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.
- What Is Medicaid?
- The Life Insurance Conundrum
- 3 Life Insurance Options That Don’t Impact Aid
- How The Death Benefit Affects Your Aid
- Final Thoughts
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
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.
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
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 adequately 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?
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.
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.
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 not 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.
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.