If a parent or spouse applying for nursing-home Medicaid owns life insurance, the type of policy decides what Medicaid looks at. A term policy has no cash value, so it does not count as an asset. A whole life or other permanent policy is measured by its cash surrender value, and the state's rules decide whether and how much of that value counts.
The questions that come up are whether a policy will block eligibility, whether it has to be cashed in, and whether moving it to a child would cause a penalty. This page walks through how Medicaid treats each kind of policy, what happens when a spouse stays at home, and what may happen to the death benefit after the member dies.
How Medicaid Classifies Life Insurance
A countable asset is any asset Medicaid adds up against the resource limit when it decides eligibility. An exempt asset is one it leaves out. Life insurance can fall on either side, and the deciding fact is the policy's cash surrender value, or CSV: the amount the owner would receive if the policy were cancelled today.
Term life insurance has no CSV. It pays only if the insured person dies during the term, so there is nothing to cash in, and it is not a countable asset. Whole life, universal life and other permanent policies build CSV over time, and that CSV is what Medicaid evaluates.
For people 65 and older, Medicaid eligibility is generally determined using the income methodologies of the Supplemental Security Income program, according to the CMS eligibility policy page; some states, called 209(b) states, use certain more restrictive rules. Federal law, including 42 U.S.C. § 1396p for transfers and recovery, sets the framework, and each state runs its own program within it.
The classification is not made once and forgotten. A policy whose CSV grows can change the picture later.
When a Permanent Policy's Cash Value Counts
Whether a permanent policy's cash value counts as a resource, how much of it counts, and under what conditions all depend on the rules the state applies, and those rules depend on that state's current law.
The face amount, meaning the death benefit, and the cash surrender value are two different figures, and a state's rules may look at either or both. A policy promising a large payout at death may have a modest CSV, and a smaller policy held for decades may have built more.
A current statement from the insurer shows the cash surrender value, the face amount and the owner. The federal rules in 42 U.S.C. § 1396p frame the transfer and recovery questions; the rules for counting a policy's cash value are part of each state's program.
Term Life Insurance and Medicaid Eligibility
Term coverage is the simplest case. It builds no cash value, so it is not a countable asset for Medicaid eligibility, whatever its face amount.
The look-back matters too. The look-back period is the window before the application during which the state reviews transfers of assets for less than fair market value. Under 42 U.S.C. § 1396p(c)(1)(B)(i), the federal look-back is 60 months for transfers made on or after February 8, 2006, counted back from the first date the person both is institutionalized and has applied. States run their own programs, so the look-back a particular state applies depends on that state's rules.
What happens to the death benefit depends on who receives it. A benefit paid to a named beneficiary goes directly to that person and generally passes outside probate, which matters in states that recover only from probate assets. A benefit payable to the member's own estate may be subject to estate recovery, depending on state rules.
This page covers Medicaid only. It does not cover Medicare, private long-term-care insurance or veterans' benefits.
Whole Life and Permanent Policies: Planning Considerations
A family looking at a permanent policy whose cash value may count has several possible paths to consider. Each has a different Medicaid consequence, and none is certain to produce eligibility or protect the policy's value.
Surrender. Cancelling the policy turns the CSV into cash. That cash is a countable liquid asset immediately, and how it is then spent becomes part of the spend-down picture described in this site's page on Medicaid spend-down.
Irrevocable burial arrangement. Irrevocable means it cannot be undone, and the owner cannot reclaim the money. Federal SSI resource rules in 42 U.S.C. § 1382b(a)(2)(B) exclude the value of a burial space or agreement representing the purchase of a burial space, subject to such limits as the Commissioner of Social Security may prescribe by regulation. Whether funds in a prepaid funeral trust or contract are exempt, and any cap, depend on each state's rules.
Transfer of ownership. Giving a policy to someone else for less than fair market value inside the look-back may cause a penalty period: a stretch of time when Medicaid will not pay for nursing facility services and certain other long-term care services (42 U.S.C. § 1396p(c)(1)(C)). Under 42 U.S.C. § 1396p(c)(1)(E)(i), for an institutionalized person the months equal the total uncompensated value transferred divided by the average monthly cost to a private patient of nursing facility services in the state (or, at the state's option, in the community) at the time of application, and under § 1396p(c)(1)(E)(iv) a state may not round down or disregard a fractional period. The penalty starts on the later of the month of the transfer and the date the person is eligible and would otherwise be receiving institutional-level care (42 U.S.C. § 1396p(c)(1)(D)(ii)), so the start rule is the same for a gift made early in the look-back as for a recent one.
A transfer to the person's spouse carries no transfer penalty under 42 U.S.C. § 1396p(c)(2)(B)(i). The statute lists other exceptions as well, each with its own conditions. This site's page on Medicaid crisis planning explains how these rules interact when care has already begun.