Medicaid Spend Down Rules on Life Insurance

How to qualify for Medicaid

Medicaid “spend down” is a financial planning strategy used by an individual whose income is too high to qualify for Medicaid. To be accepted into this program, you must spend your current assets to a low enough level to qualify 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.

To be eligible for Medicaid to cover nursing home care, your parents’ countable assets must be at or below their state’s limit. Asset limits vary by state and Medicaid category. For people who are 65 or older, blind, or disabled, many states start from the Supplemental Security Income (SSI) rules, which set a $2,000 limit for an individual, but states can use different limits. When one spouse needs nursing home care, the spouse at home can keep a larger protected amount, which changes each year.

Check the limit that applies in your parents’ state.

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 Medicaid applicant to keep their assets and qualify for Medicaid benefits. The biggest asset exemption is your parent’s family home and other necessary assets like the vehicle.

Some types of qualified annuities are counted as exempt assets, income-producing IRA, and others. Converting assets into annuities or trusts has strict Medicaid rules that vary by state, and some of these arrangements can still be subject to repayment to the state. Talk with an elder-law attorney before using one.

Non-exempt Medicaid Assets

Unless an exclusion applies (such as the face value rule explained below), 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.

If countable cash value puts your parent over the limit, it may have to be spent down before they qualify for Medicaid.

Asset Transfer Alert

For long-term care Medicaid (nursing home care and home and community-based waiver services), Medicaid looks back five years (60 months) before the application for assets that were given away or sold for less than fair market value. A transfer during the look-back period can result in a penalty period during which Medicaid won’t pay for long-term care.

The look-back period also applies to life insurance and other non-exempt assets. Giving a policy with cash value to someone else, or changing the owner, can count as a transfer of assets. Surrendering a policy and using the cash for care is one way to spend down, but it ends the coverage.

Understanding life insurance impact on Medicaid eligibility

Understanding the different life insurance policies is critical to determine if your parent’s life insurance policies are within Medicaid limits.

Term Life Insurance: a temporary plan that only pays a 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 outlives this period, the beneficiaries will not receive a death benefit because it will expire (if it’s not renewed or converted into a permanent policy).

Term life insurance doesn’t accumulate cash value.

Permanent Life Insurance: also called cash-value life insurance, does not expire and 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 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 that grows on a tax-deferred basis. Cash value is easily accessible to the policy owner through withdrawals and policy loans.

Face value is the death benefit the company would pay the beneficiaries should the insured die, assuming the policy is still in force.

Surrender value: the amount the life insurance provider will pay out if the insured decides 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; knowing the difference is critical before deciding on an asset spend-down strategy.

Life insurance and Medicaid

Not all types of life insurance are considered assets.

Small permanent life insurance policies can be excluded from the calculation of assets. Under the SSI rules many states use, if the total face value of all life insurance on a person is $1,500 or less, none of the cash surrender value counts. If the total face value exceeds $1,500, the cash surrender value counts toward the asset limit. Term insurance, and burial insurance whose terms say the proceeds can only pay burial expenses, aren’t included in that face value total.

For example, your parent has a $1,400 whole life insurance with a $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 their state’s asset limit. If your parents only had $1,200 face value insurance, the cash value wouldn’t count.

But what if your parent owns a $100,000 face value term insurance? The policy is 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 $1,500 in face value. But some states permit a higher insurance face value exemption.

Florida has an exemption amount of $2,500, while North Carolina has a maximum $10,000 face amount exemption.

If the policy’s face value exceeds the exemption amount in your state, the policy’s cash value will be considered 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.

Example:

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 with a $1,200 face value and $400 cash value and the second policy with a $1,400 face value and $600 cash value, the sum of the face value equals $2,600, and your mom exceeds the exemption limit. Therefore, the cash value of the two policies amounting to $1,000 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. To qualify for Medicaid, your countable assets must be at or below your state’s limit (often $2,000 for an individual in programs that follow the SSI rules). So life insurance can be an asset depending on the type of life insurance and the policy’s value.

Medicaid law in 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 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.

Your parents’ countable assets must be at or below the limit when they apply. Assets given away or sold for less than fair market value during the five-year look-back period before a long-term care Medicaid application can cause a penalty period.

