Guides
Medicaid eligibility and life insurance cash value
How Medicaid counts life insurance in its asset test: term vs whole life, the $1,500 face-value rule, burial exemptions, the look-back and estate recovery.
When Medicaid tests your assets, a life insurance policy with no cash value, such as term, generally does not count, while the cash surrender value of a whole life or universal life policy can count toward the asset limit. Many programs follow the Supplemental Security Income rule: if the total face value of your policies is $1,500 or less, no cash value is counted, and above that the whole cash value is. Medicaid asset rules are set partly by each state, so what follows is the general federal framework and not a prediction for your state.
Which Medicaid rules look at assets
"Medicaid" is several programs. Coverage for adults under the income-based expansion rules does not apply an asset test at all, so life insurance is irrelevant there. The asset test matters mainly for people applying on the basis of age, blindness or disability, and above all for people applying for nursing-home or home- and community-based long-term care. Those applicants must usually hold countable resources below a low limit that the state sets; many states use a figure in the low thousands for a single person. Your state Medicaid agency, or a certified elder law attorney, can give the current number.
Because the limit is so low, the question for a senior is usually whether a policy's cash value pushes them over it.
How life insurance is counted
Federal rules for SSI, which many states copy or adapt for Medicaid, are in the Code of Federal Regulations. 20 CFR 416.1230 says life insurance is counted at its cash surrender value, with one exception: if the total face value of all life insurance policies on any one person does not exceed $1,500, none of the cash value counts. In that total, term insurance and burial insurance are not taken into account.
| Policy | Typically counted? | Why |
|---|---|---|
| Term life | No | No cash surrender value, and excluded from the face-value test |
| Whole life or universal life, total face value over $1,500 | Yes, at cash surrender value | Cash value is a resource you could access by surrendering |
| Whole life with total face value of $1,500 or less | No | Small-policy exclusion |
| Policy whose terms limit proceeds to burial costs | Not in the face-value total | The federal definition of burial insurance |
| Policy owned by someone else | Generally not yours | Ownership decides; see below |
Two details trip people up. Face value counts per insured person, across all the policies on that person, so several small policies can add up past $1,500. And the cash value that counts is the net surrender value, so an outstanding policy loan reduces it. Some states use their own rules, and a few exempt policies up to higher face amounts, so confirm with your state agency.
Burial exemptions
Federal SSI rules also set aside money for funerals. Under 20 CFR 416.1231, an individual can exclude burial spaces and up to $1,500 in funds set aside for burial expenses, and that $1,500 allowance is reduced by the face value of any life insurance whose cash value was excluded, and by amounts in irrevocable burial arrangements. Interest earned on excluded burial funds that is left to accumulate also stays excluded, and if the funds are used for something other than burial, benefits can be reduced.
Many state Medicaid programs go further and exclude irrevocable prepaid funeral contracts, sometimes up to a cap and sometimes without one. The word that matters is "irrevocable": if you can cancel and get the money back, it usually counts as an asset. These contracts have their own risks, which preneed funeral insurance and funeral contracts covers. For the general costs they are meant to cover, see what a funeral costs and how families pay for it.
The look-back rule
Medicaid reviews financial transactions for a set period before you apply for long-term care. Under federal law (42 U.S.C. §1396p), the look-back period is 60 months. If you gave away assets or sold them for less than fair value in that window, Medicaid can impose a penalty period of ineligibility for long-term care benefits. That includes:
- Giving a whole life policy to a child, or naming a child as the owner, for nothing.
- Cashing in a policy and giving away the money.
- Paying premiums on someone else's policy beyond what you would do at arm's length.
Spending your own money on your own care, on a funeral you have contracted for, or on exempt assets such as an irrevocable burial plan is not a gift. A careless transfer, though, can delay coverage for months. Anyone considering moving a policy within five years of needing care should talk to an elder law attorney first.
Options people consider
None of these is right for everyone; each has trade-offs.
- Keep a policy with no cash value. Term coverage does not affect eligibility. If it is still needed, there is nothing to change.
- Surrender the policy and spend the cash on care. This turns a countable asset into paid care, which is a spend-down. You lose the death benefit, and surrender gains can be taxable; see how cash value is taxed: withdrawals, loans and surrenders. The keep, surrender or sell your policy? compares options.
- Use the cash for an irrevocable funeral arrangement. Where your state exempts it, this converts a countable asset into an exempt one. Get the contract in writing and confirm the exemption first.
- Cash value used for a spouse's needs. When one spouse needs long-term care and the other remains at home, federal spousal impoverishment rules protect a share of the couple's assets for the spouse at home. The rules and amounts are set annually and by state.
- A hybrid life and long-term care policy. Bought well before care is needed, it pays for care directly and may keep a person off Medicaid; see hybrid life and long-term care policies. It will not help someone who needs care now.
What happens to the death benefit after you die
Medicaid must seek recovery from the estates of people who received long-term care after age 55, under the estate recovery provision of the same federal statute. Life insurance paid directly to a named beneficiary is usually not part of the probate estate, so it typically stays out of recovery. The statute allows states to define "estate" more broadly, and some do, so check your state's rules. Naming the estate as beneficiary invites claims, which is one more reason to review beneficiaries; see why naming your estate as beneficiary is usually a mistake.
Key takeaways
- Term insurance generally does not count when Medicaid tests assets; the cash surrender value of whole life and universal life can.
- A common federal benchmark, from the SSI rules, is that policies with total face value of $1,500 or less per person do not have their cash value counted.
- Burial exemptions exist in the federal SSI rules and in many states, and they usually depend on the arrangement being irrevocable.
- Medicaid's 60-month look-back can penalize gifting a policy or its cash value, so get legal advice before transferring anything.
- Details vary by state and change each year, so check with your state Medicaid agency or an elder law attorney.