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Can medicaid take my life insurance money?

Here's what you need to know...
  • When a life insurance claim is made, the proceeds from the policy will be paid to the named beneficiary on the policy
  • Medicaid is a state health insurance program that’s regulated by the Federal Government
  • Unlike other types of financial assistance programs for low-income applicants, there’s no age or disability restrictions for qualifying for Medicaid as it’s based strictly on family size and income
  • The Federal government has created a Medicaid Estate Recovery Program that is aimed to recover some of the benefits that have been paid to recipients following their death
  • While the program does allow the government to seize houses, vehicles and even in some events trusts, life insurance proceeds are exempt at this time
  • Your life insurance proceeds can be at risk if you don’t have a designated beneficiary

When someone has access to limited financial resources or is deemed to be ‘medically needy’, they may qualify for a medical financial assistance program called Medicaid. While the eligibility rules and the income limits vary from state to state, nearly 20 million adults in the U.S. are covered by the program. For these adults, estate planning, and financial planning is still a very important responsibility. Start comparing life insurance rates now by using our FREE tool above!

When you’re on Medicaid, you’re asked about your assets, your retirement accounts, your bank account balances, and also about what types of life insurance policies you have in force. If you’re being asked about life insurance, it’s only natural for you to wonder whether or not the program has free reign to take life insurance money before it’s paid to your family. Read on and find out if the state or federal government can make claim to proceeds and then you’ll be prepared to structure your policy properly.

How can your life insurance portfolio affect your Medicaid eligibility?

Before you buy life insurance you’ll need to research just how it can affect your eligibility for the Medicaid program. Not all policies will be taken into consideration when you’re applying for coverage or when you’re renewing your eligibility. Separating qualified assets from unqualified assets is what you’ll need to do to gain a full understanding.

What is an unqualified asset?

Qualified assets are those you can have that don’t affect program eligibility. Unqualified assets are those that might impact whether or not you’ll be approved.

Whether or not you’ll be eligible for Medicaid with a life insurance plan depends on if the plan has cash value or not.

If you’re carrying term life insurance that offers a pure life insurance benefit, there’s no effect on eligibility because it has no cash value and can’t be classified as an unqualified asset. If, however, there’s cash value, a portion of the life insurance can become an asset.

How does Medicaid treat cash value life insurance?

How term life is viewed is very different from how Medicaid treats permanent insurance. Permanent life insurance is unique because it has a pure life insurance component and an investment component. The investment component has a cash value and can, therefore, be counted as an asset.

You’re limited to carrying life insurance with a cumulative value of between $1500 and $2000 when you apply for Medicaid. If the cash value of your insurance is higher than this, you may be required to surrender the policy or use the ‘qualified spend down’ technique. When you spend down the policy, the values will be used to pay for care expenses before Medicaid pays.

Can Medicaid take life insurance proceeds when the decedent dies?

Now that you have a basic understanding of how your choice of life insurance policy counts against Medicaid eligibility, you might be curious to learn whether or not the program is allowed to legally recover the care costs they’ve covered.

While there are different ways Medicaid can attempt to recover costs of care, it’s not always possible for the program to tap into proceeds because there’s often an exemption that protects life insurance benefits.

Medicaid doesn’t always try to seek recovery from every benefit recipient’s estate or heirs. While it doesn’t always happen, with dropping budgets and rising expenses, the program has to be replenished somehow. When the state is required to seek recovery is defined in the Omnibus Budget Reconciliation Act of 1993. Here are some scenarios where the state will try and collect from the deceased’s estate:

  • Services are provided to recipient in a nursing home
  • Services are provided in an intermediate care facility for the mentally handicapped
  • Home and community-based services in a hospital are provided to recipient who’s 55 or older
  • Prescriptions costs of recipient who’s 55 or older

Are there other recovery restrictions?

While payment for the benefits above can lead to recovery efforts, there are other restrictions that protect enrollees and their family members. Currently, states aren’t allowed to target assets or trust balances when the following is true:

  • Enrollee is survived by a spouse
  • Enrollee has living children under the age of 21
  • Enrollee has living children who are disabled
  • Recovery would make the family suffer an undue hardship

When is life insurance protected from recovery?

There are very strict laws in place that say that life insurance proceeds must be paid to the named beneficiary. Because of this, the program is prohibited from seizing benefits before they reach the hands of the deceased’s loved ones when a life insurance policy is structured properly. Unfortunately, not everyone takes the time to designate beneficiaries appropriately and this could leave proceeds at-risk of being subject to recovery efforts.

Who can be named as a beneficiary?

A beneficiary is the named person or entity that’s been designated to receive the benefits from the policy when a death claim is made. If you don’t want the state to have access to recovering proceeds from you’ll policy, you need to name a beneficiary. The following can be named:

  • A family member or friend
  • Multiple people
  • A business partner
  • A trustee or trust
  • A charity

What happens if you don’t designate a beneficiary?

When you don’t designate a beneficiary or there’s no surviving person to collect, the proceeds will be paid to the estate. Unfortunately, when the proceeds go to the estate they become part of the deceased’s assets. This means Medicaid and other debt collectors can make claim to the proceeds because of their status.

Buying life insurance can help you protect your family financially when you’re not around to do it yourself.

If you buy insurance, you need to take extra steps to be sure it winds up in the hands of the people that you love. Price the cost of insurance by using a quote comparison tool first. After you do this, apply and be sure to structure the policy so it goes to a beneficiary and not your estate. Enter your zip code in our FREE tool below to compare life insurance rates now!