The Impact of Term Life Insurance and Whole Life Insurance on Medicaid Eligibility

It is common for people of all ages, especially elderly individuals, to have a life insurance policy. With this type of insurance, a person generally pays a monthly or yearly premium and upon their death, listed beneficiaries are paid an amount of money (also called a death benefit). While this is a wonderful way to ensure surviving loved ones are financially taken care of following one’s death, life insurance policies, depending on the type of policy and the value of it, may impact one’s eligibility for Medicaid. One’s application to receive public assistance for long-term care, be that at home, in assisted living, or in a nursing home, could be denied if the life insurance policy causes an applicant to have assets greater than Medicaid allows.

Important Terms and Definitions

To differentiate between life insurance policies that do, and do not count, towards Medicaid’s asset limit, it is important to understand the difference between cash value and face value.

Cash Value / Cash Surrender Value
Permanent insurance policies provide coverage for the entirety of one’s life and accumulate a cash value. Policyholders are able to borrow against their policy’s cash value or they can terminate their policy and collect the cash surrender value. When a life insurance policy is terminated, it is called a cash surrender value, as the policyholder receives the cash value minus any applicable surrender (cancellation) fees.

Face Value / Death Benefit
The face value of a life insurance policy is also called the death benefit. This is the amount the insurance company will pay the beneficiaries named on the policy upon the policyholder’s death.

Whole life insurance policies are exempt (not counted) from Medicaid’s asset limit up to a certain total face value of all policies. While most states set an exemption amount of $1,500, some states allow a higher exemption amount.

Types of Life Insurance and Why It Matters

Not all types of life insurance policies impact Medicaid eligibility in the same way. In brief, there are three commonly purchased types of life insurance policies: term life insurance, whole life insurance, and burial insurance.

Term Life

Term life insurance does not impact Medicaid eligibility; it is not counted towards the asset limit. It provides coverage for a limited time, which may be as short as one year and as long as 30 years. If the policyholder dies within the designated coverage period, a death benefit will be paid out to the beneficiaries. If the policyholder does not pass away while the policy is in effect, the policy expires and no benefit is paid out. Term life insurance does not accumulate a cash value, which means the policy cannot be cashed out and has no value to the policyholder. This is why it is exempt from Medicaid’s asset limit.

Whole Life

Whole life insurance can impact Medicaid eligibility. This type of permanent life insurance policy provides coverage for the entirety of a person’s life and pays out a death benefit to the beneficiaries when the policyholder passes away. With whole life insurance policies, a cash value is accrued. This means that policyholders are able to take a loan out against the cash value or “cash out” (terminate) their policy altogether. Since policyholders can take cash from their existing policy, it is not exempt from Medicaid’s asset limit. However, this is not entirely true, as these policies are exempt up to a certain face value, which is state-specific. Depending on the face value of one’s whole life insurance policy, it can cause Medicaid ineligibility.

Burial

Burial insurance, also called final expense insurance or funeral insurance, does not impact Medicaid eligibility. It is a type of whole life insurance policy that covers burial / cremation costs and funeral arrangements. Life insurance that is reserved specifically for burial expenses where the funds can only be used for this purpose is exempt from Medicaid’s asset limit.

Medicaid’s Asset Limit

For a senior to be eligible for long-term care Medicaid, there are functional and financial requirements that must be met. For the purposes of this article, it is important to note that Medicaid has an asset limit, which varies by the state in which one lives. For example, for single applicants, the following states have the following asset limits: New York ($31,175), Illinois ($17,500), New Hampshire ($2,500), and Connecticut ($1,600). Generally speaking, most states have an asset limit of $2,000. California is the only state without an asset limit (eff. 1/1/24). See state-specific asset limits and learn more about Medicaid eligibility.

Some assets are not counted towards the asset limit; they are exempt. This generally includes one’s primary home, household items, a vehicle, and personal items. Furthermore, not all life insurance policies are counted as assets, and those that are countable, are exempt up to a certain cash surrender value.

