Can nursing homes take your life insurance?

If you are 65 years old, you have almost a 70 percent chance of needing some kind of long-term care in your lifetime. Given that, many seniors are understandably concerned about how to pay for it.

The cost of long-term care in 2010, according to the US Department of Health and Human Services,

averaged $205 per day for a semi-private room in a nursing home. That’s $6,235 per month or $74,825 per year.

Costs are rising every year, so today’s costs may be significantly higher. It’s easy to see that even a good-sized nest egg won’t last very long at these costs.

Many people think that their Medicare coverage will pay for nursing home care, but it won’t.

If you need long-term care, you have three options: pay for it out of your pocket, buy a long-term care insurance policy to pay for it, or apply for Medicaid.

In order to qualify for Medicaid, you must first have spent most of your own savings.

Many people wonder if a nursing home can take certain assets to pay for their care, including life insurance.

The fact is that you will pay the nursing home out of your assets until you have ‘spent down’ enough money so that you are eligible for Medicaid. At that point, after you apply and are accepted for benefits, Medicaid will pay for your care.

Learn more about nursing homes and your life insurance policy below. Don’t forget to try our free life insurance quote tool above!

Understanding Medicaid

Medicaid is a program administered jointly by the Federal and state governments that provides healthcare coverage to those who cannot afford private coverage. In order to qualify for Medicaid, you must have income and assets below certain levels.

Senior citizens who apply for Medicaid to pay for long-term care costs must first ‘spend down’ their own assets to reach the level required for eligibility for Medicaid.

In most states, you cannot have more than $2,000 in assets in order to qualify for Medicaid.

A spouse who is still living in the community can have assets of up to about $120,000 plus equity in the couple’s home. This amount is protected to allow the spouse to remain at home and live with dignity.

Some assets are exempt from the $2,000 limit. If you have a life insurance policy with a face value of less than $1,500, that policy will not count toward the $2,000 maximum for eligibility.

This is true even if the policy has a cash surrender value. In other words, you can have $2,000 in assets plus that life insurance policy and still qualify for Medicaid.

If the policy’s face value is greater than $1,500, the cash value is counted toward your Medicaid eligibility.

Here’s an example. Joe has a life insurance policy with a $1,500 death benefit and $500 cash surrender value. His life insurance policy is not a so-called ‘countable asset’ and does not factor into his Medicaid eligibility.

He can have $2,000 in other assets and still qualify for Medicaid.

On the other hand, Jane has a life insurance policy with a face value of $2,500 and a cash value of $200. The $200 cash value is factored into her Medicaid eligibility.

She can only have $1,800 of other assets besides the life insurance policy and still qualify for Medicaid.

What to Do With Your Life Insurance Policy

If you have a life insurance policy with a face value greater than $1,500 and cash value, you have several options.

You could surrender or cash in the policy. You would then have to spend the money you receive until you have less than $2,000 in order to qualify for Medicaid.

You could also withdraw the cash value from the policy, or take a loan against it. You would have to spend down the money you receive prior to qualifying for Medicaid, but you would be able to retain all or most of the death benefit of the policy.

You could transfer the ownership of the policy to your spouse, your children or a trust. Keep in mind that the insurance policy has value, and if you give the policy to your children or transfer it to a spouse, you will be subject to Medicaid’s gifting restrictions.

When you apply for Medicaid, you must provide your financial statements for the past five years. Medicaid will ‘look back’ to make sure that you have not given away any of your assets in order to qualify for Medicaid.

If you have given away assets within the five years preceding your Medicaid application, you must wait longer to be eligible for Medicaid. The length of time you have to wait depends on the amount you gave away and the average cost of nursing home care in your state.

Suppose you give away a life insurance policy that is valued at $10,000. If the cost of nursing home care in your state averages $5,000, you would have to wait two months before being eligible for Medicaid.

Consult an estate planning or elder law attorney if you have questions on transferring or gifting assets.

You may be able to assign your life insurance policy to a funeral home. This has the effect of paying for your funeral expenses with the death benefit of the policy.

Prepaid funeral expenses are not a countable asset so they would not be included in the $2,000 limit for Medicaid eligibility. Consult the funeral home for the proper way to do this.

Paying for Long Term Care With Your Life Insurance Death Benefit

Some life insurance policies include a long-term care or critical illness rider. This means that if you require long term care or have a critical illness, you may be able to use all or part of your death benefit to pay for nursing home costs while you are still alive.

A critical illness is usually defined as an illness from which you are not expected to recover, and from which you are expected to pass away within twelve months.

Check with your life insurance provider to see if your policy offers this option.

If it does, you may be able to use some or all of the death benefit on your policy to pay for your long-term care, extending the time before you have to apply for Medicaid, or perhaps avoiding Medicaid altogether.

If you are considering purchasing a life insurance policy so that you will have something to leave to your heirs even if you require Medicaid to pay for long-term care, choose carefully.

Make sure that the policy you choose will let you retain your death benefit even if you have to liquidate or borrow against the cash value to pay for nursing home care prior to qualifying for Medicare.

The treatment of your life insurance policy with respect to the costs of nursing home care is complicated.

You should consult an elder law or estate planning attorney to determine how to handle your life insurance policy if you need nursing home care, or if you have concerns about your eligibility for Medicaid.

Don’t forget to use our free life insurance comparison quote tool below!