A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Dan Walker graduated with a BS in Administrative Management in 2005 and has been working in his family’s insurance agency, FCI Agency, for 15 years. He is licensed as an agent to write property and casualty insurance, including home, auto, umbrella, and dwelling fire insurance. He’s also been featured on sites like Reviews.com.

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Reviewed by Daniel Walker
Licensed Car Insurance Agent

UPDATED: Jan 11, 2017

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Don't miss these facts...

  • Under certain circumstances, yes, a life insurance policy may be taken by Medicaid to cover expenses following the death of the Medicaid recipient.
  • However, there are ways to protect the policy beforehand.
  • For most people, a much bigger concern is how life insurance impacts eligibility for Medicaid.
  • These questions are complicated by the fact that Medicaid is a state-run federal program, thus details vary from state to state.
  • For a long list of reasons, you should read up on how life insurance relates to Medicaid well before you think you might need Medicaid.

What is Medicaid?

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Medicaid is a joint federal-state health insurance program. In most states, it is called Medicaid, but three states have renamed it. California calls it Medi-Cal, Massachusetts calls it MassHealth and Tennessee calls it TennCare.

It provides coverage for various categories of needy Americans and sometimes legal immigrants. Although somewhat inaccurate, these categories are generally summed up as low-income children and seniors, plus people with disabilities.

Learn more about Medicaid below and make sure to use our free comparison tool above to compare life insurance rates today!

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The Default Nursing Home Coverage of Middle-Class America

Additionally, Medicaid covers nursing home care for those who qualify. This detail is the one most responsible for making people concerned about how life insurance coverage interacts with Medicaid rules and regulations.

If you are an older middle-class individual and you have been seriously ill long enough that you are now considering a nursing home, Medicaid is probably the insurance program to which you will turn. It has become the default nursing home coverage for the American middle class.

Every year, more than 10 million Americans receive some kind of long term care. According to this white paper, the average annual cost of a nursing home in the U.S. is $72,000. The average annual cost for assisted living is $38,000. The average hourly cost of home health care is $21.

Unsurprisingly, this rate of spending will run through the average person’s entire life savings in the first year. Thus, Medicaid has become the primary source of coverage for long-term care in the U.S.

So, in a nutshell, health care is extremely expensive, nursing home care is even more expensive, and most ordinary people can easily run through all their assets in a short period of time to cover such expenses.

Once their assets are depleted, they will probably turn to Medicaid to assist with the ongoing costs involved in getting proper care for themselves or a loved one.

Medicaid Recovery Rules

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Following the death of a Medicaid recipient, the program not only can but must attempt to recover costs from the estate of the deceased.

According to Medicaid’s official site, the Medicaid programs have to recover a required amount of paid benefits of the insured.

The rule goes on to specify that Medicaid recovery units must seek funds from the individual’s estate for long-term care services, such as nursing homes.

According to the National Elder Law Foundation that life insurance policies that do not have a beneficiary could be the insured’s estate and could be liable to Medicaid Recovery.

With budgetary pressure mounting, Medicaid recovery units are becoming increasingly aggressive. They are making every effort to look for life insurance policy benefits that they may be able to seize.

They are looking for both declared and undeclared policies and they do not hesitate to seek legal remedy in a court of law by suing the survivors.

Medicaid Eligibility

Eligibility for Medicaid is a complicated question. It will hinge on a great many details, starting with your legal status as an American citizen or legal immigrant and going through details such as age, income level, whether you are blind or pregnant and how many countable assets you have.

“Countable assets” is a tricky concept. It isn’t anywhere near as simple as asking your net worth. It will vary depending upon your marital status, the state in which you reside and other factors.

State Details

Because Medicaid is run by each individual state, the details vary by state. Your state of residence will significantly impact the financial details for purposes of eligibility.

You can get some additional information specific to your state by going to this state map, clicking on your state’s name and then clicking on “Key Medicaid Information for (state name)” beneath the map.

You should check that out and, if necessary, print it out to start working out the numbers and wrapping your head around whether or not you might qualify.

The Look Back Period

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The people running the government aren’t dumb. They know that if you need to be poor enough to qualify for a program, some people will arrange to qualify as poor enough. So, Medicaid has what is known as The Look Back Period.

In a nutshell, Medicaid can examine your finances for the entire five years prior to your application.

If it looks to them like you moved assets or divested yourself of assets specifically to qualify for Medicaid or to hide assets from the program, you can be penalized. This look back period is why you should read up on Medicaid eligibility well before you may need it.

Medicaid Eligibility and Life Insurance

The crux of this question is whether you have term life insurance or whole life insurance. If you have term life, it is not considered a countable asset because it has no cash value.

Term Life

In fact, if you are like most Americans, you may several term life insurance policies. You may not even realize you have them. These are often accidental death policies that only pay if die of an accident. Sometimes, they are more strictly defined, such as “while flying.”

These are sometimes in effect for very short terms. For example, if you bought plane tickets using a credit card, the credit card may have automatically provided accidental death benefits solely for the duration of this flight.

For purposes of Medicaid eligibility, you do not need to worry about such policies. They may or may not be impacted in the case of Medicaid recovery after your demise.

Whole Life

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However, if you have a whole life, this question gets a lot more complicated. Over time, a whole life policy accumulates cash value. This cash value is a countable asset that impacts whether or not you qualify for Medicaid.

You are allowed one small value exempt life insurance policy. The face value of this exempt whole life policy must be no more than $1500.

If you meet both of those tests, the amount of the cash value of the policy is not relevant for purposes of determining your eligibility, nor for purposes of Medicaid recovery.

Generally speaking, in order to qualify for Medicaid, the cash value of any other whole life policy needs to be no more than $1500. However, this may vary, depending on your state and your marital status.