Can Medicaid Take My Life Insurance Policy?
Medicaid cannot take one’s life insurance policy while they are still living. However, based on the face value of one’s policy, it may be counted towards Medicaid’s asset limit, rendering one ineligible for Medicaid. If one is a Medicaid recipient, and the beneficiary of their life insurance policy is their estate, Medicaid may take the proceeds of the death benefit to recover costs it paid for one’s long-term care. This is called Medicaid Estate Recovery. It is advised one does not put their estate as the beneficiary of their life insurance policy. Rather, the name of the particular beneficiary in which one wants the proceeds to go should be on the policy, protecting the death benefit from Medicaid in the majority of states.

Exemption of Death Benefit / Face Value

Most states have established that whole life insurance policies are exempt up to $1,500 in face value, but some states allow a higher face value exemption. For example, the following states allow the following exemption amounts: Florida ($2,500), Alabama ($5,000), and North Carolina ($10,000).

If a life insurance policyholder has a face value (death benefit) over the exemption amount in the state in which they reside, the cash surrender value of the policy is not exempt from Medicaid’s asset limit. In other words, it will be added to one’s countable assets. Recall that the cash surrender value is the amount the policyholder would receive for “cashing out” their policy. If the face value of the policy is equal to or under the exemption limit, the life insurance policy is exempt (not counted) from Medicaid’s asset limit.

Examples:
Bill lives in Illinois and has a whole life insurance policy that has a face value of $1,200 and a $500 cash surrender value. The exemption amount for whole life insurance policies is $1,500 in Illinois. Therefore, Bill’s life insurance policy is not counted towards Medicaid’s asset limit.

Claudia lives in Texas, a state that allows an exemption of up to $1,500 in whole life insurance policies. She owns one policy that has a face value of $1,000 and a cash surrender value of $300 and a second policy that has a face value of $1,500 and a cash surrender value of $700. The combined face value of the policies equals $2,500, putting Claudia over the allowable exemption amount. The combined cash surrender value of $1,000 will be a countable asset.

Life Insurance Exemption Limits by State

Other Differences by State

While nearly all states use a face value exemption, Missouri is unique in that it instead uses a cash surrender value exemption. The cash surrender value is the amount one would receive if they were to “cash” out their insurance policy. However, like many states, the exemption figure is up to $1,500.

Some states allow for a partial exemption even if Medicaid applicants are over the face value limit. Pennsylvania is one such state, as it allows the exclusion of cash value up to $1,000 if an applicant’s policy has a face value over the exemption amount of $1,500.

Many states allow a face value exemption of several smaller life insurance policies as long as the combined face value of the policies is not greater than the exemption amount for the state in which one resides. However, other states, such as Missouri, allow for the exemption of only one whole life insurance policy.

Some states have rules about a Medicaid applicant having both a burial account and a life insurance policy. For instance, Illinois allows up to $1,500 cash value of a life insurance policy OR up to $1,500 for a prepaid cancellable burial plan. Georgia allows Medicaid applicants to have as much as $10,000 set aside in a burial account. However, the face value total of any life insurance policies is added to the burial exemption amount. If one reaches the burial exemption amount of $10,000, any remaining cash value of insurance policies is counted as an asset. In Missouri, a Medicaid applicant with a prepaid funeral plan cannot have a whole life insurance policy. An applicant can have one or the other.

Caution: The way each state handles life insurance policies and Medicaid eligibility is tricky. It is best to seek the counsel of a Professional Medicaid Planner prior to applying for Medicaid if the applicant has a whole life insurance plan!

What to Do If Your Policy Will Disqualify You

If one has a life insurance policy that may disqualify them from Medicaid, there are several options. Having a policy over the exempt amount does not mean that one cannot qualify for Medicaid. Rather, it means a planning strategy needs to be implemented for one to meet Medicaid’s asset limit. Letting a policy lapse by stopping premium payments is not the only option, there are other commonly used planning techniques.

Would you like to speak with an advisor about how life insurance impacts Medicaid eligibility and what can be done to preserve the policy’s value?