Can Medicaid impact your life insurance eligibility?

Medicaid is a government-funded program that provides health insurance for low-income Americans, people with disabilities, caretakers, and pregnant people. Because your income impacts whether you qualify for life insurance coverage, some people on Medicaid might not be able to get a standard life insurance policy.

However, 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 Medicaid benefits impact your life insurance eligibility

When you apply for life insurance, an underwriter evaluates your evidence of insurability to decide if you qualify for a policy. Evidence of insurability is based on your income and financial history.

Life insurance companies use evidence of insurability to confirm that your policy’s benefit is proportional to the financial support you provide to your loved ones. You can’t buy a policy so large that it’ll significantly increase your family’s wealth.

But, you must have below a certain amount of income and assets to be eligible for Medicaid benefits. [1] The amount you need to qualify for Medicaid may be too low to allow you to qualify for a life insurance policy.

An existing life insurance policy won’t be affected if you apply for Medicaid. As long as you pay your premiums, your provider can’t cancel or change your coverage because of changes to your health or income.

Every insurer has its own minimum earned income and asset requirements. An independent life insurance broker like Policygenius can help you evaluate your options.

Can life insurance coverage impact your Medicaid eligibility?

There is a limit on assets you can own to qualify for Medicaid. A term life insurance policy won’t affect your ability to get Medicaid because term life insurance is not an asset. But a permanent life insurance policy can impact your eligibility. 

Some permanent insurance policies, like whole life insurance, have an investment-like component called a cash value that can be accessed while you’re alive. Because you can use the cash value, it’s considered an asset when applying for Medicaid.

→ Learn more about cash value life insurance

How much permanent life insurance will impact your Medicaid eligibility?

The total assets you’re allowed to have under Medicaid varies by state, but is usually around $2,000. [2] Whether the cash value of your policy disqualifies you for Medicaid depends on your policy’s:

• Face value (i.e., the death benefit)

• Cash value amount

A permanent life insurance policy with a death benefit under $1,500 usually won't have its cash value counted as an asset. [3] But, the maximum death benefit varies by state and is as high as $10,000 in some states. 

If your policy’s death benefit is above $1,500, your cash value counts toward the $2,000 asset limit.

What to do if your life insurance keeps you from getting Medicaid

If your life insurance’s cash value amount disqualifies you from Medicaid, you can get rid of your policy by canceling it  — you may get some cash surrender value — or selling it, which isn’t recommended. You can maintain some amount of coverage by:

• Converting to extended term life insurance: A common option in most permanent policies, this allows you to use your cash value to purchase a new policy with the same death benefit for a shorter coverage period.

• Taking a reduced paid-up option: This option uses your accumulated cash value to purchase a new permanent insurance policy with no premiums owed and no cash value. The amount will be lower than your original death benefit, but you get lifetime coverage.

• Transferring your policy: Transferring ownership of your life insurance policy to a family member or an irrevocable trust means the cash value is no longer your asset. An estate planning attorney can walk you through the process. 

• Use your cash value to pay your premiums: If you’ve built up enough cash value you may be able to spend it down by using it to pay your premiums, then resume payments once the amount is below the maximum allowed by Medicaid.

If someone still depends on you for financial support, consider the alternatives to canceling your policy. A reduced paid-up or extended term option ensures your loved ones have financial support but doesn’t come with continued premium payments.

Alternative life insurance options for people on Medicaid

If you’re ineligible for a traditional life insurance policy and you don’t have an existing policy, final expense insurance can give you some protection. Guaranteed issue and simplified issue life insurance both offer near-certain approval as long as you can pay the premiums. However, they are expensive and come with age and coverage limits.

Guaranteed issue life insurance

A guaranteed issue life insurance policy offers coverage based on three variables: 

1. Age

2. Gender

3. 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 are generally guaranteed acceptance, the caveat is that you’ll get less coverage for your money (up to $25,000) than with term life insurance and policies are only for those age 50 to 80.

Simplified issue life insurance

Simplified issue policies offer slightly more coverage than guaranteed issue (generally up to $40,000) at a lower premium than guaranteed issue. However, serious medical conditions like cancer and heart disease may disqualify you from buying a policy. 

Most simplified issue policies are only available to those age 45 or older.

Can Medicaid take the life insurance benefit from your beneficiary?

After you die, Medicaid can seek financial restitution through something called the Medicaid Estate Recovery Program (MERP). However, your life insurance proceeds are not usually at risk of being taken using MERP.

Medicaid can only take your death benefit through MERP if all of the below are true:

• Medicaid paid for your long-term-care services (like nursing home care)

• Your life insurance paid out to your estate instead of to a beneficiary 

• You have no surviving spouse, children under age 21, or children with disabilities

Your life insurance pays out to your estate if your beneficiaries pass away or are otherwise unable to collect the payout. If you have life insurance and Medicaid, ensure that the program can’t seek repayment from your death benefit by keeping your policy’s beneficiaries up to date. 

While using Medicaid for healthcare creates additional considerations for buying life insurance and vice versa, there are ways to protect the policy you have or get a new one. A Policygenius agent can help you keep your policy updated and make a plan that balances your needs.