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How Your Life Insurance Policies Affect Medicaid Eligibility & Benefits

Find out how your life insurance policies might affect your eligibility for Medicaid health coverage.

Life insurance and Medicaid may seemingly be unrelated but there is a connection that can affect you in a negative way. 

A life insurance policy could have an impact on your eligibility for Medicaid.

Many Americans would take this into financial consideration--doing the math on the life insurance death benefits, the cost of health insurance premiums, and the benefits of Medicaid coverage.

Sadly, the result isn’t usually positive. Here’s what you should know.

Medicaid Differs By State

Medicaid is a program that is funded by both the federal government and state governments together.

However, Medicaid is run by the state you live in based on an agreement with the federal government.

Each state follows the same general Medicaid rules.

That said, states do have some control over how their programs are run and how they work.

That means:

Each state may have Medicaid programs that work in different ways.

The below information is overarching guidance on how Medicaid generally works.

Your state may work differently. For this reason, it’s important to visit your state’s Medicaid website to learn more. If you’re still unsure how your state’s Medicaid program works, you may want to contact a local expert for more guidance.

Can I Get Medicaid If I Have Life Insurance?

Yes, you may be able to get Medicaid even if you have a life insurance policy.

There’s one key concept about life insurance you need to understand that may disqualify you from Medicaid.

That’s whether the life insurance counts as an asset or not.

This mainly depends on the type of life insurance you have and how it works.

Here are the types of life insurance and what could disqualify you.

Whole Life vs. Term Life Insurance

Whole Life Term Life
Time frame Permanent Temporary, generally 5 to 30 years
Premium level Fixed for life of the policy Fixed for the term
Cash value Yes No
Interest-bearing Yes No
Loan provision Yes No
Cost High Roughly 10% of the cost of an equivalent amount of whole life insurance
Cannot be canceled except for nonpayment Yes Yes

Permanent life insurance

Permanent life insurance lasts your entire life as long as you keep your policy in effect.

This type of insurance can fall under several names including:

  • Whole life insurance
  • Universal life insurance
  • Universal indexed life insurance

Permanent life insurance may have a unique feature other types of life insurance don’t have.

When you make your premium payments, some of those payments may go toward building what is called cash value.

Cash value is like a separate account that slowly grows as you continue making premium payments. Part of your premiums are directed toward this account.

Depending on the policy type, it may actually be held in cash. In other policies, you may invest it.

Either way, this cash value, sometimes called cash surrender value, is something you can access and withdraw money from.

It grows over time as you make more premium payments. It may also grow from interest paid or investment earnings. As long as your cash value stays positive, your policy should remain in effect.

The cash value can cause a problem with Medicaid, though.

Because you can withdraw the accumulated cash value, this is counted as an asset for Medicaid’s purposes.

Medicaid may refer to this as part of your countable assets.

To qualify for Medicaid, you must usually have minimal assets. In general, this cap is $2,000.

If the cash value of your life insurance policy and other assets exceeds the limit in your state, you may get disqualified from Medicaid coverage.

Term life insurance

Term life insurance is a much more straightforward form of life insurance.

This insurance doesn’t have a cash value component.

Instead, you simply pay premiums so the life insurance company will pay a death benefit if you die while the policy is in effect.

The policy only lasts for a set term. This can be 10, 20, 30 or some other number of years.

  • If you don’t die during the policy, your beneficiaries get nothing.
  • If you do die during the policy, they get the death benefit.

Because these policies last for a limited time and have no cash value, they’re much cheaper than permanent life insurance policies.

They also don’t count as assets because there is nothing you can withdraw from the policy while it is active.

This means these policies should not impact your Medicaid eligibility.

Can I Get Life Insurance If I’m on Medicaid?

If you’re on Medicaid already, you may be wondering if you can get life insurance.

Being on Medicaid doesn’t technically disqualify you from getting life insurance.

Life insurance companies may not insure you

However, you may have trouble getting life insurance for other reasons.

Life insurance companies want to make sure you’re insuring yourself for legitimate reasons.

This is usually to provide money for your family after you pass away.

However, life insurance companies don’t want to make your family rich. Instead, they want to make sure your family is getting money to replace the income or support that you provide.

If you’re on Medicaid, you may have a hard time getting a policy because you may have limited income and limited assets.

Each life insurance company has its own guidelines in place. If you get denied by one company for a lack of income or assets, you can try applying with others.

Policy type will affect Medicaid

If you can get life insurance, you don’t want to get a policy that could disqualify you from Medicaid.

That means:

Getting a permanent life insurance policy should be very carefully considered.

You don’t want the policy’s cash value to ever put your assets above the countable assets limit for your state.

Term life insurance may be a better option to avoid this problem if you qualify for coverage.

If you don’t qualify for traditional coverage, other options do exist but are often expensive.

Other life insurance options

Guaranteed issue life insurance is a permanent life insurance policy but does not come with a cash value component.

Virtually anyone can get approved for this insurance because there is no medical exam.

For this reason, life insurance companies know this is the insurance of last resort and price it accordingly.

Death benefits are often limited and premiums are very expensive.

If you die during the policy’s waiting period, usually the first couple of years, your beneficiaries don’t get the death benefit.

Instead, only the premiums paid are refunded in most cases.

Another option to consider is simplified issue life insurance.

This may offer more coverage and is a bit more restrictive than guaranteed issue life insurance.

You will have to answer some health questions and your medical history will likely be searched. A medical exam isn’t normally required, though.

The underwriters reviewing your health history may disqualify people with certain health conditions. You may also get denied for other reasons, such as your age.

Already have a policy? You may be able to keep it

If you already had permanent or term life insurance before getting on Medicaid, you can keep your policy.

Life insurance companies won’t revoke your policy because Medicaid covers you.

Still:

You need to watch any cash value component of a policy carefully.

If you exceed your state’s asset limits, your Medicaid eligibility may expire.

Can Medicaid Take My Life Insurance Death Benefit?

One common question Medicaid applicants have is whether Medicaid can take their life insurance death benefit.

After receiving Medicaid benefits for long-term care and passing away, Medicaid may seek to get reimbursed for their costs from the deceased’s estate.

This only applies if you’ve received long-term care after age 55 in most cases.

If you have received long-term care, Medicaid generally can’t go after your life insurance death benefit payment if one of the following is true:

  • You leave behind:
    • A child under 21 years old
    • A child that is blind or disabled
    • A surviving spouse or domestic partner

As long as you keep your insurance policy up to date with a legal beneficiary, they normally can’t go after the death benefit payment, either.

If the death benefit does not have a beneficiary and goes to your estate, it may be fair game for Medicaid to try to retrieve.

For this reason, it’s essential to always make sure you keep your beneficiaries up to date.

Consult an Expert

Medicaid is exceptionally complex and programs vary by state.

For this reason, it makes sense for Medicaid applicants to seek out legal advice from an expert.

The last thing you want is to mess up your eligibility for Medicaid due to a technicality.

A lawyer may be able to help you prepare to apply for Medicaid.

They may be able to help you figure out how to best structure your current life insurance policies before applying for Medicaid.

In some cases, you may qualify for Medicaid without losing your life insurance’s intended benefits for your beneficiaries.

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