Can Medicaid impact your life insurance eligibility?

Medicaid is a government funded program that provides health insurance for low-income Americans. Because your level of income impacts whether you qualify for life insurance coverage, people on Medicaid might not be able to get a life insurance policy.

Conversely, having too much in assets can make you ineligible for Medicaid. If you have a life insurance policy with a cash value feature, it could put you over the Medicaid asset limit.

How do Medicaid benefits impact life insurance eligibility?

When you’re going through the life insurance application process, the underwriter evaluates your evidence of insurability to determine if you are eligible for life insurance coverage. Evidence of insurability is essentially your financial background and the justification for purchasing an income replacement.

Life insurance companies evaluate this information because the life insurance death benefit isn’t meant to increase your family’s wealth — it is meant to provide a replacement for the financial support you provided to your dependents before you died.

There are income and asset requirements in place to be eligible for Medicaid benefits — they must be below a certain threshold. The same threshold that makes you eligible for Medicaid could make you ineligible for life insurance. If your income is low enough that you’re eligible for Medicaid, it also might be too low for you to be ineligible for a traditional life insurance policy.

Insurers typically don’t have uniform guidelines in place about minimum earned income and assets — each application is evaluated on a case-by-case basis. A life insurance broker like Policygenius can help you evaluate your options.

If you already have a life insurance policy in place and need to apply for Medicaid, you’ll see no changes in your policy. As long as you continue to pay your policy premiums, life insurance companies cannot cancel or change your coverage even if there are changes in health or income.

Can life insurance coverage impact Medicaid eligibility?

If you already have a life policy in place, it can impact your eligibility for Medicaid, depending on the type of policy you have. This is because of how Medicaid determines its financial eligibility for its programs; there is a limit on assets you can own in order to qualify.

Whether or not your life insurance policy impacts your Medicaid eligibility depends on if your policy is considered an asset. If you have a term life insurance policy, you shouldn’t see any impact on your Medicaid eligibility, whereas some permanent policies could have an adverse effect on an application for Medicaid benefits.

Term life insurance

The most straightforward type of life insurance, term life insurance, only offers the death benefit that is paid out to your beneficiaries when you die. Because it doesn’t have any supplemental components, like a cash value, it’s essentially of little value while you’re alive and therefore not considered to be an asset or income.

For that reason, if you have a term life policy in force and later need to apply for Medicaid benefits, it won’t have any impact on your eligibility.

Permanent life insurance

Some permanent life insurance policies, like whole life insurance, have an investment component called a cash value that can be accessed while you’re alive.

You can use the cash value to take out a loan or you can surrender the policy completely and keep the cash. Because you are able to access and use the cash value while you’re alive, it’s considered an asset when applying for Medicaid.

Whether or not the cash value of your policy is prohibitive for Medicaid eligibility will depend on the face value of your policy, which determines how your cash value grows. Federally, the maximum allowed amount is $1,500, but each state has different thresholds for the maximum amount of assets you can have to get Medicaid.

If the face value of your policy is under these requirements, then your policy’s cash value won’t be considered an asset and you could still be eligible for Medicaid. However, if the face value is above the maximum threshold, then your cash value could count as an asset and disqualify you from receiving benefits.

Life insurance options for people on Medicaid

Just because you’re ineligible for a traditional life insurance policy because of Medicaid benefits doesn’t mean you’re completely unable to purchase life insurance protection. There are a few life insurance policies that guarantee coverage, though they are often unaffordable and come with limitations.

Guaranteed issue

A guaranteed issue life insurance policy offers coverage based on three variables: age, gender, and the state you reside in. It’s optimal for people whose medical or financial history makes them ineligible for a traditional life policy.

While applications for guaranteed life policies are generally guaranteed acceptance, the caveat is that they tend to be costly and unaffordable.

Final expense

Final expense life insurance is a policy that pays out enough to cover end of life expenses, such as a funeral or cremation. Because the application usually only asks minimal questions and has limited barriers for acceptance, it’s known as a last resort life insurance option for people who can’t get a traditional life insurance policy.

There are two types of final expense life insurance policies:

• Guaranteed issue, which covers high-risk individuals and offers coverage of up to $25,000
• Simplified issue, which is for people who insurers deem as moderately risky and offers coverage of up to $50,000

Again, these options are a lot costlier than traditional coverage and can often be unaffordable. The graph below shows the pricing disparity between traditional life policies and final expense policies.

Methodology: Sample monthly premium rates based on 68 year-old non-smoker male; quotes based on policies offered by Policygenius in 2020.

Can Medicaid programs take the life insurance death benefit from your beneficiary?

After you die, Medicaid can seek financial restitution through something called the Medicaid Estate Recovery Program (MERP).

This can only happen under particular circumstances, such as if they paid for your nursing home care, and repayment can only come from your estate’s assets and property — meaning any death benefit paid out to your beneficiaries cannot be taken by MERP. But, if your death benefit becomes a part of your estate — either because you designated it as the beneficiary or your primary and contingent beneficiary is no longer — then it can be sought after by Medicaid through your estate.

If you have a life insurance policy and rely on Medicaid for health insurance, the best way to ensure that the program can’t seek repayment from your policy’s death benefit is to keep your policy’s details up to date, especially in terms of your policy’s beneficiaries.