Medicaid and Life Insurance: What You Need to Know

In this article...
  • Your life insurance plan may directly impact Medicaid eligibility. Learn how Medicaid and life insurance affect one another and how to get the most from both.

For many disabled, pregnant or low-income Americans, Medicaid provides essential healthcare coverage, but eligibility is determined by strict guidelines. If you have a life insurance policy and are thinking about applying for Medicaid, it’s important to understand how your coverage may affect program eligibility. On the flipside, Medicaid recipients may find their ability to get life insurance impacted by their benefits. In this article, we’ll take a look at how Medicaid and life insurance may impact one another and how you can get the most from both.

Does Life Insurance Affect Medicaid Eligibility?

Whether your life insurance coverage affects your Medicaid eligibility depends on the type of plan and the amount of coverage. That’s because Medicaid is an income-driven program with strict guidelines. As such, it sets limits on the value of assets you can own. That may include life insurance.

Term vs. Whole Life Insurance: Impacts on Medicaid Eligibility

Not every life insurance plan impacts Medicaid eligibility. To determine whether your coverage will impact your Medicaid eligibility, let’s look at two common types of policies: term insurance and whole life insurance:

Term Life Insurance

Term life insurance is coverage that lasts for a limited amount of time, typically between 10 and 30 years. If the insured dies while the coverage is in effect, the policy’s beneficiaries receive a death benefit, which is considered the face value of the policy. If the insured outlives the coverage, the policy expires and benefits are lost.

Because term life insurance has no cash value and can’t be cashed out while the policyholder is alive, Medicaid doesn’t consider it an asset. Essentially, this type of policy has no value to the policyholder so it isn’t included in Medicaid’s asset limit and won’t impact eligibility.

Whole Life Insurance

Whole life insurance provides lifetime coverage, paying out a death benefit to beneficiaries after the insured passes away. However, whole life insurance also includes an investment component, which gives it a cash value. These funds may be withdrawn during the policyholder’s lifetime, and as such, may be considered an asset under Medicaid’s eligibility guidelines. Depending on the accrued cash value of a whole life plan, it can interfere with your odds of getting approved for Medicaid.

How Much Life Insurance Can I Have on Medicaid?

If you have a term life policy, there's essentially no limit to the amount of life insurance you can have while on Medicaid. That’s because a term policy pays a death benefit to beneficiaries after the insured passes away but has no actual monetary value to the policyholder. However, because Medicaid eligibility is determined by your income and owned assets, life insurance policies that have a cash value are taken into consideration when you apply for this government benefit.

Medicaid eligibility guidelines are complex and may vary year to year and from state to state. Specific requirements may also depend on your age and care needs, although most plans require applicants to have less than $2,000 in assets. However, in many states, whole life policies with a face value of up to $1,500 are considered exempt from Medicaid's asset limit. In some states, such as Florida and North Carolina, the amount may be even higher.

That means that if your policy’s death benefit exceeds this state-governed amount, the cash value of your policy is counted toward your Medicaid asset limit. Depending on your state of residence, you may also be eligible for a partial exemption for your life insurance if the policy’s value exceeds the specified limit.

Can Medicaid Seize a Life Insurance Death Benefit From Your Beneficiaries?

If the death benefit from your life insurance policy is paid out directly to a named beneficiary or beneficiaries, Medicaid can't touch it. However, if the death benefit is paid to your estate, Medicaid may seize the funds through the Medicaid Estate Recovery Program, providing the following conditions are also met:

  • Medicaid paid for long-term care needs, such as skilled nursing or assisted living
  • You leave behind no surviving spouse or minor or disabled children

Typically, a life insurance death benefit only defaults to your estate if your designated beneficiaries pass away before you do or they're unable to collect the payout. It can be avoided by keeping the beneficiary information updated and accurate on your life insurance policy documents. States may also waive the recovery of benefits if doing so would cause undue hardship to the family of the deceased.

Can Medicaid Affect Your Ability to Get Life Insurance?

Although Medicaid may not directly impact your ability to get a policy, there is a direct correlation between Medicaid and life insurance eligibility. Because Medicaid is designed for low-income Americans, its eligibility requirements include strict income and asset limits. Individuals who meet those requirements may find it difficult to get approved for a life insurance policy.

Essentially, that’s because life insurance is meant to replace your income when you die, protecting beneficiaries from the financial hardship that results from your absence. It isn’t meant to create wealth. Policies are approved, in part, by evaluating evidence of insurability, which includes looking at your current and future income. That means that if you qualify for Medicare, insurance providers may find your income too low to warrant approval for a life insurance policy.

The good news is that Medicaid recipients may qualify for life insurance through providers who have lower income thresholds for policies. They may also be able to purchase guaranteed or simplified issue plans, which guarantee coverage regardless of income. On the downside, these policies typically offer lower coverage at a higher cost than traditional plans.  

Where Can You Get Help?

If you’re receiving public assistance and need assistance navigating the ins and outs of Medicaid and life insurance, an experienced estate planner may be able to help you get the coverage you need to make sure your family is protected. An attorney who specializes in elder law may also be able to Medicaid recipients or potential applicants through the legalities of maintaining life insurance coverage. If you can't afford to pay a consultant, contact your state Medicaid agency for answers to Medicaid-related questions and help with applying.