Dear Attorney: I am so confused. My husband was just placed in a nursing home and will need Medicaid. Some of my friends are telling me that my husband and I can’t have life insurance policies. Is this true?
Answer: While term life insurance policies do not count as assets for Medicaid eligibility, the value of whole life policies, (the kind that accumulate cash value) is another story. Whole life policies have a face value and a cash value. The face value is the amount that the policy pays in the event of death of the insured. The cash value is the amount the policy is worth if the policy holder cashes it in.
If the total face value of all the applicant’s whole life policies is $1,500 or more, most states consider the total cash value of all policies as a countable asset that affects Medicaid eligibility.
Consider this example:
Brad is a widower with two grown children. He has assets of less than $1,000, not counting his whole life insurance policy that has a face value of $5,000. In Connecticut, his assets fall within Medicaid eligibility guidelines. However, his life insurance policy has a cash value of $3,250. Since the face value is higher than $1,500, the policy’s case value is a countable asset. Brad cannot qualify for Medicaid unless he deals with this life insurance policy.
Brad has several options. He can simply cash in the policy and spend down the money or he can purchase a pre-paid funeral contract. Brad could also make a gift of the policy to his children. This gift would be subject to the same transfer penalties that apply to gifts in Connecticut.
If Brad needs nursing home care, however, he may no longer have mental capacity to take these actions. But, if he has previously signed a durable Power of Attorney for financial matters with language specifically allowing his agent to cash in his life insurance policy or change the beneficiary, his agent can take those steps for him. The Power of Attorney document should carefully spell out the grant authority so the agent will be able to deal with the policy easily and quickly.
Now consider this example about life insurance policies on the community spouse:
Cindy has Alzheimer’s disease and lives in a nursing home paid for by Medicaid. Her husband, Ted, lives at home. Ted has a term life insurance policy with a face value of $25,000 that names Cindy as the beneficiary.
The term policy, which does not accumulate cash value, did not count as an asset for Cindy’s Medicaid eligibility. However, if Ted dies before Cindy, the insurance benefit will go to Cindy. The resulting cash asset will disqualify Cindy of Medicaid benefits.
A pension or individual retirement account (IRA) that pays Cindy as a beneficiary would have the same results. If possible, Ted should name someone else as beneficiary on all of these kinds of policies and accounts.
Attorney Daniel O. Tully is a partner in the law firm of Kilbourne & Tully, P.C., members of the National Academy of Elder Law Attorneys Inc., with offices at 120 Laurel St., Bristol (860) 583-1341.