Medicaid “spend down” rules on life insurance are important if you have an elderly parent who needs a long-term nursing home or assisted living care. If you or your parent lack the money for such care, you may consider helping your parent apply for Medicaid – a welfare program that offers medical coverage to eligible low-income seniors.
Most of the time, an individual will only qualify for Medicaid after they spend down their cash or physical assets to a specified limit. If your parents have life insurance, Medicaid spend-down rules can seem complex with all the rules, restrictions, and requirements.
So lets look into the spend down rules a bit more.
What is Medicaid Spend Down?
Medicaid “spend down” is a financial planning strategy used by an individual whose income is too high to qualify for Medicaid. For you to be accepted into this program, you must spend down your current assets to a low enough level to be eligible for Medicaid.
You can apply for Medicaid through Medicaid agency in your state or the Health Insurance Marketplace. Keep in mind that each state has a different Medicaid spend-down eligibility requirement.
If your parents have life insurance and want to qualify for Medicaid in the future, you’ll first need to understand the Medicaid spend-down rules on life insurance in your specific state.
HOW TO QUALIFY FOR MEDICAID
To be eligible for Medicaid to cover nursing home care, your parents’ countable assets should not greater than $2,000 for one person or a maximum of $126,420 for married couples where one of them is trying to obtain Medicaid.
Each state has its own asset limit, but these figures are used as a rule of thumb.
There are two categories of assets – exempt and not-exempt. Exempt assets don’t factor in Medicaid eligibility, while non-exempt assets are subject to the state’s spend-down requirements.
Exempt Medicaid Assets
Exempt assets allow the Medicaid applicant to keep their assets and qualify for Medicaid benefits. Your parent’s family home and other necessary assets like the vehicle are the biggest asset exemption.
Some types of qualified annuities are counted as exempt assets as well as income-producing IRA and others. Converting some assets into Medicaid friendly annuities or trust requires Medicaid repayment or recovery.
Non-exempt Medicaid Assets
The cash value in a whole life insurance policy does count as an asset. The cash value on your parent’s permanent life insurance is a non-exempt asset.
Regardless if it’s a whole life or universal life insurance policy. Like other non-exempt assets, the cash value is subject to the spend down rule.
Cash value must be spent down to qualify for Medicaid.
Asset Transfer Alert
Medicaid has a look back period ranging between 36 months to five years, depending on the state laws. Gifting away assets or transferring assets for less than fair market value must be done in advance of applying for Medicaid. If you don’t do this right, it may result in Medicaid penalties due to the look-back period requirements.
The look-back period also applies to life insurance as well as other non-exempt assets. To follow Medicaid’s, spend down rules, a life insurance policy should be surrendered for its cash value or converted to market value, and the proceeds can be used for paying long term medical care.
UNDERSTANDING LIFE INSURANCE IMPACT ON MEDICAID ELIGIBILITY
It’s critical to understand the different types of life insurance policies to determine if your parent’s life insurance policies are within Medicaid limits.
Term Life Insurance – a temporary plan that only pays death benefit if the insured dies during the policy’s timeframe. You can choose coverage terms, but the typical periods are multiples of 5—five, 10, 15 to 30 years.
If the insured outlive this period, the beneficiaries will not receive a death benefit because it will expire (if it’s not renewed or converted into permanent policy).
Term life insurance doesn’t accumulate cash value.
Permanent Life Insurance – also called cash-value life insurance, does not expire and it will last a lifetime. The insured is covered until death as long as the insurance policy is in force.
Aside from the death benefit payout, permanent life insurance accumulates cash value. Permanent life insurance such as whole life insurance, universal, and variable life insurance accumulates cash value over time.
Term Life Insurance vs. Permanent Life Insurance
A term life insurance policy has no investment component and does not accumulate cash value. It is not a countable asset and will not affect Medicaid eligibility.
Permanent life insurance accumulates cash value and may be considered a countable asset for Medicaid eligibility. Permanent life insurance policies can affect Medicaid eligibility.
Don’t allow your parents to lapse their policy to prevent the cash value and cash surrender value from counting against them. They can opt to cash out their policy through a life settlement. This will allow them to sell their policy for a lump sum that they can use; however, they see fit.
Cash value is the fund that accumulates in a permanent life insurance policy. A part of the premium payments goes into a cash-value account the grows on a tax-deferred basis. Cash value is easily accessible to the policy owner through withdrawals and policy loans.
Face value is the amount of death benefit that the company would payout to the beneficiaries should the insured die, assuming the policy is still in force.
Surrender value – is the amount the life insurance provider will pay out it the insured decided to surrender the policy before becoming payable upon maturity or death. The surrender value is computed by the cash value amount less any fees associated with early termination.
Face Value vs. Cash Value
Permanent insurance policies both have a face value and cash value. The Medicaid eligibility rules touch both; that’s why it’s critical to know the difference before deciding on asset spend-down strategy.
LIFE INSURANCE AND MEDICAID
Not all types of life insurance are considered assets.
Small permanent life insurance policies are exempted from the calculation of assets according to Medicaid law. If your parent’s policy’s face value is $1,500 or less, it won’t count as a countable asset. However, if the policy’s face value exceeds $1,500, it is considered an available asset and will be counted for the $2,000 asset limit.
