How Life Insurance Affects Medicaid Eligibility and What to Do
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One thing you find in common in most people particularly seniors is buying life insurance. As you know, it is an insurance that requires you pay a certain fee per month or year.
After death, a certain amount of money is paid to your specified beneficiaries as death benefits. This can serve many purposes like taking care of your loved ones when you are gone. It can also help take the burden of funeral expenses off their necks.
However, life insurance can sometimes affect Medicaid eligibility and that depends on the value of life insurance as well as type.
- Understanding Medicaid
- Medicaid Eligibility
- The Types of Life Insurance and What It Means
- Medicaid’s Asset Limit
- Exemption of Death Benefit / Face Value
- Exemption Limit By States – Things You Must Know
- Can Medicaid Take Out Of My Life Insurance Policy?
- Steps to Take If Your Policy Will Disqualify You
- How Medicaid Spend Down Works?
- How an Income Spend Down Works
The program is administered by the state to help low earning adults, seniors, women, and children by providing them with necessary healthcare coverage.
Notwithstanding, Medicaid goes beyond just healthcare when taking a look some other services been offered by the program too depending on states, services like behavioral, autism, dental care, and telemedicine services.
There are certain requirements to be met before you can qualify for Medicaid. First and foremost, for most states in the U.S., your assets must not be above $2,000.
The mistake most people make when counting what make up their asset is that forget about to include life insurance. The thing is subject to the life insurance value and the type; your policy can be included as an asset.
The type of life insurance you subscribe to between the two main types, which are whole life or term life insurance can determine if your life insurance will count as an asset.
For term life insurance policy, you can’t include it as an asset when applying for Medicaid.
However, if it is the whole life insurance policy then it can be included as an asset. That depends on the accumulated cash value available to the owner.
Although the state is the one that controls what to offer under Medicaid services, they must obey federal directives on compulsory benefits. The state and federal government jointly fund the Medicaid programs under the state government.
To qualify for Medicaid is not as simple as it appears. The eligibility criteria are split into two by the Affordable Care Act.
- MAGI- Modified Adjusted Gross Income category.
- Non-MAGI- those who don’t fall under the MAGI category.
The Types of Life Insurance and What It Means
We have different types of insurance and they affect your eligibility for Medicaid differently.
Generally, as mentioned earlier, the two main types of life insurance policies that are subscribed to are the whole and term life insurance policies.
Of the two types, only whole life insurance is counted among your assets to determine your eligibility. We take a look at both types of life insurance and they differ in terms of Medicaid eligibility.
The term life only offers limited coverage for life insurance and this could be just a year or as much as thirty years until the insurance policy finishes. The death benefit will only be paid if the insured dies within the specified coverage of the policy.
However, if the policy lapses before the insured dies then no death benefit will be paid out to the listed beneficiaries. For this reason and more, there is no option for accumulated cash value under a term life policy. That implies that you can’t cash out your policy and it holds no value to the insured. For this reason, term life is not considered an asset under Medicaid eligibility.
What is different about the whole life policy is that the coverage is not limited instead it covers the policyholder’s entire life. As such, it will release the death benefits to the listed beneficiaries when the insured dies.
Under the whole life insurance policy, there is accumulated a cash value that the insured can borrow against. In some cases, the policyholder may decide to cash out the life insurance policy, which will end the policy. For this reason, the whole life insurance policy is counted as an asset for Medicaid eligibility.
However, that doesn’t mean you still can’t qualify with whole life. The policy is overlooked up to a specific face value under the Medicaid asset limit thou the face value changes based on the state.
Consequently, the amount of the face value of your policy will determine if you qualify for Medicaid under the whole life insurance policy.
Medicaid’s Asset Limit
Mostly, seniors need Medicaid assistance for long term care; however, to qualify you must meet financial and functional requirements.
For this reason, you must know the Medicaid asset limit pertaining to each state. For instance, New York has an asset limit of $15,150 while Connecticut has $1,600 as its asset limit per applicant.
Generally, the asset limit you will find in most states of the federation is $2,000 per applicant.
However, you should know that not all assets are counted under the Medicaid asset limit. For instance, your house, personal belongings, and the vehicle don’t count.
Exemption of Death Benefit / Face Value
Earlier, we talk about the whole life insurance policy exempted up to certain face value. In most states, this falls around $1,500. Nevertheless, certain states could allow more than that. For example, states like Carolina exempt about $10,000 and Florida could reach $2,500.
Therefore, if the face value (death benefit) of your whole life plan is over the limit set in your state the cash value of the policy is counted as an asset. However, when the face value is below the limit set then the policy is not counted.
