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How Medicaid Treats Life Insurance (Part 1)

                Medicaid requires the applicant to spend down all assets to under $2000 before approving an application for benefits.  The question comes up frequently about life insurance.  Is it an asset and if so, what is the value?

                In order to answer that question, we must examine what kind of life insurance we are talking about.     Term life insurance is a type of insurance in which a premium is charged and paid – usually on an annual basis – and if the insured dies while the policy is “in force”, the death benefit is paid to the designated beneficiary.  For Medicaid purposes, this type of life insurance has no monetary value to the owner while he/she is alive, so it is not an asset and does not count towards the asset limitation.

                There are other life insurance policies, however, that have a cash value.  The idea is that as the premium is paid to the insurance company some of that amount goes towards the cash value which builds up over time.  This cash value can be taken out by the policyholder as a loan.  If the policy is no longer needed or desired, then the policy can be cancelled and the owner will receive the cash surrender value amount.  This is different than term policies which, if cancelled, do not entitle the owner to any money back.

                It is the cash value that then counts as an asset towards the $2000 asset limit for Medicaid eligibility purposes.  We often see clients who are needing Medicaid benefits to pay for long term care that have one or more life insurance policies with cash surrender value.  A decision must be made as to how to dispose of them before Medicaid eligibility can be achieved.

                Cancelling the policy and then spending down the cash surrender value is one option.  But is it the best one?  It depends on the situation.  Next week I’ll share with you the different choices.