For example, your parent has a $1,400 whole life insurance with $700 cash value. The insurance policy is considered a non-countable asset and exempt from Medicaid.
If your parents have permanent life insurance with a $1,600 face value and $800 cash value, the cash surrender value will count toward Medicaid $2,000 asset limit. As long as your parents only had $1,200 face value insurance, they would pass the Medicaid asset requirement for long-term care.
But what if your parent owns a $100,000 face value term insurance? The policy is totally exempted since the term policy does not have a cash value.
Life Insurance Exemption
Most states have a permanent life insurance policy exemption of up to up to $1,500 in face value. But some states permit a higher insurance face value exemption.
The state of Florida has an exemption amount of $2,500, while North Carolina has a maximum $10,000 face amount exemption.
If the policy face value exceeds the exemption amount in the state you live, the policy’s cash value will be considered as countable assets. However, if your face value is below the exemption limit, your life insurance policy will not be counted from Medicaid’s asset limit.
Your father lives in Texas and has a permanent life insurance policy with a face amount of $1,300 with a $600 cash surrender value. If the Medicaid exemption limit in his state for life insurance is $1,500. Therefore, your father’s permanent insurance policy is exempted and will not be counted towards Medicaid’s asset limit.
Your mother lives in Illinois; the allowed exemption in the state is $1,500. If your mom owns two whole life insurance policies that has a $1,200 face value and $400 cash value and the second policy with $1,400 face value and $600 cash value, the sum of the face value equals $2,600, your mom exceeds the exemption limit. Therefore, the cash value of the two policies amounting to $1,100 will be a countable asset.
If your parents have a life insurance policy that may disqualify them from Medicaid, they have an option to qualify through Medicaid’s spend-down.
MEDICAID SPEND DOWN RULES ON LIFE INSURANCE
Can life insurance affect Medicaid eligibility? Yes. In order to qualify for Medicaid, your assets must be less than $2,000. So life insurance can count as an asset depending on the type of life insurance and the value of the policy.
Medicaid law on most states exempts small whole life insurance policies from the calculation of assets. If your policy’s face value is less than $1,500, it won’t be considered as an asset for Medicaid eligibility purposes.
However, if your policy’s face amount is more than $1,500, the cash surrender value counts as an available asset.
All non-exempt assets must be spent down five years before your parents apply for Medicaid and qualify for Medicaid’s asset limit.
HOW TO SPEND DOWN ON LIFE INSURANCE
If your parents have a life insurance policy, check if their plan will disqualify them from Medicaid. Having a life insurance policy exceeding the exemption amount doesn’t mean they are not eligible for Medicaid. It means you need to implement some planning strategy before applying to be able to meet Medicaid’s asset limit.
If you think stopping premium payment to let the policy lapse is your only option, think again. Here are the different planning techniques you can do to qualify for Medicaid.
Transfer the policy
If your mother does not require long-term care Medicaid, you can transfer your father’s life insurance to her (non-applicant). The cash value on your dad’s plan would then go to your mom’s resource allowance. As of this year, most states permit the non-applicant spouse to own assets up to $128,640.
Transferring your father’s insurance policy to a funeral home to pay for a non-cancellable burial plan is another possible option. Burial plans are exempted from Medicaid’s asset limit.
Transferring your father’s policy to you or your adult siblings is not recommended because it is considered a gift that may violate Medicaid’s look-back rule.
There are two exceptions to this rule. Medicaid’s look-back period will not be violated if the whole life insurance policy is transferred to an adult child who is blind or disabled.
Borrow from the Cash Value
Borrowing from the cash value will keep your parent’s policy active, but it will lower the cash value and face value of their policy. If they decide to go this route, one important thing to remember is that they still need to pay the premiums to keep the policy active.
Your parents must also monitor the cash value because it increases over time, and they may find they are no longer eligible for Medicaid.
Sell the Policy
Your parents can sell their policy to a relative or a friend at cash surrender value. The buyer can pay the premiums to keep the policy active. Since your parents are no longer the policy owner, it will not be counted as an asset.
Viatical settlement is another option to sell the life insurance. They can sell the insurance policy to a settlement company that will be the beneficiary and take over the premium payment. This is a good option for people with a life expectancy of 20 years or less.
Getting cash from selling the life insurance policy can put your parents over the asset limit. As a result, they have to spend down the cash by paying medical bills, paying credit card, home modifications, and outstanding debts.
Cash Out the Policy
Your parents can cash out their life insurance policy and collect the cash value. The cash value should be “spend down” or used until the Medicaid asset limit is met in the state where they reside.
The proceeds can be used for healthcare expenses, debt repayment, or needed home repairs. If they choose this option, the policy will be canceled, and there will be no death benefit for the beneficiary.
Before implementing any planning technique, you need to be cautious not to violate Medicaid’s look-back rule. Most states have a five-year look-back period where they look at all your previous asset transfers to ensure you do not gift or sell assets under fair market value. If you violate Medicaid’s look-back rule, it will result in ineligibility.
Research Medicaid spend-down rules on life insurance in your state before making any spend-down strategy with a life insurance policy. It is best to talk to your attorney to determine the best strategy for your parents.
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