How are Whole Life Insurance Policies Treated When Applying for Medicaid?
Can a whole life insurance policy owned by a current recipient of Medicaid benefits be transferred or borrowed against in order to avoid becoming ineligible for benefits?
It can’t be transferred, but it can be borrowed against. Transferring the policy would cause a penalty, postponing eligibility for Medicaid by a period of time based on the cash value of the policy. However, if you were to borrow the cash value, the policy would then have no cash value and no longer would be countable against the Medicaid asset limit. You would have to spend down the borrowed funds, which could be done prepaying for the applicant’s funeral or for anything else he or she may need.
In terms of whether to cash out the policy or borrow against it, the main question is whether there is a significant difference between the cash value and the death benefit. If the cash value is $10,000 and the payment at death is $12,000, it may not be worth maintaining the policy for the extra $2,000. But if the death benefit were $25,000, it would almost certainly be worth maintaining the policy in order to get the extra $15,000 upon the insured person’s death. Just make sure that there is a beneficiary for the policy, so that it’s not payable to the Medicaid beneficiary’s estate.