Ronald Fatoullah & Associates - Elder Law

Don't Let Life Insurance Affect Your Medicaid Eligibility

By Ronald A. Fatoullah, Esq. and Jeffrey P. Gorak, Esq.

Don't-Let-Life-Insurance-Affect-Your-Medicaid-Eligibility-DPLIC-139515098-300x200.jpg{4:50 minutes to read} A life insurance policy is a contract between an individual (the insured) and an insurance company (the insurer) where the insured pays a premium in exchange for the insurer's promise to pay a certain sum of money (the death benefit) to the designated beneficiaries on the death of the insured.

The two most common types of life insurance policies are 1) term life insurance and 2) whole life insurance. Under both policies, an insured pays a premium (can be annual or monthly) during a term of years (for example, 20 years), and if the insured dies during the term, the insurer pays the death benefit to the insured's designated beneficiaries. But a whole life insurance policy also has a cash surrender value, meaning that the insured can surrender the policy at any time and receive the cash value of the account, which is largely determined by a number of premium payments made by the insured.

Both types of policies are great estate planning tools. They both pay the death benefit directly to the designated beneficiaries, thereby avoiding probate. Further, such proceeds are not recoverable from the estate by Medicaid, because Medicaid can only recover against assets distributed through the probate process. Despite these benefits, whole life insurance, in particular, can be problematic when it comes to applying for Medicaid.

In New York, an applicant may have up to $14,850 (or $21,750 for a couple) in resources in order to qualify for Medicaid. A life insurance policy with no cash surrender value (such as a term policy) poses no problem, as it is not counted as a resource for Medicaid purposes. But a life insurance policy with a cash surrender value will be counted as a resource if the death benefit exceeds $1,500. Its value will be the cash surrender value. Medicaid views these policies as resources, because they can be surrendered for cash. An applicant who owns a life insurance policy with a cash surrender value must, therefore, plan wisely to maintain the policy and still qualify for Medicaid.

The planning options available to a Medicaid applicant with a whole life insurance policy largely depends on the cash value of the policy. If the cash value (not the death benefit) is less than $1,500, a Medicaid applicant may purchase a separate burial fund in an amount equal to or less than the $1,500, thereby removing this amount as a countable resource.

Planning, however, becomes more problematic when the cash value, in combination with the applicant's other (non-exempt) resources, exceeds the applicant's resource allowance ($14,850). When this happens, some applicants surrender the policy and spend down the cash. This is ill-advised in many circumstances, because surrendering the policy results in the loss of the death benefit.

If an applicant is contemplating Medicaid home care, the applicant may transfer (or gift) the ownership of the policy to a family member, because there are no transfer penalties for home care. If, however, an applicant is contemplating Medicaid nursing home care and he or she cannot transfer the policy to a spouse or disabled child, which are exempt transfers for nursing home care, a better alternative may be to have the applicant's children purchase the policy from the applicant for the cash surrender value. The cash received can then be spent down or used to purchase an irrevocable funeral agreement, which is not considered a transfer. If the cash value (when combined with the applicant's other non-exempt resources) is significant, further Medicaid planning will be needed. This may include, for example, a gift/loan strategy where part of the cash value is used for the applicant's care. The benefit of these latter techniques is that the death benefit of the policy remains in effect, which is often the very reason for purchasing the policy.

A life insurance policy is a great estate planning tool. It offers both the advantage of avoiding probate and the protections against a Medicaid recovery. But it can be problematic when planning for Medicaid. It is important to review the various planning techniques with an experienced elder law attorney when planning for Medicaid.

Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Jeffrey P. Gorak, Esq. is an elder law attorney with the firm. The law firm can be reached at 718-261-1700, 516-466-4422, or toll-free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm, and he can be reached at 424-256-7273.

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