Medicaid and Life Insurance Eligibility Rules You Need to Know in 2025

Families often worry about how their life insurance policy will affect their Medicaid eligibility. The quick answer is, a life insurance policy can affect a Medicaid application, particularly if it has cash value. Unlike term life insurance, which has no cash value, a whole life insurance or other permanent life insurance policy accumulates a cash surrender value over time.

This cash value is considered a countable asset by the Medicaid program. If the cash value of your policy, combined with other assets, exceeds the state’s asset limit, it could disqualify you from receiving Medicaid benefits. Strategic Medicaid planning with an elder law attorney can help.

Dumm Takeaways

• A life insurance policy with cash value can be a countable asset for Medicaid.
• Term life insurance does not have a cash value and is not considered a countable asset.
• Arkansas and Missouri have different rules for how a life insurance policy affects eligibility.
• In Arkansas, the total face value of your policies is the key factor.
• In Missouri, a policy’s cash surrender value is the primary consideration.
• Medicaid’s five-year look-back period can penalize gifting a policy.
• Irrevocable trusts can be a way to protect assets for funeral expenses.
• A life settlement will affect your eligibility for Medicaid assistance.

Do You Really Need to Give Up Your Life Insurance for Medicaid?

Many people assume that owning any life insurance policy means they must surrender it to qualify for Medicaid, but this isn’t always the case. The rules depend on the type of policy and its value. A life insurance policy is only considered a countable asset if it holds cash value that can be accessed by the policyholder.

A Common Misconception About Eligibility

Many people wrongly think that any life insurance policy makes someone ineligible for Medicaid benefits. The Medicaid program has specific rules regarding assets, and it is the type of life insurance and its cash value that truly matters. A person’s financial assets must be below a certain asset threshold to qualify for long-term medical care, such as nursing home care. A policy is only a factor if it is a countable asset.

The Big Difference Between Term and Whole Life Insurance

The key difference lies in the policy structure. Term life insurance provides a death benefit for a specific period but does not accumulate cash value. Since there is no cash surrender value to access, a term life policy is not considered a countable asset for Medicaid eligibility. Conversely, whole life policies and other forms of permanent life insurance build cash value over time.

A Different Approach for Each State

The way Medicaid treats life insurance is not uniform across the United States. Each state establishes its own guidelines within a federal framework. Residents of Missouri and Arkansas must understand their state rules. This helps with Medicaid planning and protecting a life insurance policy.

Life Insurance Rules in Arkansas

Arkansas has a specific rule regarding the face value of whole life policies. In Arkansas, if the combined face value of all permanent life insurance policies is $1,500 or less, the cash value of those policies is fully exempt. If the total face value exceeds this $1,500 exemption amount, the full cash surrender value of the policy is counted as a countable asset toward the Medicaid asset limit.

Missouri’s Specific Policy on Cash Value Life Insurance

Missouri’s approach is slightly different from its neighbor. Instead of focusing on the face value, Missouri focuses on the cash surrender value itself. Here are some key points about the state’s policy:

• Missouri allows an exemption for the cash value of a whole life policy up to $1,500.
• If the cash value is above this threshold, the entire amount is counted as an asset.
• A Missouri Medicaid applicant cannot exempt both a whole life insurance policy and a prepaid burial plan. They must choose one.

Knowing these specific state rules helps a family avoid unnecessary transfer penalties and creates a smoother path to Medicaid benefits.

Table: Life Insurance and Medicaid Rules

State	Asset Limit (Single Applicant)	Life Insurance Exemption	How it Works
Arkansas	$2,000	Face Value Exemption up to $1,500	If the total face value of all policies is $1,500 or less, the cash value is not counted. If it exceeds $1,500, the full cash value is a countable asset.
Missouri	$6,068.80	Cash Value Exemption up to $1,500	If the cash surrender value of a whole life policy is $1,500 or less, it’s exempt. If it’s over, the entire cash value is counted toward the asset limit.

How Cash Value Impacts Your Assets

The cash value of a permanent life insurance policy can be a significant roadblock to receiving Medicaid benefits. When a Medicaid applicant’s countable assets exceed the state’s asset threshold, they must “spend down” those assets to qualify. This is a common part of Medicaid planning, and understanding exactly what counts toward that limit is the first step.

