It’s common for there to be overlap in people who require Medicaid assistance and people who have a life insurance policy. Life insurance is a type of insurance product in which the insured pays either a monthly or annual premium towards a policy so that in the event of their death, their insurance beneficiaries can receive a paid amount of money known as a ‘death benefit.’ Death benefits are a way to ease the financial burden on the surviving loved ones of the insurance policy holder.

In this life insurance guide, we’ll compare how withdrawals made during surrender periods are impacted by both term and whole life insurance products, provide helpful insights about life insurance and Medicaid, and more.

More than eighty-five million people are enrolled in Medicaid programs across the US,* accessing help with medical care costs on a low or limited financial income. Each state has its own Medicaid thresholds, which set the maximum you can earn and own and remain eligible to receive Medicaid benefits.

Those receiving Medicaid support may wish to purchase a policy to secure a death benefit for their loved ones.

Life insurance coverage that includes an account value component could mean you fall outside the relevant Medicaid thresholds. You can have life insurance while on Medicaid but it's crucial to understand the implications and your specific policy. Anyone who holds or is considering purchasing life insurance and is also claiming or intending to claim Medicaid support must evaluate their options carefully.

Life insurance may impact Medicaid because each state sets an asset and policyholder income limit. Those financial limits are the maximum you can earn or own in assets and remain eligible for help with long-term medical costs.

Although the Medicaid limits can vary by state, we advise you to verify the Medicaid financial restrictions depending on where you live.

Some financial assets, including your home, vehicle, and personal items, are excluded when determining whether you qualify for Medicaid services. Other assets, like some insurance policies, are treated as financial assets and will be considered when checking your Medicaid eligibility.

The rules and thresholds for Medicaid change from year to year, and the criteria differ based on your age, health status, and whether you have children. To further complicate matters, the asset test can be tricky to apply as it also varies depending on the financial assets you own and whether they are categorized as ‘countable.’

Keep in mind that certain assets may not be counted towards asset limits, meaning that they are considered exempt. Remember, these assets may include your primary home, vehicle, household items, and other personal items. Not all insurance policies are counted as financial assets, either–in fact, there are situations in which non-exempt life insurance policies can still qualify as exempt up to a certain cash surrender value.

In most states, whole life insurance policies holding a face value of $2,000 or less are exempt from Medicaid’s asset limit. However, some states have higher face value exemption amounts. Typically, if the combined face value of all of your policies is higher than the face value exemption amount in your state, the cash value of the policies may count toward the asset limit.

However, the basic rule for Medicaid planning is that if you own assets above the state threshold, including a cash account value within a life insurance product, you may fall outside the eligibility limits and be disqualified for Medicaid services. If you need to confirm the asset limits in your state, you can visit the official Medicaid website for the most up-to-date eligibility information.

We noted that some life insurance policies do not affect Medicaid eligibility. For example, a straightforward life insurance product that covers funeral costs without an account cash value would be unlikely to have any impact on your eligibility.

Term and whole life insurance are the most common types of coverage, and the policy structure will determine your eligibility for Medicaid assistance.

Term Life Insurance Products

Term life insurance will generally not impact whether you qualify for Medicaid. If the insured person passes away while insurance coverage is in force, a death benefit will normally be paid to their named beneficiary, subject to any policy exclusions or limitations.

These life insurance products can be helpful to individuals who would prefer to pay lower monthly premiums or rates (typically, term life insurance premiums are lower than those of whole or permanent life insurance) and want to leave their survivors with a death benefit. Death benefits can often help the surviving beneficiaries to pay off any end-of-life costs for the insured and provide a financial cushion.

However, if your term life coverage expires prior to your passing, the policy becomes invalid, and there will not be any insurance benefit payable under that policy. If your term life product does not have an accumulative account value, it will not be counted as a financial asset and won’t typically affect the Medicaid asset limit.

Whole Life Insurance Products

A whole life insurance policy is more likely to influence your eligibility for Medicaid because it provides permanent coverage that is valid for your entire life. These life insurance products can accrue an account cash value alongside a death benefit.

An insurance policyholder can take a loan against the account cash value or withdraw some of the value they have built up. These loans can be used at the insured’s discretion, whether that’s to pay for higher levels of care later on in life, a downpayment on a mortgage, or a car payment. Although these transactions can reduce the death benefit payable if not repaid, access to further income means the cash value is not exempt from Medicaid asset calculations. However, each state provides exemptions for Medicaid benefits, so you should be aware of the rules in your state.

What role does burial insurance play in all of this? Burial insurance. also known as ‘final expense insurance’ or ‘funeral insurance,’ typically has no impact on Medicaid eligibility. Burial insurance usually falls under the same umbrella as whole life insurance and generally acts as a part of a policy that covers burial or cremation costs as well as funeral arrangements.

There are various solutions if you have a life insurance product and are concerned that it may affect your Medicaid eligibility or if you want to purchase life insurance and protect your eligibility for Medicaid. If you allow your insurance policy accounts to lapse, this could reduce the death benefit payable to your loved ones in the future.

Options for your life insurance policy might include:

• Planning your life insurance policy contributions and withdrawals to avoid tipping over the exemption limit–while noting that drawdowns from your account value could impact the overall insurance coverage
• Transferring your life insurance to a partner or spouse, making sure their assets remain below the limits (research the limits in your state.)
• Selecting an alternative insurance product that delivers the benefits you require, such as a term life insurance policy

As always, the right decisions depend on your circumstances, the value of other countable assets, and the thresholds within your state. However, it is well worth reviewing those eligibility limits and taking action to ensure you have adequate life coverage while protecting your entitlement to Medicaid services. If you need assistance in understanding life insurance and Medicaid, you can always discuss with life insurance providers you trust.

Why Does the Account Value of My Life Insurance Product Affect My Eligibility for Medicaid?

Each state imposes a financial asset limit, which sets the maximum you can own before to be eligible for Medicaid. Since this financial limit varies by state, you should research on your own to see what limits are applicable to you.

Keep in mind that Medicaid typically cannot take your life insurance policy while you are alive, either. But because this is based on the face value of your specific insurance policy‒which could be counted towards the asset limit‒it could impact your Medicaid eligibility.

Can I Apply for Medicaid if I Have a Life Insurance Policy?

You can apply to the Medicaid program whether or not you have a life insurance policy. However, the type of insurance you have and the policy's account value might tip you over the maximum asset value eligible recipients can have.