If you have more than one whole life insurance policy, or if the cash value of the policy is high, things start getting a lot more complicated. At that point, you not only will need to thoroughly examine how your life insurance policies impact your eligibility for the

At that point, you not only will need to thoroughly examine how your life insurance policies impact your eligibility for the program but also need to examine how you can legally protect as much of your insurance as possible from Medicaid recovery in the event of your death.

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The Spend Down Period

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When older people are seriously ill for a long time, they typically run through the majority of their assets prior to considering an application to Medicaid. This is known as the “spend down period.”

Here is a list of examples of acceptable expenses which can be incurred during the spend-down period:

  • prepaying funeral expenses
  • Paying off your mortgage
  • Making repairs to your home
  • Replacing your old automobile
  • Updating the furnishings in your primary residence
  • Paying for home-based care
  • Purchasing a new home

You should also make yourself generally familiar with Medicaid’s asset rules. In general, the following are considered non-countable assets:

  • Personal possessions, including clothing, jewelry and furniture.
  • Your personal motor vehicle used for personal transportation, regardless of value.
  • Under some circumstances, a second vehicle may be excluded.
  • Your primary residence, assuming it is in the same state where you are applying for Medicaid insurance coverage. (This may be negative impacted by the act of residing in a nursing home.)
  • Prepaid funeral plans.
  • A small amount of life insurance.

So it isn’t at all illegal to spend your assets down to a level that makes you eligible for Medicaid. In fact, it is entirely normal to do so. But, it depends a great deal on how you do that. It depends on what kinds of assets you were using and also on what kinds of expenses you were paying.

This is partly common sense. In other words, for many people, the fact that they have been ill a long time and running through their money to cover both medical expenses and related costs is exactly why they will wind up poor and in need of Medicaid.

But it is also partly kind of a game of legal loopholes. It may all look the same to you, but you need to find out beforehand which moves are considered acceptable under the rules and regulations of the program.

So let’s talk about that next. Let’s specifically talk about how you might dispose of your life insurance and/or its cash value without raising any eyebrows at the Medicaid office in your state.

Legal Protecting Your Life Insurance and Your Loved Ones

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If you know what you are doing, there are perfectly acceptable, legal ways to protect your interests while qualifying for Medicaid. Which ones make sense for you will depend a great deal on the details of your life, as well as the rules of the state in which you reside.

Here are some potential options:

  • You may be able to take out a loan against the cash value to get it below $1500. If you spend the loan on your nursing home care, this is not considered a dodge.
  • You may be able to prepay burial expenses with the policy. This might be done by assigning the policy to the burial home, or by cashing in the policy and using it to prepay the burial costs.
  • Convert your whole life insurance policy to a Long Term Care policy. This can be a means to keep the policy and have the funds benefit you while you are still alive while staying within the rules for Medicaid.
  • Update your policy. Make sure it lists several beneficiaries and that they are all currently alive. This can help prevent the policy from becoming part of the estate and can help protect the funds from Medicaid recovery.

Remember that re-assigning the benefits in the last 60 months prior to your Medicaid application can be scrutinized as part of the look back. However, if it is done properly, it shouldn’t be a problem.

Some people are more likely to qualify as exempt from Medicaid recovery, such as a disabled child. Alternately, you may want to name your spouse by name.

Do Your Research

If you are receiving Medicaid benefits, your spouse may also need to revisit their life insurance policies and reposition some of their assets. If you were to receive a large life insurance payout while on Medicaid, it could disqualify you from receiving further benefits, at least for a time.

If you have substantial assets, you should be going over these rules well beforehand. Disposing of assets during the look-back period in a manner frowned upon by Medicaid can cause you to be heavily penalized.

The penalty will come in the form of being disallowed Medicaid benefits for a set period of time.

This time period will be determined by the value of the assets that were “improperly allocated” in the eyes of the many bureaucratic regulations of this joint federal-state program.

This white paper says it best when it talks about how the length of the penalty period is determined by dividing the assets by the average rate of care for the state in question.

The lack of limit means that if the government concludes you were up to no good, you may never qualify for Medicaid.

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If You Are Married

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Medicaid provides protections for health spouses. The rules are complicated and will vary by state.

If you are married and receiving Medicaid, or if you are the healthy spouse married to someone receiving Medicaid for long-term care, you need to familiarize yourself with these rules.

They are intended to ensure that the surviving spouse is not left destitute. Thus, they provide a number of exceptions to the rules to account for various circumstances impacting both partners in a married couple.

Additional Protections

Although Medicaid recovery can be very aggressive, there are some protections in place. For example, no recovery can take place while the Medicaid recipient still lives, or their spouse still lives.

Plus, no recovery will take place while there is still a legally dependent child under age 21 who is blind or disabled.

So, Medicaid recovery is not intended to be a hardship for the recipient or their loved ones. It is intended to be a legal means to protect the finances of the Medicaid program from “fraud, waste and abuse.”

In some cases, it may not be outright illegal, but if a recipient has substantial assets that they could use for their own care, yet they are managing to access Medicaid instead, this can be viewed as abuse.

In essence, Medicaid is trying to protect itself from being unnecessarily bled. For most ordinary people, one of the biggest assets available after their death is the proceeds from a life insurance policy.

Medicaid is increasingly trying to tap into those resources to recoup certain kinds of expenses.

Last Minute Quick Tips

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  • You mostly do not need to worry about term life insurance policies.
  • If you have a single, small value whole life policy, it may be exempt.
  • If you have a policy with substantial face value and substantial cash value or more than one whole life policy, you will need to do some careful planning in order to legally protect your assets and your loved ones.

If you are in that last category, it might be in your best interest to speak with an elder care lawyer or a financial planner listed as a fiduciary.

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