does Receiving A Death Benefit Affect Your Medicaid Eligibility?

People ask us about the impact of receiving a life insurance death benefit. How does that death benefit impact a person who receives Medicaid?

Again, I am not a lawyer, and I recommend you speak to a reputable lawyer in your state for specifics.

However, usually, if you are on Medicaid and receive a death benefit, that death benefit amount is considered income. Depending on the laws in your state, receiving that income will negatively impact your Medicaid eligibility and cancel your benefits. The death benefit is not taxable to you, but likely is reportable to Medicaid.

Again, you need to check the laws of your state and speak to a qualified attorney.

There are ways around this scenario. A trusted loved one could be the beneficiary instead of you. Additionally, a trust could be the beneficiary. The trust could pay income to you as the Medicaid recipient and not impact your assistance. However, check with a lawyer as this topic is beyond the scope of this article.

Moreover, owning the life insurance policy outright doesn’t affect your beneficiaries. In other words, Medicaid can’t go after your beneficiaries for any estate recovery upon receiving the death benefit. The death benefit goes directly to your beneficiary and avoids probate.

However, if your estate is named the beneficiary, then yes, Medicaid could make claim to your death benefit.


Now You Know 3 Life Insurance Options That Don’t Affect Your Medicaid Eligibility

I hope you found this article informative. Yes, you can protect your life insurance from Medicaid, keep your Medicaid benefits, and protect the spend-down process. We discussed several ways you could go about this, including:

  • Term life insurance
  • Whole life structured properly
  • A funeral trust and/or an estate planning trust

Don’t know what to do next? Give us a call, contact us, or use the form below. We would be happy to help you.

As with everything we do, we place your best interests first. That means we won’t recommend a solution if it does not make sense in your situation. Even if there a solution that we can’t provide, we will tell you about it and help you any way we can. This is the only way we know how to work with our clients.

Learn More

Are you interested in learning more about the information in this article? Please fill out the form below, and we will email you additional information or give you a call. We always work in your best interest. By entering your information, you are providing your express consent that My Family Life Insurance may contact you via e-mails, SMS, phone calls, or prerecorded messages at any phone number(s) that you provide, even if the number is a wireless number or on any federal or state do-not-call list. Additionally, you understand that calls may be placed using automated technology, and that consent is not a requirement for purchase. Your information will NOT be sold and will remain private. However, you may opt out at any time. We respect your privacy first and foremost.

Published by

John

I am a CFP® Professional and have an MBA. I founded My Family Life Insurance to provide honest, trustworthy advice and economical insurance solutions to individuals, families, and business owners. Contact me if you have any questions. There is no risk! If I can't help you, you've learned a little more, and we'll part as friends. Seriously! Can your current agent say this?

8 thoughts on “3 Ways You Can Obtain Life Insurance And Keep Your Medicaid Benefits [We Give You The Answers You Need With Life Insurance Options]”

  1. My 86 year old mother is in a nursing home and, other than a $15,000 whole life insurance policy, would qualify for Medicaid.
    She has a pre-paid irrevocable funeral contract, so the funeral trust is not an option.
    Her adult children would like to preserve the life insurance value above the current cash value ($9000).
    One suggestions has been for the adult children to “buy” the policy from her – basically pay her the cash value and transfer ownership to one of them, but how would that need to be done to make Medicaid happy.

    1. Hi Gladys,

      The funeral trust is one, easy way, but your Mom has fulfilled that option already.

      I am not a lawyer, and I suggest you speak to one to obtain the correct guidance for your state. Generally speaking, her adult children could become the owners of the policy, but she has to be of sound mind to do so. Again, I would consult an attorney in this regard so you can follow the rules in your state.

      John

  2. My wife has Alzheimer and is in a memory care facility. I have POA and she has no life insurance at all. She is currently on Medicaid. We get plenty of offers for guaranteed acceptance whole life, no medical exam, no medical questions and structured payout for the first 2 years of the policy. Is it too late to purchase life insurance on her behalf and still get it in an irrevocable trust? There seems to be no sense to get a burial policy if Medicaid is just going to take the proceeds. Is there any way around this so I can at least get funds to bury her? If it helps I’m a 100% disabled Vietnam veteran who does get a free burial plot for my wife.

    1. Hi Don,

      Thanks for reaching out to us. I am sorry to hear this. Life insurance is available. It would be a guaranteed acceptance policy as you said since your wife is in a facility. As we wrote, there is a carrier that has this irrevocable trust now. Availability and the amount you can put into the trust depends on the state you live in. Let us know if you want us to help more. We will send you an email.

      John

  3. My mother has whole life insurance of $8000. She needs to go on Medicaid for long term care. Can Medicaid take the policy if my brother and I are named as beneficiaries…OR..if I as her adult child is on permanent disability?

    1. Hi Deb – Thanks for reaching out to us. I appreciate it. I would suggest speaking to a qualified lawyer who specializes in Medicaid law in your state. But, I can give you a general education. First, yes, they can if your mother needs to qualify for Medicaid. It really depends on the cash value in the policy. Medicaid might say “Hey, before you want us to pay for your Mom’s care, she needs to use that cash value in the policy”. These cases might terminate the policy. If your mom is of sound mind, she could transfer the policy to you as owner.
      However, if your mom passes, Medicaid can’t take life insurance from you or your brother as beneficiaries.
      John

  4. Hi John, My name is Bob and I reside in Illinois. I had stopped working and went on SS (my only source of income) and have used Medicare/Medicaid at/since age 62; I am now 68. I have a $100,000 term life policy with my now ex-wife and two (2) sons as beneficiaries. I have no retirement income but what I receive from SS. Do I have to worry about Medicare or Medicaid coming after that policy? My health, at the present moment, doesn’t dictate that I’ll be having the need of Long term Care provided by the state; however what DHS has picked up/assisted with, has helped tremendously. I don’t own property anymore and my annual income is less than 16k/per year. I would like to leave my family something to help out with their futures. I would appreciate any advise or insights you have . Much appreciation. Thank you in advance for helping.

    1. Hi Bob,
      Thanks for reaching out. I am happy you found our article informative.

      First thing, I am not an estate lawyer, so if you have specific questions about Medicaid, you should contact an elder law attorney in Illinois.

      Generally speaking, Medicaid can’t take the death benefit money on life insurance. Upon your passing, that money goes to your beneficiaries. It is outside of probate. Unless your beneficiaries are on Medicaid or receiving some type of aid which depends on an income/asset resource test, your beneficiaries should receive that money OK.

      If you are looking for more life insurance, likely the only type you will qualify for now is whole life. That contains cash value and can potentially affect your resources if you own the policy. I have heard and read many other agents say it is OK for you to own the policy. In my opinion, it is not. The cash value can increase rapidly and before you know it, the life insurance cash value would be a countable asset for Medicaid. That would seriously disrupt your aid.

      This is why I generally recommend having someone else own the policy (say your sons) provided the person who owns it is not on Medicaid themselves.

      Again, this is a general answer. I am not a lawyer, and I recommend you speak to one if you have specific questions as every state has some nuances when it comes to Medicaid.

      If you’d like to chat about it, I would be happy to and can be reached at (800) 645-9841.

      John

Leave a Reply

Your email address will not be published. Required fields are marked *

 

Copyright © 2022 • My Family Life Insurance | 300 Brickstone Square, Suite 201, Andover, MA 01810 | (800) 645-9841. All rights reserved. • Privacy Policy • Marketing by Vision Advertising