His Life Insurance Has A $1,600 Face Value, $100 Over The Line. Medicaid Counts The Cash Inside It And Told Him To Surrender The Policy Before The Nursing Home Was Covered

The post His Life Insurance Has a $1,600 Face Value, $100 Over the Line. Medicaid Counts the Cash Inside It and Told Him to Surrender the Policy Before the Nursing Home Was Covered appeared first on 24/7 Wall St..

A retired widower is applying for Medicaid before moving into a nursing home. Then a small whole life policy he bought decades ago to cover his funeral stops the application cold. Face value: $1,600. Because that policy has cash value, it can count toward his Medicaid resource limit.

Medicaid eligibility for older adults generally uses financial rules drawn from Supplemental Security Income (SSI), a federal program for people who are older, blind, or disabled and have very limited means. States can vary from those rules. Under the SSI life-insurance test, the cash value is excluded when the combined face value of policies he owns on his life is $1,500 or less. Go over that line and the cash surrender value can become a countable asset. His policy sits $100 over.

The federal health plan for people 65 and older, Medicare covers short skilled rehab stays but leaves long-term custodial care to Medicaid, the joint federal and state program for people with very limited assets.

How the $1,500 Face Value Test Exposes Every Dollar of Cash Value

Every permanent policy carries two numbers. Face value is the death benefit printed on the policy. Cash surrender value is what the insurance company pays if the owner cancels today. Face value decides whether the policy counts. Cash value decides how much counts.

The Social Security Administration’s operations manual calls the cash surrender value “the actual resource value of the life insurance policy for SSI purposes.”

Say he lives in a state using a $2,000 individual resource limit. His policy holds $1,150 in cash value and his checking account holds $1,300. Checking alone stays under the limit. Add the policy and his countable total jumps to $2,450.

If the insurer allows the face amount to be decreased so his total coverage falls to $1,500 or less, the policy’s cash value can become excluded under the SSI rule. Crossing the line changes the resource treatment.

Medicaid runs through the states, and the details vary. Pennsylvania, for example, uses the $1,500 face-value trigger but excludes the first $1,000 of cash value when the combined face value is higher. The caseworker’s state manual has the final word.

Term Life Has No Cash Value. Whole Life Can

Term life insurance has no cash value and is generally ignored, whatever the death benefit. The trap catches whole life and other permanent policies that build cash, especially small final expense policies seniors buy for funerals.

The test also adds up the applicable policies on one person’s life. Two $900 whole life policies he owns on himself, each safe on its own, combine for $1,800 in face value, and that puts at risk the cash in both.

Burial Fund Exclusion Offers a Smarter Exit Than Surrender

SSI rules carry a separate exclusion: a person and a spouse can set aside up to $1,500 each to pay for burial expenses. SSA’s manual lists “life insurance policies and/or dividend accumulations designated for burial” as qualifying burial funds. In states that follow that approach, the widower can designate his policy for burial, and its $1,150 cash value fits under the cap.

Designation requires paperwork. The owner titles the fund for burial or signs a statement showing how much has been set aside, for whose burial, how the money has been set aside, and the date it was first set aside.

The $1,500 cap is decreased by the face value of any life insurance policy on the individual that’s already excluded, and by any amount held in an irrevocable burial trust or contract. A person with a $1,000 excluded policy has only $500 of burial room left.

The other standard option is an irrevocable funeral trust or prepaid funeral contract. Money placed in a properly structured irrevocable arrangement is generally exempt, though many states cap the amount.

Surrendering the Policy Doesn’t Make the $1,150 Disappear

If the policy’s $1,150 cash value was already countable, surrendering it simply turns one countable resource into another. The $1,150 becomes cash and stays in the resource calculation until it is spent.

If that leaves him over his state’s resource limit, he has to reduce countable assets before Medicaid can cover long-term care. Spending the money on his own needs or an allowed burial arrangement is different from giving it away. A gift to his children during Medicaid’s five-year lookback can trigger a transfer penalty that delays long-term-care coverage.

Four Documents to Pull Before Anyone Applies

• The face value used for the Medicaid calculation, verified with the insurer, plus details on any riders, dividend additions or other policy features.
• The current cash surrender value, in writing and dated, from the insurance company.
• The combined face value of every policy on the applicant’s life, including old employer and fraternal policies.
• The state’s own rule: its face value threshold, burial fund treatment, and cap on irrevocable funeral contracts.

Families who gather those numbers before the caseworker does may be able to designate the policy’s cash value for burial or use it in an allowed funeral arrangement instead of simply cashing it out. The policy, the beneficiary form, and the ownership on every account belong in the same folder, the kind of checklist you’d build in a free estate guide.

The post His Life Insurance Has a $1,600 Face Value, $100 Over the Line. Medicaid Counts the Cash Inside It and Told Him to Surrender the Policy Before the Nursing Home Was Covered appeared first on 24/7 Wall St..