For example, if John lives in Ohio that has a face value limit of $1,500 and John has a whole life policy with a face value of $1,100 and a cash surrender value of $400. In this case, the life insurance plan of John is exempted from Medicaid’s asset limit.
On the other hand, if Victor lives in Florida with a face value limit of $2,500 and Victor has a whole life policy with a face value of $1,200 and a $400 cash value. At the same time, he owns a second policy that has a $1,700 face value with an $800 cash value.
Together, the face value of both policies will be $2,900, which is above the exempted limit. So, the cash value of both policies, which is $1,200 will not be exempted.
Exemption Limit By States – Things You Must Know
Now you know as a whole life policyholder, the face value exemption is what can count against your Medicaid eligibility if you pass the limit set in each state. Almost every state utilizes a face value limit.
However, states like Missouri are different in the sense that what it uses is not face value exemption rather cash surrender value (your cash out value). Nevertheless, similar to other states, the limit stands at $1,500.
It worth noting that we have states like Pennsylvania, which permits partial exemptions if the applicants for Medicaid have passed the limit. It permits the omission of cash value worth $1,000 when the policyholder has already passed the $1,500 face value exemption limit.
Additionally, a lot of states permit exemption for many smaller life insurance policies provided the face value of all the policy combined does not pass the exemption limit. Notwithstanding, some states like Missouri does not permit exemption for more than one whole life policy.
In certain states, there are also guidelines concerning people that have both life insurance as well as burial account. For example, in states like Illinois, it permits $1,500 for life insurance cash value or the same amount in a burial plan.
States like Georgia will permit applicants up to $10,000 in burial plan and any face value will be combined to the burial exemption limit. That is when you reach the burial exemption limit of $10,000, every cash value that remains will not be exempted.
States like Missouri will limit you to only one of either whole life insurance exemption or burial account exemption. You can’t have an exemption for both.
Be advised that it can become complicated, how every state conducts Medicaid eligibility and life insurance. So, if you have a whole life plan, it is advisable to seek the advice of an expert in Medicaid.
Can Medicaid Take Out Of My Life Insurance Policy?
You can’t lose your life insurance to Medicaid while you are alive. Nevertheless, depending on your life insurance policy face value, it may affect your Medicaid eligibility.
However, when someone dies, it is possible for Medicaid to take a part of your life insurance provided you are 55 years and above.
That is if you list your estate as your beneficiary in your life insurance and you are a recipient of Medicaid. Then a part of your death benefit may go back to Medicaid to pay back the bills it settled for your long-term care in a process known as Medicaid estate recovery.
So, if Medicaid was responsible for your bills when in an assisted living home. The program will need you to refund those costs from your estate. It can as well attempt to get back money spent on other bills like prescriptions and medical bills from your estate.
It is worth noting that it is better to include the specific name of your policy beneficiary instead of putting in your estate. This is to help prevent Medicaid from taking out of your death benefit in most of the states.
Steps to Take If Your Policy Will Disqualify You
In a situation when your life insurance could make you ineligible for Medicaid, there are many steps you can take to fix that.
In other words, if you have life insurance that will place well above the exempt limit. That doesn’t mean that you still can’t be eligible for Medicaid.
Instead, what you need to do is to make strategic planning appropriately so as not to pass the Medicaid’s asset limit. The common belief is that allowing a life insurance policy to expire by not paying the monthly premium is the only choice. However, we have some other generally utilized methods too.
However, care must be taken when using these planning methods to become eligible for Medicaid without giving up your life insurance. You must be careful so as not to fall foul of the Medicaid’s look-back rule.
It is the time in which Medicaid takes a look into every former transfer to make sure you don’t sell or gift assets below a fair market price and if found guilty, you may be rendered ineligible for a certain period.
Cash Out the Life Insurance Policy
You can simply cash out the life insurance policy by collecting the cash value, which effectively terminates the policy. You can utilize the cash value until you meet the Medicaid exemption limit in your state.
For example, seniors can use the cash to settle bills incurred by long-term care, make adjustments in the house to make it comfortable for a senior. You can also be used to settle debts.
However, this method means ending your life insurance, which translates to no death benefit for your beneficiaries.
Borrowing a Loan using the Cash Value as Collateral
In order to bring the face value and cash value of your life insurance policy down to fall within the limit of the Medicaid’s asset limit. You can borrow a loan against the policy. This keeps your policy going while making you eligible for Medicaid.
However, you should note that this doesn’t the monthly premiums you need to pay. This can later increase your policy cash value and render you ineligible again. Using this method means you have to monitor your cash value constantly.
Transfer the Life Insurance Policy
It is possible to transfer the policy to a spouse that not is in need of Medicaid. The spouse acquires the cash value of the policy, which will now count as part of the spouse resource allowance.