How to spend down on life insurance

If your parents have a life insurance policy, check if their plan will disqualify them from Medicaid. 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 from letting 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, moving your father’s life insurance to her (the non-applicant spouse) may be an option. But this doesn’t automatically protect the policy: when one spouse applies for nursing home Medicaid, the spouse at home can keep only a protected amount that changes each year. Check your state’s rules before changing ownership.

Transferring your father’s insurance policy to a funeral home to pay for a non-cancellable (irrevocable) burial plan is another possible option. Irrevocable burial plans are often excluded from countable assets, depending on state rules.

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 their policy’s cash value and face value. 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 may find they are no longer eligible for Medicaid.

Sell the Policy

Your parents can sell their policy to relatives or friends at cash surrender value. The buyer can pay the premiums to keep the policy active. Since your parents are no longer the policy owner, the policy itself won’t be counted as their asset, but the money they receive counts, and selling for less than the policy is worth can be treated as a transfer under the look-back rules.

A viatical settlement is another option to sell life insurance. They can sell the insurance policy to a settlement company that will be the beneficiary and takes 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 cash by paying medical bills, credit cards, 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 “spent 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 home repairs. If they choose this option, the policy will be canceled, and there will be no death benefit for the beneficiary.

Important Note:

Before implementing any planning technique, you must be cautious not to violate Medicaid’s look-back rule. Long-term care Medicaid has a five-year look-back period to check whether you gave away or sold assets for less than fair market value. A transfer that breaks the rule can result in a penalty period during which Medicaid won’t pay for long-term care.

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.

Frequently asked questions

What does insurance spend down mean?

This is a term used in the Medicaid program. It means using money or assets, including a life insurance policy’s countable cash value, to bring countable assets down to the Medicaid limit before Medicaid pays for nursing home care. Medicaid doesn’t count the death benefit, but it can count a policy’s cash surrender value unless an exclusion applies, such as the $1,500 face value rule many states use.

Is Medicaid part of Medicare?

Medicaid and Medicare are two separate programs. Medicaid is a program run by the states, and Medicare is run by the federal government.

Can I get both Medicaid and Medicare?

Yes, many people qualify for both. Whether you can get Medicaid depends on your state’s income and asset rules.

What is the difference between Medicaid and Medicare?

The main difference between Medicaid and Medicare is that Medicaid is a program for low-income people, and Medicare is a program for people 65 or older or with disabilities.

Is Medicaid a federal program?

Medicaid is a program run by the states, but it is funded by the federal government.

How do I apply for Medicaid?

You can apply for Medicaid by contacting your state Medicaid agency. The agency’s website will have information on how to apply. You can also call the agency and ask for an application.

Can you have Medicaid and private insurance?

Yes, you can have private insurance and Medicaid at the same time. Whether you qualify for Medicaid depends on your state’s income and asset rules.

What is the asset limit for Medicaid?

It depends on your state and Medicaid category. Programs for people who are 65 or older, blind, or disabled that follow the SSI rules generally start from a $2,000 limit for an individual, but states can use different limits. Contact your state Medicaid agency for the limit that applies to you.

What is the income limit for Medicaid?

The income limit for Medicaid depends on your state and the Medicaid program. You can contact your state Medicaid agency to determine your state’s income limit.

Can I keep my house if I go on Medicaid?

It depends on your state. In some states, you can keep your house if you go on Medicaid; in others, you may have to sell your house. You can contact your state Medicaid agency to find out the rules in your state.

Can I keep my car if I go on Medicaid?

It depends on your state. In some states, you can keep your car if you go on Medicaid; in others, you may have to sell your car.

How can I hide money from Medicaid?

You cannot hide money from Medicaid. If you have too much money or too many assets, you will not be able to get Medicaid.

What is a Medicaid spend down?

A spend down is when you use your money or assets to bring your income or assets below the limit for Medicaid. This can be done by spending money on medical care, nursing home care, or other allowable expenses. Giving money away to someone else can cause a penalty under the look-back rules.

What is a Medicaid waiver?

A Medicaid waiver is a type of program that allows people to get care in their own homes instead of in a nursing home. To be eligible for a Medicaid waiver, you must meet certain requirements, such as age 65 or older or having a disability.

Can I get Medicaid if I own a house?

It depends on your state. In some states, you can keep your house if you go on Medicaid; in others, you may have to sell your house. You can contact your state Medicaid agency to find out the rules in your state.

How does Medicaid spend down work?

Spend down works by reducing your income or assets until they are below the limit for Medicaid. This can be done by spending money on medical care, nursing home care, or other allowable expenses. Giving the money to someone else can cause a penalty under the look-back rules.