What is Considered an Asset by Medicaid?

Medicaid separates assets into two categories: exempt and non-exempt. Exempt assets are things you can keep, such as your primary residence, a single vehicle, and household goods. Non-exempt, or countable, assets are those that must be spent down. The cash value of a life insurance policy falls into this category, along with:

• Savings and checking accounts
• Stocks, bonds, and mutual funds
• Most Retirement Account funds

Asset Limits in Missouri

In Missouri, the individual asset limit for a Medicaid applicant seeking long-term care is approximately $6,068.80. This is the maximum amount of countable resources a single person can have. For a married couple where both are applying, the combined limit is around $12,137.55.

For a single applicant with a community spouse, the applicant can keep $6,068.80 in assets. The community spouse can keep a much higher amount under the Community Spouse Resource Allowance.

Asset Limits in Arkansas

Arkansas has a lower individual asset limit for a Medicaid applicant, set at $2,000. For a married couple where both are applying, the combined limit is $3,000. The Community Spouse Resource Allowance in Arkansas lets a non-applicant spouse keep some assets. This is like Missouri, but the amounts are different.

Table: Medicaid Asset Limits

Category	Missouri Asset Limit	Arkansas Asset Limit	Countable Assets
Single Applicant	$6,068.80	$2,000	Cash, savings, checking accounts, stocks, bonds, investments, and cash value from life insurance.
Married Couple (Both Applying)	$12,137.55	$3,000	All jointly owned assets are counted.
Married Couple (One Applying)	$6,068.80 (Applicant) + $157,920 (Community Spouse)	$2,000 (Applicant) + up to $157,920 (Community Spouse)	The applicant has a low limit, while the community spouse can keep a protected amount under the Community Spouse Resource Allowance.

Your Policy’s Face Value Can Make a Huge Difference

The face value of a life insurance policy, or the death benefit, is often misunderstood in the context of Medicaid. Cash value mainly affects eligibility. But face value also plays a surprising role in deciding whether a policy is exempt or not.

When Does a Policy’s Face Value Matter?

A policy’s face value can be a deciding factor in whether its cash value is even considered. Many states, including Arkansas, have a life insurance exemption amount based on face value. If the combined face value of all permanent life insurance policies is below this specific threshold, the cash value of the policies is disregarded entirely. This can be an effective way to protect a small final expense insurance policy.

How Face Value Affects Medicaid in Missouri

Missouri does not use face value to determine asset exemption. Instead, it uses a cash value exemption. A whole life policy is only exempt if its cash value is below a certain threshold (currently $1,500). If the cash value is over that amount, the entire cash value counts toward the asset limit. The face value is not the determining factor in this instance, but it is the amount paid to beneficiaries upon the policyholder’s passing.

How Face Value Affects Medicaid in Arkansas

Arkansas’s state rules are different. The face value is what matters. If the total face value of all a person’s life insurance policies is $1,500 or less, the policies are exempt from Medicaid’s asset limit. If the total face value exceeds $1,500, the cash surrender value of all policies is counted as a countable asset. This highlights the importance of knowing your state of residence’s specific regulations.

The Tricky Look Back Period

One of the most complex aspects of Medicaid planning is the Look-back Period. The rule is designed to prevent people from simply giving away assets to qualify for benefits. Any transfers of assets, including a life insurance policy, made during this time can result in a period of ineligibility.

What is the Five Year Look Back Period?

The Medicaid Look-back Period is a 60-month window preceding the date a person applies for nursing home Medicaid or other long-term care services. During this period, the state reviews all financial transactions to see if any assets were transferred for less than fair market value. The purpose is to determine if the applicant purposefully “spent down” their assets to fall below the Medicaid asset thresholds. If a disqualifying transfer is found, a penalty period of Medicaid ineligibility is imposed.

How Gifting a Policy Can Backfire

Transferring ownership of a cash value life insurance policy to a family member or another person can be considered a gift. If the transfer happens during the Look-back Period, it will be subject to a Transfer Penalty. The cash surrender value of the policy at the time of the transfer will be divided by the state’s average cost of nursing home care. The result is the number of months the applicant will be disqualified from receiving Medicaid benefits.

When the Rules Are a Little More Flexible

Some exceptions exist to the strict Look-back Period rules.

