Will Medicaid take my mom’s life insurance policy?

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Q. My 78-year-old mom has vascular dementia and other health issues. She is on Medicaid. Can she buy life insurance to help pay for her funeral expenses without Medicaid taking the policy as an asset?
— Daughter

A. We hope you and your mom are doing well.

Generally, it is best to make and prepay for funeral arrangements prior to and as part of the spend down in qualifying for Medicaid.

A term life policy, which has no cash surrender value, will have a zero value during your mom’s lifetime, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

“As long as your mom and her estate are not the beneficiary, the proceeds cannot be attached by creditors — including Medicaid — upon her death,” she said. “Assuming she named you — or whoever else is responsible for her funeral arrangements — as the beneficiary, the proceeds can be used by the named beneficiary to pay for the necessary arrangements.”

But if your mother qualifies for Medicaid, the question arises as to how will she pay the premium on this policy, Romania said. It may be possible for her to prepay the premium in order to qualify for Medicaid, she said.

If the life insurance policy has a cash surrender value, then before your mother can qualify for Medicaid, she must spend down her assets and will be required to liquidate the cash in this policy. That’s because Medicaid applicants may not have more than $2000 of countable assets in order to qualify, Romania said.

There are also income caps in qualifying for Medicaid, therefore, notwithstanding the asset limit, again the issue of premium payments must be considered, she said.

Assuming the insurance can be retained, your mother qualifies for Medicaid and the insurance is paid to her estate instead of a named beneficiary, New Jersey law kicks in. Statute N.J.S.A. 3B:22-2 sets forth an order of priority of claims when assets are insufficient to pay all creditors.

“Reasonable funeral expenses are paid before Medicaid is reimbursed,” Romania said. “However, Medicaid will take assets that are in excess of the funeral and other administrative expenses of the estate.”

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This story was originally published on March 26, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.