Life Insurance and Medicaid
Every time someone applies for Medicaid (Title 19), the Connecticut Department of Social Services reviews all of that person’s assets, and if married, both spouses’ assets. It often comes as a surprise to people, but that includes examining life insurance policies. It can be an unwelcome surprise if the policy has to be cashed in, because many people plan on life insurance to pay for their funeral.
The first thing to know is that term insurance does not count as an asset. That is because term insurance only pays out when you die. It has no cash value while you are alive, so you can keep it and the death benefit goes to the beneficiary. In a husband and wife situation, this can cause a problem. If one spouse is on Medicaid, and the other spouse dies owning a term insurance policy with the “sick” spouse named as beneficiary, the “sick” spouse will suddenly have too many assets and be disqualified for Medicaid if assets then exceed $1,600. So it is important to make sure the person on Medicaid is not a beneficiary of life insurance policies.
The second thing to know is that whole life policies may count as an asset, because they have a cash value. The current rule is that the Department of Social Services will look at the applicants total policies. If the face value (the amount to be paid at death) of all policies added together does not exceed $1,500, the policies will not be counted, even if the cash value (the amount to be paid if you cash it in) far exceeds the $1,500.
In the past, it was not uncommon to find applicants with two or three tiny $500 policies which they had taken out decades before. Those were exempt. If the applicant had four $500 policies, the trick was to cash in the one with the least cash value, and keep the other three adding up to $1,500 or less face value, as they would then not be counted.
Usually policies have a much higher face value than $1,500, so in most cases the cash value must be counted, and when added up, if the cash values exceed $1,600, an unmarried applicant will not be eligible for Medicaid. This can be a costly trap for the unwary, because a child may make an application for the parent and be completely unaware that such a policy exists as there are no monthly statements for life insurance. In some cases it can lead to the child’s personal liability for the nursing home bill.
If the “healthy” spouse owns the policies, the cash value of the policies will count as an asset against the limit the “healthy” spouse can keep. As another reminder, it is important to name someone other than the Medicaid recipient as the beneficiary in case the “healthy” spouse dies before the one on Medicaid.
A common situation is where a Medicaid recipient has a group term policy from his former employer. Nobody thinks about such a policy because no premiums are paid by the retiree. It is necessary to obtain a change of beneficiary form from the employer or the administrator of the group term insurance, to name someone other than the Medicaid recipient.