Understanding Life Insurance Policies And How They Relate To Medicaid

When an individual is applying for Medicaid and has assets that exceed Medicaid’s resource limit, a Medicaid spend-down is necessary. Assets in excess of the allowable amount must be spent down in order to achieve financial eligibility. Some kinds of life insurance policies are included in the spend-down with a few exceptions. Below is a breakdown of what needs to be liquidated in order to be eligible for Medicaid.

There are two popular types of life insurance policies that have different effects on the Medicaid application process.

Term Life Insurance Policies:

Term Life Insurance Policies have premiums that increase as the individual’s age increases. These policies only carry a death benefit. They are also referred to as protection policies; their purpose is to assist the beneficiaries in the event of the policy holder’s sudden death. Since there is no current cash value in term policies they are not considered an asset according to NJ Medicaid guidelines. These policies may remain active and will not impede one’s Medicaid eligibility. Once an individual is on Medicaid he/she will have minimal assets and may not have the money to cover the monthly premiums. Some beneficiaries choose to cover the monthly premiums so that they can ultimately benefit from the death benefit once the Medicaid recipient passes.

Whole Life Insurance Policies:

Whole Life insurance policies generally have fixed premiums, death benefit and cash value reserves. These policies may be liquidated at any time. Being that they carry a current cash value, they are not exempt from the Medicaid spend-down and must be liquidated in order to meet Medicaid’s financial eligibility requirements. There is one exception to the rule! If the Whole Life Policy has a face value of less than $1,500.00, regardless of the cash surrender value, it is exempt from the Medicaid spend down and may remain open and active. “Face Value” is the original death benefit amount on the day the policy was purchased, prior to the policy holder making monthly premiums. While the policy is active it will accumulate cash value from the premiums as well as dividends from reinvestment money. The cash value may exceed the original death benefit (or Face Value). Once the policyholder passes, the beneficiaries will then be able to claim the total death benefit from the policy.