Medicaid considers the cash surrender value of most life insurance policies to be a resource that is subject to the Medicaid spend-down process. A person is not allowed to own more than $2,000.00 of resources in order to qualify for Medicaid assistance. Therefore, the ownership of a life insurance policy may prevent Medicaid eligibility.
If a person must spend down the life insurance policy then there are several options available to that person. One option is to “surrender” the policy. The life insurance company will then provide the cash surrender value to the owner of that policy.
Another option is to borrow against the cash surrender value. Most of the cash surrender value will be depleted and the policyholder will then receive a check for the amount borrowed against the life insurance policy. The proceeds can then be utilized for expenses and costs that are allowed by Medicaid. This option works best for those policies that have a death benefit that is significantly greater than the cash surrender value.
Another option is to assign the policy to a funeral home and establish an irrevocable funeral trust. This option is usually not available for those policies that are not paid in full.