Listen to Lawrence…Medicaid’s treatment of the Life Insurance Accelerated Death Benefit

December 11, 2020
Dear clients and friends,
Here is another one of your questions and my response:
Here is my question for Listen to Lawrence:
We are in our late sixties. My husband has a term life insurance policy (a ten-year renewable) which he purchased recently so that — should he predecease me during the ten years of the term — I would have some extra monies (over and above our savings) to take care of routine home maintenance such as lawn mowing, snow removal, handyman repairs…all things which he currently does and which I have no interest in doing. This term policy came with an Accelerated Death Benefit rider which allows him to use some of the life insurance money if he were to come down with a terminal illness.
My question: Let’s say at some point he goes into a nursing home and qualifies for Medicaid. While there, he then comes down with a terminal illness.  Can Medicaid force him to use that Accelerated Death Benefit? (Remember, the whole point of his taking out the insurance was to provide me with some additional money for house maintenance, not to give it to Medicaid). The life insurance company says he can opt out of this rider, if he wants to.
As we learned in my last email, Medicaid does not generally count a term life insurance policy as an asset because it has no cash surrender value. You see, the way Medicaid works is that you must use all AVAILABLE assets for your long term care before you turn to Medicaid. A term policy with no cash value has no such available funds.
However, a term policy with an ACCELERATED DEATH BENEFIT is a different animal. Essentially, this policy turns a term policy into an AVAILABLE asset should the insured be deemed “terminally ill.” Assuming this client would otherwise be eligible for Medicaid, this will, as the questioner above surmised, take away the full use of the death benefit to meet the expenses of the surviving wife.
So, what can be done? First, we could look into canceling the accelerated death benefit. Does the insurance contract allow this? On the other hand, we do not know what the Medicaid laws will be in the future so it may be wise to keep the accelerated benefit. There was a reason the client wanted this benefit in the first place!
Second, we could change the owner and beneficiary of the policy now to the children or to an irrevocable trust. One way or another, the children could later contribute money to help their mother out with her expenses. Today, there would be no look-back on the transfer because the policy has no cash value. On the other hand, If it is transferred later, around the time that the husband is deemed “terminal,” the policy would likely have an immediate value subject to a look-back.
The better plan would probably be to transfer the policy now, but we would still have to read the policy to see what would happen with the accelerated death benefit. If the benefit is kept, who would the policy pay the accelerated benefit to: the new owner or the insured?
Similarly, other clients of mine have riders to their life insurance policies which allow them to tap into their death benefit to pay for their long term care. If this is triggered, such payments from the policy would also be “available” from a Medicaid perspective. Again, transferring the policy may make sense, depending upon all the facts and circumstances.
I hope this helps! Please forward this information to your friends and relatives.
As always, please send me your questions. If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.
Let’s stay connected.
Stay safe!