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October 28, 2004
Life Insurance and Medicaid
Personally, I hate life insurance. I don’t have any life insurance. When I pay my wife’s life insurance premium, I squirm, because I know that I am helping to pay for those huge skyscrapers in Boston that are owned by the life insurance companies. However, for the seniors who are currently faced with nursing home placement, almost all of them have some amount of life insurance.
MassHealth (Medicaid) treats the cash surrender value of a life insurance policy as an asset, only if the total face value of all policies of the applicant and spouse exceed $1,500. The cash surrender value is the amount of money that you would receive if you turned in your life insurance policy. In determining whether or not you have more than $1,500 of life insurance, you may disregard any policy that doesn’t have any cash surrender value. Generally, the two types of life insurance policies that you can disregard are term and burial insurance. Term insurance is a type of life insurance policy that does not have any cash surrender value. Burial insurance is also a life insurance policy that does not have a cash surrender value. Burial insurance is insurance whose terms specifically provide that the proceeds can be used only to pay the burial expenses, funeral expenses, or both of the insured.
Let’s assume that you have a life insurance policy with a face amount of $2,000 and a cash surrender value of $5,000, and you need immediate nursing home care. What should you do?
If you are single, owning this policy would mean that you are over assets and not eligible for MassHealth (Medicaid). In last weeks article I discussed the asset limit as being less than $2,000 for a single person. In order to qualify for MassHealth (Medicaid), you would have to do one of two things in order to spend-down to less than $2,000 in assets. The best option would be to assign the policy to a funeral home to prepay for your funeral. This is considered an allowable method of spending-down your assets and there will not be any disqualification period for doing this. If you already have a prepaid funeral, you would be able to do a “half-a-loaf”. The “half-a-loaf” is a method of gifting where you give away half of your assets and keep one-half to pay for the disqualification period for having given the other half away. Timing is critical in doing the “half-a-loaf” and if you wait too long, the only other option would be to give the proceeds to the nursing home.
If you are married, the cash surrender value of the policy is treated like any other asset of the couple. Assuming that the couple is not over the applicable asset limit, the only thing that would have to be done is to transfer ownership from the sick spouse to the spouse at home. There is never any disqualification period for transfers between spouses. If, on the other hand, you are over the applicable asset limit, you could then assign the policy to a funeral home for a pre-paid funeral. This would be a non-disqualifying transfer and an appropriate method of spending down your excess assets. As a last resort the policy could be cashed and the proceeds used to purchase an annuity. The conversion of excess assets into an annuity payable to the health spouse continues to be one of the most popular methods of achieving MassHealth (Medicaid) eligibility for married couples.
One thing that I haven’t mentioned is that in order to do any of the above planning techniques, you need to have a valid durable power of attorney. In many cases, the person entering the nursing home is unable to handle their financial affairs and dealing with their life insurance would, in many cases, involve a guardian unless there was a durable power of attorney in place.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds a masters in accounting and a masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org