Medicaid is required by law to secure repayment of any payments made to recipients.  One asset often overlooked in estate planning is a life insurance policy.  Many of our clients have asked if Medicaid can use the life insurance as an asset in order to disqualify them from receiving benefits.  The answer to this question, like many others, is it depends on the type of insurance policy.  No lien is placed on your policy in most cases, but you won’t receive benefits until you use up the money in your cash value policy.

Medicaid Planning Significance

Medicaid requires that you spend down your assets, selling them off or spending any cash on hand that you have, to meet certain guidelines before you apply for benefits. This medical assistance program provides funds for low-income individuals. One of the assets that Medicaid looks at is cash-value life insurance policies.  A cash-value life insurance policy which acts as a semi savings account and builds a cash reserve during your lifetime.  Medicaid has set a limit on how much money can be held in a cash-value policy, which if it is greater than $1,500, Medicaid may decline approval of your benefits.

Alternative to cash value policy which still protects your family

Alternatives to cash-value policies include:

1. term life insurance;

2. permanent life insurance, with no or low cash value associated with it — i.e. universal life with secondary guarantees — is unaffected by Medicaid; no lien is placed on the policy to reclaim benefit payments. This means you get to pass your death benefit on to your heirs intact without worrying about whether your beneficiaries will receive the money they need.

3. Life insurance trust.  Another alternative includes placing any type of insurance policy, including cash-value policies, into an irrevocable life insurance trust.  With this alternative you give up total control over the policy. The policy is legally no longer “your” policy, and as such you can’t make changes to the policy, and you can’t reclaim ownership over the policy.  However, Medicaid can’t deny you benefits, as you don’t own the cash value.  You must transfer the policy 60 months prior to applying for Medicaid, however, as Medicaid looks back five years for any assets that were transferred.  Any asset not transferred more than five years ago counts toward your overall assets.

Although the money built up in a cash-value policy may come into use when you need it most, it is a bit of a double edged sword.  Since you can’t accumulate more that $1,500 in your cash -value policy for Medicaid purposes, if you do you must “spend down” the amount in the policy.  When you spend down the cash-value, it may reduces the death benefit by an equal amount. This could leave your spouse or children with less money than you anticipated for their care after you have passed away.

4. Consider transferring the ownership of your policy to another person you trust.  The problem with this plan, is that the other person may change the terms, or beneficiaries of the policy once “they own” your life insurance policy.  Money has a tendency to destroy friends and family relationships.  The same 60 month look-back rule applies for transfer of ownership for Medicaid purposes.

5.  Convert the policy to universal life with secondary guarantees. If you have no one you trust sufficiently to transfer ownership to, you may be able to convert a cash-value policy to a universal life type of policy.  Under a universal life insurance policy, typically it is not meant to build cash value, instead cash values actually diminish, but the policy is guaranteed to keep the death benefit in force.  You may wish to structure the conversion so the cash value runs out prior to your application for Medicaid.  This way, there is no cash value to claim during the application process.

We have skilled attorneys who can help you navigate the quagmire of Medicaid and irrevocable insurance trusts.  Remember, if you are going to set up an irrevocable life insurance trust to keep assets outside your estate, or qualify for Medicaid benefits you must do so at least 60 months prior to applying for Medicaid.  The lawyer will help set up the trust and transfer the life insurance into the trust.