Life Insurance Issues Revisited

In prior Post 3, I discussed life insurance issues. This post will discuss them in greater detail with an emphasis on life insurance planning.

As indicated in Post 3, the cash value of a life insurance policy has an effect on Medicaid eligibility with the cash value being a resource. The solution to this problem is to borrow against the cash value or surrender the policy. As indicated, in a community spouse situation, a transfer to the community spouse might make sense.

"Paid up" insurance may or may not have cash value. Similarly, if dividends are used to increase the value of insurance, there may or may not be cash value. Keep in mind that the surrender of a policy is a taxable event with the gain being the difference between the amount realized and premiums paid. This results in ordinary income.

There are many uses for life insurance in today's world that do not have a direct bearing on Medicaid. For example, in the last twenty years, term insurance has become popular. Term insurance is used for purposes such as buy-sell agreements and to cover the costs of a child's college education. Such policies have no cash value.

As pointed out in Post 3, the key problem to avoid is the situation where there is group insurance ( no cash value) and the cash value policy is under $1,500. The rule is that the policies are aggregated for these purposes and the cash value counts towards eligibility.

Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.