The two most common types of life insurance policies are term life insurance and whole life insurance. Under both policies, the insured pays an annual or monthly premium during a term of years (e.g. 20 years), and if the insured dies during the term, the insurer pays the death benefit to the insured’s designated beneficiaries.  A whole life insurance policy also has a cash value, so the insured can surrender the policy at any time and receive the cash value of the account, which is largely determined by the amount of premium payments made.

Both policies are great estate planning tools. They both pay the death benefit directly to the designated beneficiaries, avoiding probate.  Further, such proceeds aren’t recoverable from the estate by Medicaid: Medicaid only recovers against probate assets. However, whole life insurance in particular can be problematic when applying for Medicaid.

For 2020, in New York, an applicant may have up to $15,750 (or $23,100 for a couple) in resources in order to qualify for Medicaid. A life insurance policy with no cash value (e.g. a term policy) poses no problem – it isn’t counted as a resource by Medicaid.  However, a life insurance policy with cash value will be counted as a resource if the death benefit exceeds $1,500.  Under Medicaid, these policies are resources because they can be surrendered for cash. An applicant who owns a life insurance policy with a cash value must plan wisely to maintain the policy and still qualify for Medicaid.

A whole life insurance policy holder’s options largely depend 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 equal to or less than $1,500, thereby removing this amount as a resource.  When the applicant’s combined cash value and non-exempt resources exceed their resource allowance, planning becomes more problematic.  Applicants can surrender the policy and spend down the cash, but this often results in the loss of the death benefit. However, if applying for Medicaid home care, the applicant may transfer/gift the policy to a family member, because there are no transfer penalties for home care.  Medicaid nursing home care does have transfer penalties, so unless the policy can be transferred to a spouse or disabled child, (which are exempt), a better alternative may be to have the applicant’s children purchase the policy from the applicant for the cash value. The proceeds can be spent down or used to purchase an irrevocable funeral agreement, which isn’t a transfer. If the cash value (combined with the other non-exempt resources) is significant, further Medicaid planning will be needed, e.g. gift/loan strategies where part of the cash value is used for the applicant’s care.  Those techniques maintain the policy’s death benefit.

A life insurance policy is a great estate planning tool. It avoids probate and protects against a Medicaid recovery. But it can be problematic when planning for Medicaid, so it’s important to review these strategies with an experienced elder law attorney. 


Ronald A. Fatoullah, Esq. is the founder of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Stacey Meshnick, Esq. is a senior attorney with the firm and supervises the Medicaid Department. The law firm can be reached at 718-621-5300, or toll free at 1-877-ESTATES.  Mr. Fatoullah is also a partner advisor with Advice Period, a wealth management firm, and he can be reached at 424-256-7273. 

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