This frees the applicant to meet Medicaid eligibility. Another way to transfer the life insurance policy is to have it transferred to a chosen funeral home as a non-cancellable burial account. This doesn’t count as an asset under Medicaid.
However, it is worth noting that the transfer of the policy to your adult child is termed a gift, which violates Medicaid’s look-back rule. That can render you ineligible for Medicaid if found guilty.
Sell the Policy
The policyholder is what is most important when talking about Medicaid eligibility and life insurance.
So, for someone applying for Medicaid and has life insurance, such a person can have a relative like cousins or friends buy the life insurance to keep the policy alive. The person pays you the cash surrender value and continues paying the monthly premiums.
You can also opt for life settlement as another way of selling your life insurance. This method means you sell life insurance to a third party to keep the policy alive. Such a person becomes the beneficiary and continues to pay the monthly premiums. Mostly, seniors embrace this method when their life expectancy is below twenty years.
Bear in mind, the money you get from offering your policy up for sale will likely place you above the Medicaid’s asset limit. That means you will have to spend part of it to bring down your asset to within the limit, this is a process called Medicaid Spend Down.
One of the ways of bringing down the money to within the limit is to spend it on assets that can’t be counted as assets. For example, paying medical bills, home rehabilitation, long term care, personal belongings, and so on.
Another way is to covert the policy to LifeCare Assurance, which is also known as a long-term care benefit plan.
In other words, you sell your policy to get long-term-care services during which services like in-home care or assisted living will be covered. Then when this period lapses, you can then file an application for Medicaid.
How Medicaid Spend Down Works?
If after choosing one of the mentioned strategies above to qualify for Medicaid especially if you selling your life insurance. You could find yourself way above the limit of the Medicaid limit. The thing to do is to spend down your assets.
Medicaid spend-down is a way of spending part of your income or asset to bring it down to the limit allowed for Medicaid eligibility.
As we already mentioned, every state has different eligibility criteria, which also affect the way you spend down. Understanding the limitations and eligibility criteria can help you plan your spend-down strategy.
The Rules, Exemptions, and Limits of a Medicaid Spend Down
If you have life insurance that will put you beyond Medicaid’s limit, you will need to carry out an asset or income spend down. You can spend part of it on settling debt like a mortgage, credit card, and medical bills.
After which you can now apply for Medicaid once you meet the limit. You either do an asset spend down, income down or both.
How an Income Spend Down Works
For example, if a senior rake in $900 per month in Social Security, however, the income limit for Medicaid in the state he or she resides is $500. That means such a person will have to do a $300 spend down before he or she can be considered for Medicaid.
It can be a complicated or easy thing to do base on your medical costs. In a situation where you are indebted to a hospital in the tune of thousands then you could pay $300 per month until you have cleared the debt.
This will form part of your spend down. On the other hand, you could spend down on periodic visitation to the hospital or monthly drugs.
How an Asset Spend Down Works
In the case of asset spend down; you will look at the limit set by your state for Medicaid’s asset limit. You will have to spend down on all non-exempted assets like cash at hand, money in your bank accounts, stocks, vacation or rental houses, etc. to reach the eligible limit.
Your exempted asset like personal house and belongings or vehicles doesn’t count as an asset under Medicaid.
How to Calculate the Spend Down Amount
You make your calculation based on your financial standing and work with the limit set by your state in which you reside. You can also seek the assistance of an expert in Medicaid planning.
To know the actual amount you need to spend down can be tricky. The asset limit for individuals, married couples, or one spouse varies per state. Even thou the state asset limit is easy to calculate, the way each state calculates the countable asset a healthy spouse can have varies. That even makes the calculation more complex.
As mentioned above, Medicaid planning can be a very complicated process. The requirements to become eligible differ per state and just a little mistake could result in detrimental results over a long-term period.
It is advisable to consult an expert lawyer in Medicaid in your vicinity and plan your spend-down methods before laying off your assets or applying for Medicaid.
Seeking the help of a Medicaid planner will certainly make things lot easier if you find the calculation too tricky and you don’t want to end up ineligible. That is considering the fact that spending down in each state could have different interpretations.
You can’t embark on a guessing game when it comes to choosing the strategy that will work you instead you need meticulous planning to ensure you get the best of both Medicaid and life insurance.
All in all, knowing the implication of having a life insurance policy and how they affect Medicaid eligibility, then knowing what to do can save you a lot of headaches when planning your Medicaid spend-down.
As well as avoiding some of the pitfalls that can render you ineligible for Medicaid assistance that you desperately need for your senior years.