12 Oct Will Medicaid take the proceeds from term life insurance?

Q. Does or can Medicaid recover the proceeds of a term life insurance policy when a beneficiary is named on the term policy and the for someone on Medicaid and upon their passing?
— Beneficiary, maybe

A. There are lots of rules when it comes to Medicaid.

Let’s see how they may apply to your situation.

First, we want to make sure you know that Medicaid is a federal program that is administered differently from state to state, and that each application is individual and there may be exceptions to these general rules.

There are different rules for married applicants than unmarried applicants, and different rules for applicants with disabled children.

In order to be eligible for Medicaid, an applicant must demonstrate that they have both a medical and a financial need, said Christopher Olszak, an attorney with Davison Eastman Muñoz Paone in Toms River.

He said with some exceptions, an unmarried individual who is applying for Medicaid cannot have more than $2,000 in available assets.

An asset is considered to be available if it can be converted to cash.

Olszak offered this example: Let’s say that an applicant has a permanent life insurance policy with a death benefit of $25,000, but the policy also has a cash surrender value of $5,000. Because the applicant has the right to surrender the policy in exchange for a lump sum payment of $5,000, Medicaid considers the policy to be an available asset.

“If the applicant does not surrender the policy and obtain the cash value — or perhaps assign the policy, for example, to a funeral home to prepay the applicant’s funeral — ownership of the life insurance policy will make the applicant ineligible for benefits because the cash value exceeds $2,000,” he said.

A term policy, however, does not have a cash value and would not render the applicant ineligible for Medicaid benefits, Olszak said.

“Medicaid would not require the policy to be canceled and the beneficiary of the policy would be allowed to receive the death benefits upon the Medicaid recipient’s death,” he said.

Because the proceeds would be paid to the beneficiary and not the decedent’s estate, New Jersey would not have the right to assert a claim for recovery against the proceeds.

But importantly, in the event the proceeds were paid to the Medicaid recipient’s estate and not a named beneficiary, the life insurance proceeds would be subject to Medicaid recovery, he said.

“However, the practical problem is that once the policy owner is on Medicaid, he/she would only have $2,000 or less in his/her name for the rest of his or her life,” Olszak said. “If the owner is out of money and the beneficiary does not continue paying the premiums for the term policy, the policy could lapse.”

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This story was originally published on Oct. 12, 2022.

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.