Can You Have Life Insurance While on Medicaid?


Updated: May 22, 2024

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Having a life insurance policy while on Medicaid is possible, but it may affect your eligibility, depending on the type of policy. Medicaid, aimed at assisting low-income individuals, has strict income and asset limits. The type and value of your life insurance policy can determine whether it counts as an asset and in turn, whether it impacts your Medicaid eligibility.

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Types of Life Insurance and Their Impact on Medicaid

Different types of life insurance can have varying effects on Medicaid eligibility. Understanding these impacts allows for informed and effective financial planning.

Term Life Insurance

Term life insurance is characterized by its fixed coverage duration, often 10–30 years. It only pays out if the policyholder dies within this term. It doesn't accumulate cash value, so it's not typically considered an asset for Medicaid eligibility purposes. This type of insurance is useful for individuals who need coverage for a specific period, such as while raising children or paying off a mortgage, without impacting their Medicaid status.

Permanent Life Insurance

Permanent life insurance, such as whole and universal life insurance policies, provides lifelong coverage. It also accumulates cash value over time. Policyholders can borrow against or withdraw this savings component. You can potentially be disqualified from Medicaid if the cash value exceeds allowable asset limits.

WHO QUALIFIES FOR MEDICAID?

Medicaid is for individuals with limited income and assets. Eligibility criteria vary by state but generally include specific income thresholds and asset limits.

What If Your Life Insurance Disqualifies You From Medicaid?

If your life insurance policy affects your Medicaid eligibility, there are several actions you can take:

1
Cash Out the Policy

Surrendering your life insurance policy for its cash value effectively reduces your total assets, potentially bringing you back within Medicaid's eligibility limits. This move can be helpful if the cash value of your policy is pushing you over the asset threshold. It's important to consider any potential tax liabilities or loss of the death benefit for your beneficiaries.

2
Take Out a Loan Against the Policy's Cash Value

This approach allows you to access the cash value of your life insurance without losing the policy. By borrowing against the life insurance policy, you keep the coverage intact while obtaining funds that you might need immediately. This can be particularly helpful if you anticipate needing Medicaid in the near term but also want to maintain life insurance coverage. Keep in mind that the loan may accrue interest and can reduce the death benefit if not repaid.

3
Transfer the Policy

Transferring the ownership of your life insurance policy to another person (like a family member) can exclude it from being counted as your asset. This action may have implications such as loss of control over the policy and potential gift tax considerations. It's a strategic move for those who want to maintain the policy but need to reduce their asset levels for Medicaid eligibility.

4
Sell the Policy

Known as a life settlement, selling your life insurance policy means you get a lump sum payment, usually higher than the cash surrender value but less than the death benefit. This option can provide a significant amount of money that you can use for immediate needs, like medical expenses or paying off debts. This is a beneficial route for those who no longer need the policy or find the premium payments burdensome. However, it involves giving up the death benefit and may have tax consequences.

CAN MEDICAID TAKE YOUR LIFE INSURANCE?

Medicaid cannot take the death benefit from a life insurance policy paid directly to a named beneficiary. However, if the policy's benefits are payable to the estate of the deceased, these funds could be subject to estate recovery by Medicaid. This scenario is more likely if Medicaid had covered long-term care costs for the individual. Policyholders need to keep their beneficiary designations current to prevent the death benefit from becoming part of their estate.

Life Insurance and Medicaid: State-Specific Rules

State-specific regulations significantly influence how life insurance affects Medicaid eligibility. For instance, some states exempt whole life insurance policies with a face value of up to $1,500 from Medicaid's asset limit.

This exemption limit can differ among states — in some states, policies with higher values may be exempted without affecting Medicaid eligibility, whereas in others, the limits are more stringent.

In most states, term life insurance policies, which do not accumulate a cash value and expire after a set period if the policyholder is still alive, don't impact Medicaid eligibility. They're generally not counted towards Medicaid's asset limits due to their lack of cash value.

For accurate state-specific information, refer to government websites like Medicaid.gov.

How to Get Life Insurance and Keep Medicaid

Although certain life insurance policies may disqualify you from Medicaid coverage, there are several ways to get both. It's always wise to familiarize yourself with your state's specific Medicaid rules and how they relate to life insurance to ensure you're making informed decisions about your coverage and financial planning.

1
Choose the Right Type of Policy

Selecting term life insurance is a safe option as it doesn't usually count towards Medicaid's asset limit. This type of policy offers coverage for a specific period without accumulating cash value, making it less likely to affect your eligibility for Medicaid.

2
Monitor the Policy's Face Value

If you have or are considering permanent life insurance, ensure the policy's face value remains within your state's Medicaid exemption limits. The face value is what the policy would pay upon death, and if it's too high, it can impact your Medicaid eligibility.

3
Regular Policy Reviews

Periodically review your life insurance policy to help ensure that the policy's terms, especially in terms of cash value for permanent life insurance, still align with Medicaid eligibility criteria. As personal circumstances and Medicaid rules can change, regular reviews will help you stay within the required guidelines.

Compare Life Insurance Rates

Ensure you're getting the best rate for your life insurance. Compare quotes from the top insurance companies.

Alternatives for Individuals on Medicaid

Individuals on Medicaid have several alternatives to life insurance that align with Medicaid's eligibility criteria:

Burial or Final Expense Insurance: These are specialized, lower-value life insurance policies designed to cover funeral and burial costs. Their lower value typically keeps final expense insurance policies under Medicaid's asset limits, making them a suitable choice for those on Medicaid.

Special Needs Trusts: These trusts allow you to set aside funds for a loved one with a disability without affecting their Medicaid eligibility. This can be a strategic way to provide financial support for dependents while maintaining access to Medicaid benefits.

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MONEYGEEK EXPERT TIP

Considering professional advice for Medicaid planning is highly recommended. A Medicaid planning expert can offer personalized strategies, help navigate state-specific Medicaid rules and suggest the best insurance options based on individual circumstances to ensure both health care needs and financial security are addressed.

FAQ About Life Insurance and Medicaid

MoneyGeek answered common questions to help you understand the impact of life insurance on Medicaid and make an informed decision.

Can I get life insurance if I am already on Medicaid?
Does life insurance count as an asset?
Does life insurance payout affect Medicaid?
How do state-specific rules affect life insurance and Medicaid?
What options are available if life insurance affects Medicaid eligibility?
How often should I review my life insurance policy if I'm on Medicaid?

About Mark Fitzpatrick


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Mark Fitzpatrick has analyzed the property and casualty insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. Currently, he leads P&C insurance content production at MoneyGeek. Fitzpatrick has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.

Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.


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