Medicaid Spend Down Rules on Life Insurance in 2022

Medicaid Spend Down Rules on Life Insurance image

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 let’s 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. 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.

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HOW TO QUALIFY FOR MEDICAID

To be eligible for Medicaid to cover nursing home care, your parents’ countable assets should not be 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 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 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 some assets into Medicaid-friendly annuities or trusts 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

Depending on the state laws, Medicaid has a look-back period ranging between 36 months to five years. Gifting away or transferring assets for less than fair market value must be done before 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 and 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 long-term medical care.


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 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 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 Medicaid’s $2,000 asset limit. If 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 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 $1,100 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. To qualify for Medicaid, your assets must be less than $2,000. 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.

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. 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, 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 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, it will not be counted as an asset.

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. 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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ADDITIONAL QUESTIONS & ANSWERS ON MEDICAID SPEND DOWN RULES ON LIFE INSURANCE

What does insurance spend down mean?

This is a term used in the Medicaid program. It means that before Medicaid can pay for nursing home care, the person’s life insurance must be used to pay for care. The only exception is if the life insurance policy has a cash value, Medicaid will not require that it be used to pay for nursing home care.


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?

It depends on your income and assets. If you have too much money or too many assets, you will not be able to get both Medicaid and Medicare. However, if you have too little income or assets, you will not be able to get Medicaid.


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?

It depends on your income and assets. If you have too much money or too many assets, you will not be able to have both Medicaid and private insurance. However, if you have too little income or assets, you will not be able to have Medicaid.


What is the asset limit for Medicaid?

There is no asset limit for Medicaid. However, if you have too much money or too many assets, you will not be able to get Medicaid.


What is the income limit for Medicaid?

The income limit for Medicaid depends on your state. In some states, there is no income limit; in others, the income limit is very low. 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 food, clothes, or medical care. You can also give them money to someone else or use it to pay for nursing home care.



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 food, clothes, or medical care. You can also give the money to someone else or use it to pay for nursing home care.


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 2022?

There is no income limit for Medicaid. However, if you have too much money or too many assets, you will not be able to get Medicaid.


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?

No, you do not have to pay back Medicaid.


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 by contacting your state Medicaid agency or calling 1-800-633-4227.


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.


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