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LONG-TERM CARE PLANNING STRATEGIES WITH LIFE INSURANCE

by: Begley Law Group

by Marianne Johnston, Esquire

When planning for long-term care cost, certain actions should be taken regarding life insurance policies.

            Life insurance with a cash value is a countable asset when determining eligibility for Medicaid benefits.  The only exception is if the face value of the policy is $1,500 or less.  Term life insurance and most employer provided life insurance policies do not have a cash value and therefore have no impact on Medicaid eligibility.

Medicaid applicants and their spouses need to address beneficiary designations and ownership of life insurance policies to ensure their assets are best protected.

Beneficiary Designations

Remove Medicaid Applicant and Applicant’s Estate as Life Insurance Beneficiary

            Spouses often name each other as beneficiaries of their life insurance policies.  If one spouse is likely to need a nursing level of care, the healthy spouse, referred to as the “Community Spouse” in Medicaid regulations, should change the beneficiary on their policies to their children or other persons.  Otherwise, if the spouse in the nursing home receives insurance proceeds, he or she would lose eligibility for Medicaid benefits and the funds would be subject to spend down on long-term care costs.

Review beneficiary designations of all life insurance policies, including those without cash value, and remove the estate of a Medicaid recipient as a beneficiary.  Otherwise, proceeds from that policy are subject to estate recovery by the State upon the Medicaid recipient’s death.

When naming beneficiaries be mindful to name contingent beneficiaries of the life insurance policy as well as primary beneficiaries.

Ownership of Life Insurance Policy

Surrender Life Insurance Policy for Cash

            Because a person may only own a maximum of $2,000 in countable assets to be eligible for Medicaid benefits, a Medicaid applicant must divest themselves of any life insurance policy which places them over this limit.  A comparison must be made between the death benefit and the cash value of each policy.  If the difference between the death benefit and the cash value is small, the policy might be cashed in with the proceeds used to purchase a funeral or other needed item.  If the amount received from cashing in the policy includes dividends or interest greater than the policy’s cost, that excess portion will be taxed as ordinary income.  Therefore, if cashing out a life insurance policy for Medicaid eligibility purposes, withholding for federal income tax is wise.

Assign Policy to Community Spouse

            If the death benefit of a Medicaid applicant’s life insurance policy is substantially greater than its cash value, the Community Spouse may wish to retain the policy.  The cash value of the policy would count toward the Community Spouse’s “Community Spouse Resource Allowance” (“CSRA”)[1].

Gift Policy to Children

If there is a significant difference between the death benefit and the cash value of the policy, a Medicaid applicant may want to gift the policy to their children.  Such a transfer would delay Medicaid eligibility because of the imposition of an asset transfer penalty.  The length of the penalty would be based on the cash value of the life insurance policy being assigned to the children.  Following such ownership transfer, the children would be responsible for paying premiums on the life insurance policy but would pay no income tax upon receiving the proceeds therefrom.

Sell Policy to Children

If  the delay in eligibility for Medicaid benefits caused by gifting an insurance policy would cause financial hardship, an alternative is to sell the life insurance policy to their children for payment equal to the cash value of the policy as of the date of transfer.  If the applicant’s child purchases the policy for the full cash value, no Medicaid transfer penalty would arise.  However, under the “transfer for value” rule, the child would be taxed on the proceeds from the policy to the extent that they exceeded the child’s cost basis, which would be the purchase price and any premiums paid.

Assign Policy to Funeral Home

            Life insurance policies can often be assigned to funeral homes.  The funeral director will want the policy to be paid up in exchange for the prepaid funeral.  The assignment must be irrevocable, and the funeral services purchased must be the same or greater than the cash value of the policy.  The funeral home is named as the policy’s owner and the policy proceeds are irrevocably assigned to the funeral home to be used for payment of the funeral costs at the time of death.  The State of New Jersey must be named primary beneficiary on the policy for any funds remaining after the funeral bill is paid.

            No Action Required with Term Policy

Remember, a term life insurance policy is not a countable resource for Medicaid eligibility because it has no cash value.  Therefore, ownership of such policies does not have to be changed or assigned.

[1] The CSRA is the amount of countable assets the Community Spouse is permitted to retain when seeking Medicaid eligibility for his or her spouse.  The CSRA is one-half of the couple’s countable assets subject to a maximum ceiling of $154,140 and a minimum of $30,828 in 2024.