Do Life Insurance Proceeds Count as Income for Medicaid?

Medicaid, a program providing health coverage to millions, operates with complex eligibility rules, particularly concerning financial resources. Life insurance proceeds are not always considered income. Instead, the program evaluates both income and assets, and the way life insurance is treated can affect an individual’s eligibility. Understanding these distinctions is important for navigating Medicaid’s requirements.

Medicaid’s Definition of Financial Resources

Medicaid eligibility relies on a clear distinction between “income” and “assets.” Income generally includes money received in a given month, such as Social Security benefits, pensions, or wages. If an individual receives an inheritance or a large sum, it is considered income in the month it is received, but then becomes an asset in subsequent months.

Assets, conversely, are resources owned that can be converted into cash to pay for care. These include bank accounts, investments, real estate beyond a primary residence, and certain types of life insurance. Medicaid programs establish specific asset limits, which are low for individuals, around $2,000 in many states for long-term care programs. For married couples, when one spouse is not applying for Medicaid, the asset limits can be higher for the non-applicant spouse, exceeding $150,000.

This distinction between income and assets is important because different rules apply to each category. Meeting both income and asset thresholds is necessary for Medicaid eligibility for long-term care services. While some Medicaid programs use a Modified Adjusted Gross Income (MAGI) methodology that does not consider assets, programs for older adults, blind individuals, or those with disabilities require an asset test.

Treatment of Life Insurance Proceeds

Life insurance proceeds, specifically the death benefit paid to a beneficiary, are treated as an asset for Medicaid purposes, not as monthly income. When a beneficiary receives a life insurance payout, that lump sum adds to their total countable resources. This can impact their Medicaid eligibility if the combined amount exceeds the program’s asset limits.

The type of life insurance policy matters when determining its impact on Medicaid eligibility. Term life insurance policies do not accumulate cash value; therefore, they are not counted as an asset during the policyholder’s lifetime. However, the death benefit from a term policy, once received by the beneficiary, will still be considered an asset to them.

Whole life or universal life policies, known as cash value life insurance, build cash value over time. This cash surrender value is considered an asset of the policyholder while they are alive and applying for Medicaid. While many states exempt policies with a total face value below a certain threshold, $1,500, if the face value exceeds this amount, the entire cash value of the policy counts towards the applicant’s asset limit.

Navigating Eligibility with Life Insurance Proceeds

If life insurance proceeds, when combined with other countable assets, cause a beneficiary’s total resources to exceed Medicaid’s asset limit, the individual may become ineligible for benefits. Eligibility can be regained once these excess assets are “spent down” to meet the program’s requirements. Spending down involves using the funds on permissible expenses for the Medicaid applicant or for exempt purposes.

Permissible spend-down options include paying for medical bills, making necessary home modifications for medical needs, or establishing an irrevocable funeral trust. An irrevocable funeral trust allows an individual to set aside funds for funeral and burial expenses, and these funds are not counted as an asset for Medicaid eligibility, provided the trust meets specific state guidelines and limits. Most states have a limit on the amount that can be placed in such a trust, up to $15,000.

The Medicaid “look-back” period is a key consideration for long-term care services. In most states, this period extends back 60 months (five years) from the date of a Medicaid application. Any transfer of assets, including gifting life insurance policies or their proceeds for less than fair market value during this look-back period, can result in a penalty period of Medicaid ineligibility. This rule prevents individuals from giving away assets to qualify for Medicaid, ensuring funds are used for the applicant’s care before public assistance.