There are several rules regarding life insurance relative to long-term care/Medicaid planning. There are two principal types of life insurance, namely term insurance and whole life insurance.
Whole life insurance is a policy that builds cash value, and the premiums are usually significantly greater than term. With a term policy, you pay the premiums and there is very seldom any cash build up. Therefore, the policy has no value until you die.
Term life insurance usually does not count in Medicaid planning since it has no cash value. However, there are policies that do pay a dividend on term insurance, and it must be noted that the income or value built up in a term policy is countable in a long-term care application for medical assistance. In most cases, if the policy is not greater than $1,500.00, then the cash value does not count. Once the policy face value is greater than $1,500.00, then all of the cash value is countable.
For example, if you have a term life insurance policy of $100,000.00 and are applying for Medicaid, this policy has no cash value and therefore, the policy is not countable for Medicaid purposes. When you die, your family will receive the death benefit of $100,000.00, which will not be countable as long as the beneficiary of the policy is not also institutionalized.
If your policy is a whole life policy of $1,500.00, then the cash value will be countable toward your allowable assets. In many cases, you may have a $1,500.00 policy, which means that the original death benefit was $1,500.00. However, if your family has paid this policy for fifty years, the cash value may be $2,500.00 and the death benefit may therefore be in the vicinity of $5,000.00. This policy is a non-countable asset for Medicaid purposes so long as it is not cashed in. However, if it is cashed in, then the cash surrender value of the policy becomes an asset and has to be utilized for expenses if you want to apply for Medicaid benefits.
There are some policies, such as VA life insurance, which must be owned solely by the applicant. These policies may not be transferred. For example, while other life insurance policies may be assigned to a funeral home to prepay expenses, a VA life insurance policy may not be assigned, since only the veteran may own the policy. Therefore, in cases such as those where the cash value is in excess of the limits, there may not be an opportunity to do much planning with the life insurance policy except cash it in and spend down the assets on applicant expenses such as funeral costs and possibly nominal gifting. However, in a case where the applicant is married, the surviving spouse may be entitled to retain all or a portion of the cash of the policy even though it has to be surrendered.
Prior to surrendering any policy, an insurance agent, accountant and attorney should all be consulted relative to the best possible opportunity for the policy, since there may be some adverse tax consequences from cashing it in. If a term or whole life policy is of a significant value, it may be wiser to consider a viatical settlement of the policy prior to having it surrendered. These types of arrangements are such that a third party would consider buying the life insurance policy on the applicant’s life at the current time for a discounted value from the death benefit, and the family receives cash immediately rather than waiting for the family member to pass away. At the same time, the family does not need to continue paying premiums on the policy. These are specialized situations, which must be reviewed very carefully prior to selling the policy, and sometimes it is appropriate to have multiple bids from purchasers of these policies prior selling them.
By: Hyman G. Darling, Esquire