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At some point during your retirement years, there is a good chance you will need the type of medical care that only a long-term care (LTC) facility can provide. The cost of that care may cause you to turn to the Medicaid program for assistance. If you fail to plan ahead by including Medicaid planning in your comprehensive estate plan, you may find it challenging to qualify given the extremely low asset limit imposed on applicants by Medicaid. Fortunately, Medicaid does exempt some assets from the “countable resources” limit. One exempt asset that often confuses applicants is the value of life insurance policies. Failing to understand how Medicaid determines the value of a life insurance policy can be problematic if you need to qualify to help cover your LTC expenses.

Will You Need Medicaid Coverage?

Although there is no way to know with any degree of certainty that you will need LTC, the odds are favorable that you, or someone you love, will eventually need that type of care. When you enter your retirement years, your odds of one day needing LTC are about 50/50. With each passing year, those odds increase. If you are still alive at age 85, those odds will have increased to about a 75 percent chance of needing LTC before the end of your life. As of 2016, the average cost of a year in LTC nationwide was $80,000 – and that figure is expected to continue to increase in the years to come. Because neither Medicare nor the average health insurance plan will cover LTC expenses, over half of all seniors currently in LTC depend on Medicaid to help cover the cost.

Medicaid Eligibility Guidelines

The good news is Medicaid will help cover the costs associated with LTC. The bad news is Medicaid imposes both an income and an asset, or “countable resources” limit on all applicants. Typically, the countable resources limit is only $2,000, meaning an applicant cannot have countable resources exceeding that amount. If the value of your assets exceeds the limit, you will be ineligible until you “spend-down” your assets until you qualify under the countable resource limit. This may mean you will need to sell your assets and use the proceeds to cover your LTC expenses during the waiting period.

What Assets Are Exempt?

Fortunately, Medicaid does exempt some assets from the countable resources calculation. Because Medicaid is administered by the individual states, there will be some differences in the assets a state considers exempt. However, common examples include:

• Principal place of residence, lot, and sale proceeds if another residence is purchased within 3 months of the sale
• Household goods and personal effects up to a specified amount
• Engagement and wedding rings
• Automobile used for necessary transportation, such as for transportation to employment or medical treatments
• Business property
• Life insurance policies up to a specified amount

How Does Medicaid Determine the Value of Life Insurance Policies?

In most states, term life insurance is exempt. Life insurance with a face value of up to $1,500 is also exempt from being a countable resource. If a policy has a face value above $1,500, it is a countable resource. Once you determine it is a countable resource, you next look to the cash surrender value of the policy. The cash surrender value counts toward the $2,000 asset limit. Let’s look at Mary who has the following assets:

• $950 in cash in her checking account
• Life insurance policy 1: a term policy with a death benefit of $10,000
• Life insurance policy 2: a whole life policy with a death benefit of $1,200 and a cash surrender value of $1,200
• Life insurance policy 3: a whole life policy with a death benefit of $1,600 and a cash surrender value of $1,100

Mary has countable resources of $2,050 and does not qualify. Policy 1 is exempt as a term policy. Policy 2 is exempt because the face value is only $1,200. Even though the value of policy 3 is less than policy 2, it is still a countable resource because the face value of policy 3 is over $1,500. Therefore, we consider the value of policy 3, which is $1,100. Thus, Mary has $1,100 plus her checking account of $950, for a total of $2,050. Mary is not currently eligible because her state has a limit on countable resources of $2,000. If Mary spends $51 or more, perhaps by going out to dinner, she would have less than $2,000 in countable resources and she would qualify.
Determining which life insurance policies are exempt and which ones will disqualify you for Medicaid can be confusing. The best way to ensure your life insurance policies do not create a hurdle to Medicaid eligibility is to consult with an experienced estate planning attorney in your area.