Can Nursing Homes Take Your Life Insurance?

Life insurance provides a sum of money to designated beneficiaries upon the insured individual’s passing. It comes in various forms, primarily term life insurance and permanent life insurance. Term life insurance offers coverage for a specific period without accumulating cash value. Permanent life insurance, including whole life and universal life, can build cash value over time. Understanding these distinctions is important for long-term financial planning, especially when considering nursing home care costs.

Understanding Nursing Home Costs

Nursing home care represents a significant financial challenge. Initially, individuals cover these expenses through private payment, using personal savings, pension income, or other financial resources. This “private pay” period continues until personal funds are largely exhausted.

Medicare, the federal health insurance program for those aged 65 or older and certain younger people with disabilities, offers limited coverage for nursing home care. It primarily covers short-term, skilled nursing facility care following a qualifying hospital stay, focusing on rehabilitation rather than long-term custodial care.

Medicaid is the primary payer for long-term nursing home care for individuals who meet specific financial and medical eligibility requirements. This joint federal and state program becomes an option once an individual has depleted most personal financial resources. Medicaid ensures those with limited means can access necessary long-term care services.

Nursing homes do not directly “take” a life insurance policy. They bill for services rendered, and the payment mechanism shifts based on the individual’s financial situation. The concern arises because the cash value of certain policies can affect an individual’s eligibility for Medicaid, which then becomes the payer for nursing home services.

Life Insurance and Medicaid Eligibility

The type of life insurance significantly influences Medicaid eligibility, particularly for nursing home care. Term life insurance does not count as an accessible asset for Medicaid because it lacks a cash value that can be surrendered or borrowed against. Permanent life insurance policies, such as whole life or universal life, accumulate a cash surrender value, which Medicaid considers a countable asset.

Medicaid imposes asset limits for eligibility. For a single individual, the countable asset limit in most states is $2,000 in 2025. For married couples where both spouses apply for Medicaid long-term care, the asset limit ranges between $3,000 and $4,000 in many states. When only one spouse requires nursing home care, the Community Spouse Resource Allowance (CSRA) allows the spouse remaining in the community to retain a portion of the couple’s joint assets. In 2025, the federal maximum for this allowance is $157,920, with a federal minimum of $31,584, though state-specific limits may vary. If a life insurance policy’s cash value, combined with other countable assets, exceeds these limits, the individual becomes ineligible for Medicaid until those assets are reduced, often through a “spend-down” process.

Medicaid employs a “look-back” period to prevent individuals from transferring assets to qualify for benefits. In most states, this period extends 60 months, or five years, prior to the Medicaid application date. Any asset transfers, including life insurance policy ownership or cash value, made during this look-back period for less than fair market value can result in a penalty period of Medicaid ineligibility. The penalty length depends on the transferred assets’ value and the average nursing care cost in that state.

Exemptions apply to life insurance policies under Medicaid rules. Many states exempt whole life insurance policies with a face value of $1,500 or less from being counted as an asset. If the combined face value of all permanent life insurance policies exceeds this amount, their cash value becomes countable towards the asset limit. Some states may have higher face value exemption amounts.

Regarding Medicaid estate recovery, if a Medicaid recipient’s life insurance policy names their estate as the beneficiary, the proceeds may be subject to recovery by the state after their death to recoup long-term care costs. However, if the life insurance proceeds are payable directly to a named beneficiary outside of the probate estate, they are protected from Medicaid estate recovery. Proper beneficiary designation is an important consideration in estate planning.

Managing Life Insurance for Long-Term Care

Individuals facing nursing home care have several options for managing life insurance policies for long-term care planning. One approach involves cashing out a permanent life insurance policy, surrendering it to the insurer for its cash value. This lump sum can be used as part of a “spend-down” strategy to meet Medicaid asset limits, though it results in the loss of the policy’s death benefit for beneficiaries.

Another strategy involves changing life insurance policy ownership. Transferring ownership to an irrevocable trust or another individual, such as an adult child, can remove the policy’s cash value from the applicant’s countable assets for Medicaid. This action must be completed well in advance of a Medicaid application, ideally outside the 60-month look-back period, to avoid penalty periods. Such transfers involve a loss of control over the policy by the original owner.

For those with a qualifying health condition, viatical settlements and life settlements offer alternatives to access a policy’s value during their lifetime. A viatical settlement is an option for terminally ill individuals, allowing them to sell their life insurance policy for a lump sum, between 50% and 80% of the death benefit. Life settlements are available to chronically ill or elderly individuals who may not be terminally ill, allowing them to sell their policy for a lump sum that is more than the cash surrender value but less than the full death benefit. The buyer assumes future premium payments and receives the death benefit upon the insured’s passing, providing the original policyholder with immediate funds for care.

Accessing the cash value through policy loans is another possibility for permanent life insurance policies. While a policy loan can provide immediate funds, it reduces the death benefit paid to beneficiaries and can lead to the policy lapsing if the loan and accrued interest are not repaid. This option should be carefully considered due to its impact on the policy’s future value.

Establishing an Irrevocable Life Insurance Trust (ILIT) can be a planning tool. An ILIT is designed to hold a life insurance policy, effectively removing its cash value from the grantor’s countable assets for Medicaid eligibility. For this strategy to be effective, the trust must be irrevocable and established many years before the need for long-term care arises, adhering to specific legal requirements.

Given the complexities of Medicaid rules and financial implications, seeking guidance from professionals is prudent. Consulting with an elder law attorney or a financial advisor specializing in long-term care planning can help individuals understand these regulations and develop a tailored strategy. These professionals can provide specific advice regarding state-specific variations in Medicaid rules and the most appropriate course of action for an individual’s unique circumstances.