Dear Claire,
There are, indeed, two broad categories of life insurance: term life and whole life insurance. Each category receives a different treatment in a Medical Assistance (MA) assessment. While the two categories, term and whole, have many differences in costs and benefits, we will only address the effects for a person applying for Medical Assistance funded long term care or waivered services. The purpose of this letter is not to recommend one type of policy over the other, but only to explain the differences for an individual applying for MA for long term care coverage.
Term life insurance is usually offered for a specific length of time, often 10 or 20 years, and the premium amount is agreed upon in the policy language. Term insurance lasts for the length of the term, unless converted or extended, and does not build up cash value. In other words, a term life insurance policy only pays out if the insured person dies during the term of the insurance. If that does not happen, there is no benefit or payout as a result of the life insurance policy.
If you own a term life insurance policy, that policy will have no affect on an asset analysis for MA long-term care services. Because term life insurance does not have a cash value, it is not recognized as an asset during an application for MA.
Whole life insurance, also referred to as permanent life insurance, universal life insurance, and/or variable life insurance, combines the insurance coverage with an investment or cash value. Often a whole life insurance policy will allow you to get part of this cash value back by cashing in the policy or by borrowing against the cash value that has built up. A whole life insurance policy continues as long as the insured person lives and continues to keep the premiums and other requirements up to date.
The cash value in a whole life insurance policy is attributable to the owner of the life insurance policy, not the beneficiary of the policy. If you own a whole life insurance policy and you apply for MA long-term care, that policy could be counted as an asset to the extent of the available cash value as described above.
If the total cash value of all life insurance policies owned by the Medical Assistance applicant is $1,500 or less, that value can sometimes be considered an excluded asset under the "burial set-aside" rule. Medical Assistance for long-term care allows a person to keep up to $1,500 over and above the normal asset limit as a "burial set-aside," but only if the applicant does not already have a prepaid burial plan or life insurance valued at more than $1,500. Note: there are several ways to fund burial expenses, such as through an insurance policy, a prepaid funeral plan, or by other means. I encourage you to seek further advice if you have questions about burial plans.
A single person applying for Medical Assistance can only have $3,000 in countable assets to be eligible for and receive Medical Assistance coverage. (If the applicant is married, this applies to the spouse needing the long-term care coverage. There are additional limits for a spouse who remains in the community.) For example, if a single person has a whole life insurance policy with a $10,000 cash value, that $10,000 will be added to the total asset value and will have to be spent down to the asset eligibility limit of $3,000 before Medical Assistance coverage would kick in.
If Medical Assistance has already been applied for, and a spenddown to the asset limit is required, there are strict limits on what the money can be spent on, namely health care needs. If assets are spent down prior to making application for Medical Assistance coverage, a person could spend down by paying valid debts, purchasing a prepaid funeral plan, or anything of value he or she may need or want. No gifting should be done within 5 years of anticipated need for Medical Assistance coverage in order to avoid ineligibility at application.
I hope you find this information helpful. Please speak with an attorney if you have any questions about your specific situation.
