Seniors who need Medicaid long-term care often own life insurance policies, so they will need to know how those policies impact their Medicaid eligibility. The answer depends on the type of life insurance, the value of the policy or policies, and the senior’s state of residence. These rules are relevant to seniors who require long-term care in nursing homes, their own home and assisted living residences.

Exempt Assets

Medicaid long-term care applicants need to meet an asset limit in order to qualify. However, not all assets count toward the limit. Some assets are exempt, like personal items, a primary vehicle and most primary homes. Some life insurance policies will also be exempt from the asset limit.

The individual asset limit for Medicaid long-term care in most states in 2024 is $2,000, although there are some exceptions, like New York, where the individual asset limit is $31,175. California is the only state without asset limits. All other states require seniors to have limited assets in order to qualify for Medicaid’s nursing home coverage, or its long-term care coverage in the community through Home and Community Based Services (HCBS) Waivers or regular Medicaid for seniors.

Which Types of Life Insurance are Considered by Medicaid

Term life insurance is not counted toward Medicaid’s asset limit. This type of insurance covers the holder for a limited period of time. If the holder does not die during that time, no benefit is paid. Term life insurance policies do not accrue any cash value, and they can not be cashed out.

Whole life insurance can count toward Medicaid’s asset limit. These policies cover the holder for their whole life and pay out when they die. The pay out amount or death benefit is the “face value” of the policy, but whole life insurance policies also accrue a “cash value” as the holder pays their premiums. Both the face value and cash value can impact Medicaid eligibility, as we will explain in the next section.

Burial insurance is a type of whole life insurance policy that is not counted toward Medicaid’s asset limit. Any insurance policy where the funds can only be used for final/burial expenses is considered exempt by Medicaid, and that’s the case with burial insurance.

How Medicaid Treats Whole Life Insurance

All 50 states and Washington, D.C., have a face value exemption limit for whole life insurance policies. In most states, the limit is $1,500. This means:

• If the total face value of the Medicaid applicant’s whole life insurance policies is less than or equal to the state’s exemption limit ($1,500 in most states), the policies are not counted against the asset limit.
• If the total face value of the Medicaid applicant’s whole life insurance policies is greater than the state’s exemption limit ($1,500 in most states), the total cash value of all the policies will be counted toward the asset limit.

The whole life insurance exemption limit does vary in some states. In Florida, for example, it’s $2,500. This webpage sponsored by the American Council on Aging lists all of the whole life exemption limits by state.

State Variations in the Treatment of Life Insurance

In addition to the whole life insurance exemption limits varying by state, there are other differences in how states treat whole life insurance. Some states allow for a partial exemption for applicants who are over the state’s face value exemption limit. Pennsylvania is one of these states, and it allows $1,000 of the cash value to be exempt even if the applicant is over the state’s face value exemption limit of $1,500. Some states also have their own rules about how burial insurance and whole life insurance impact each other. In Illinois, for example, Medicaid applicants can exempt either up to $1,500 in cash value of whole life insurance policies OR up to $1,500 in burial insurance.

Missouri has the most unique rules when it comes to whole life insurance. Instead of a face value exemption, Missouri uses a cash value exemption of $1,500. The state also only allows for the exemption of one whole life insurance policy rather than several. And Missouri Medicaid applicants can not exempt both a whole life insurance plan and a burial plan, they have to pick one or the other (like Illinois, mentioned above).

Options When a Policy is a Disqualifying Asset

Seniors who are interested in Medicaid but have countable whole life insurance policies that will put them over their asset limit do have options for becoming eligible.

1) The senior can either cash out or sell the policy. The proceeds from the sale or cash out will likely put them over their asset limit, but they can “spend down” those proceeds until they reach their limit. Spending down is a common Medicaid planning strategy where the applicant spends their excess assets on themselves, or their spouse if they’re married, until they reach their limit. They should not spend on items that can be counted toward the asset limit, like a second car or second home, or non-essential items like jewelry or art. And spending on anyone other than themselves or their spouse would be a violation of the Look-Back Period.

2) They can take out a loan against the cash value of the policy. This lowers the face value of the policy, and it’s possible to lower the face value until the policy reaches the state’s whole life insurance face value exemption limit and becomes exempt.

3) If they’re married and their spouse is not a Medicaid applicant or recipient, they can transfer the policy to their spouse thanks to the Community Spouse Resource Allowance (CSRA). Medicaid considers the assets of married couples to be jointly owned, but when only one spouse is applying for Medicaid, the CSRA pushes the asset limit of the non-applicant spouse to as much as $154,140 in 2024, depending on the state. So, a non-applicant spouse will have a much better chance of absorbing the total cash value of any whole life insurance policies and staying under their asset limit than the applicant spouse, whose asset limit in most states in 2024 is $2,000. It’s important to note that the CSRA only applies to Medicaid’s nursing home coverage and Home and Community Based Services (HCBS) waivers. It does not apply to regular Medicaid for seniors.

4) Consult a Medicaid planning professional. Depending on a senior’s financial, family and medical situation, a Certified Medicaid Planner may have other suggestions on how to best handle a senior’s whole life insurance policies. They can also help seniors “spend down,” take out a loan on their whole life insurance policy or properly use the CSRA. Connect with our team of professionals at Eldercare Resource Planning to see how they can help you best advise your senior clients.