Can I get Medicaid if I have a job?

It depends on your income. If your income is too high, you will not be able to get Medicaid.

Can I work and still get Medicaid?

Yes, you can work and still get Medicaid. However, your income may limit the amount of Medicaid you can receive.

What are the advantages of Medicaid?

The advantages of Medicaid are that it is available to people with low incomes and covers a wide range of medical services.

What are the disadvantages of Medicaid?

The disadvantages of Medicaid are that it has very low income and asset limits and can be hard to qualify for.

What is the highest income to qualify for Medicaid?

Income limits vary by state and Medicaid program, and they change each year. Contact your state Medicaid agency for the current limits.

How do you qualify for Medicaid?

To qualify for Medicaid, you must meet certain requirements, such as age 65 or older or having a disability.

How do I qualify for dual Medicare and Medicaid?

In most cases, you qualify for dual Medicare and Medicaid if you receive both Medicare and Medicaid benefits. To find out if you qualify, contact your state Medicaid agency.

I’m on disability, do I automatically qualify for Medicaid?

It depends on your state. In some states, you automatically qualify for Medicaid, and in other states, you may have to apply. You can contact your state Medicaid agency to find out the rules in your state.

My spouse is on Medicare. Do I automatically qualify for Medicaid?

It depends on your state. In some states, you automatically qualify for Medicaid, and in other states, you may have to apply.

How do I check my Medicaid status??

You can check your Medicaid status by contacting your state Medicaid agency.

What is the Medicaid application process?

The Medicaid application process varies from state to state. You can contact your state Medicaid agency for more information.

Can I apply for Medicaid online?

It depends on your state. In some states, you can apply for Medicaid online; in others, you may have to apply through a paper application.

What is the Medicaid deadline?

The Medicaid deadline varies from state to state. You can contact your state Medicaid agency for more information.

Do you have to pay back Medicaid?

You don’t pay Medicaid back while you receive benefits. But after a Medicaid recipient dies, the state may seek repayment from their estate for certain Medicaid costs (estate recovery). Recovery can’t be made while a surviving spouse is alive, or when there is a surviving child under age 21 or a child who is blind or disabled. Each state sets its own estate recovery rules, so check with your state.

Which state has best Medicaid program?

There is no one state with the best Medicaid program. The best Medicaid program depends on your needs and what is available in your state.

Is Medicaid a welfare program?

Medicaid is not a welfare program. It is a health insurance program that is available to people with low incomes.

Can I have Medicare and Medicaid at the same time?

Yes, you can have Medicare and Medicaid at the same time.

Can I get Medicaid if I am not a U.S. citizen?

It depends on your state. In some states, you must be a U.S. citizen to get Medicaid, and in others, you may be able to get Medicaid even if you are not a U.S. citizen.

Do I have to reapply for Medicaid every year?

It depends on your state. In some states, you must reapply for Medicaid every year; in others, you may only need to reapply every few years.

How do I find my Medicaid caseworker?

You can find your Medicaid caseworker by contacting your state Medicaid agency.

How do I cancel Medicaid?

It depends on your state. In some states, you can cancel Medicaid by contacting your state Medicaid agency; in others, you may have to go through a paper application process.

How do I contact my local Medicaid office?

You can contact your local Medicaid office through your state Medicaid agency.

How many people are on Medicaid?

There are over 75 million people on Medicaid.

Who finances Medicaid?

Medicaid is financed by both state and federal governments.

Sources

• Electronic Code of Federal Regulations, 20 CFR 416.1205, Limitation on resources (SSI)
• Electronic Code of Federal Regulations, 20 CFR 416.1230, Exclusion of life insurance (SSI)
• Electronic Code of Federal Regulations, 42 CFR 435.601, Application of financial eligibility methodologies (Medicaid)
• Electronic Code of Federal Regulations, 42 CFR 433.36, Liens and recoveries (Medicaid)
• Medicaid.gov, Eligibility Policy (transfer of assets and the five-year look-back)

1 comment

Claire Masters

It’s interesting to know how permanent life insurance accumulates value as the years go by and can even be transferable among spouses. I don’t have a family of my own yet but I think these types of coverages are important so as to leave yourself and your loved ones with ample protection and a safety net. It would be nice if a company could advise me on the best one I could get for my age and personal purpose.

December 17, 2021 at 10:48 am