• Transfers to the community spouse are generally exempt.
• Transfers to a child who is a caretaker and has lived in the home for at least two years prior to the applicant entering a nursing home may also be exempt.
• Creating an irrevocable trust for certain purposes, such as a special needs trust for a disabled child, can also be a way to transfer assets without a penalty.

Other Options for Your Life Insurance Policy

You do not have to simply surrender a life insurance policy to qualify for Medicaid. There are several strategic ways to handle a policy with cash value to meet the Medicaid asset limit without losing all of the policy’s value. These options are a key part of effective Medicaid planning.

Cashing Out the Policy to Spend Down

A common strategy is to cash out a permanent life insurance policy for its cash surrender value. The funds received from this surrender value can then be used in a Medicaid spend-down strategy. A person can use the money for medical expenses, home improvements to their exempt residence, or to pay off debts.

Transferring a Policy to a Community Spouse

If a Medicaid applicant is married, transferring the ownership of a life insurance policy to the community spouse is an option. The cash value of the policy then becomes part of the Community Spouse Resource Allowance (CSRA), a protected amount of assets that the non-applicant spouse can keep. This helps protect the death benefit and avoids the need to liquidate the policy.

Using a Life Insurance Policy as an Irrevocable Burial Trust

An irrevocable burial trust is a very powerful Medicaid planning tool. You can use the cash value of a life insurance policy to fund a trust that is specifically for funeral and burial expenses.

• Once the funds are in an irrevocable trust, they are no longer considered a countable asset for Medicaid.
• The trust ensures that funds are set aside for final expenses, providing peace of mind for both the applicant and their family.
• Arkansas and Missouri have specific rules on the amount that can be placed in these trusts, so a Medicaid planning professional should be consulted.

What if You are Already Receiving Medicaid?

A common question for someone already on Medicaid is whether they can purchase a new life insurance policy. While it may seem counterintuitive, there are situations where getting a new policy, especially for final expenses, is a good idea. However, the type of policy you select is very important to maintaining Medicaid eligibility.

Getting a Life Insurance Policy While on Medicaid

You can get a life insurance policy while receiving Medicaid benefits. But you must avoid getting a policy with cash value that puts your assets over the state’s limit. A term life insurance policy is usually the safest option as it does not accumulate cash value. If a permanent life insurance policy is purchased, its cash value would count toward your asset threshold.

Why Guaranteed and Simplified Issue Policies are a Consideration

For people with health challenges who may not qualify for traditional life insurance, guaranteed issue life insurance and simplified issue life insurance are excellent options.

• Guaranteed issue policies have no health questions or medical exams. They are ideal for individuals with a serious illness who need a way to cover burial expenses and other final costs.
• Simplified issue policies ask a few health questions but do not require a medical exam. They are typically more affordable than guaranteed issue policies and can be a good fit for someone who is on Medicaid due to low income, but otherwise in decent health.

What Happens to Life Insurance Payouts After You Pass Away?

Many people believe that naming a beneficiary on a life insurance policy protects the death benefit from being counted by Medicaid, but it is not always that simple. After a person receiving Medicaid benefits dies, the state may have a claim against the estate for the cost of care.

When the Medicaid Estate Recovery Program May Step In

The Medicaid Estate Recovery Program (MERP) requires states to recover some long-term care costs. They do this from the estates of deceased Medicaid recipients. This typically applies to individuals age 55 or older who receive services like nursing home Medicaid or home and community-based services.

Life insurance proceeds, if paid to the deceased’s estate rather than directly to a named beneficiary, can be subject to estate recovery. If a life insurance policy has no named beneficiary or if the beneficiary has died, the death benefit goes to the estate. Then, the Medicaid Estate Recovery Program can claim it.

Protecting Your Loved Ones and Their Inheritance

To help prevent a life insurance payout from being claimed by Medicaid, it is a good practice to name a specific beneficiary on the policy. When a death benefit is paid directly to a beneficiary, it generally bypasses the probate process and is not considered part of the deceased’s estate. This helps ensure that life insurance proceeds go to the intended person, such as a child or family member, rather than being used to repay the state for medical assistance.

Common Exceptions to Medicaid Estate Recovery

Both Missouri and Arkansas offer some protection from estate recovery. The state cannot make a claim if the deceased is survived by:

• A spouse.
• A child under age 21.
• A child of any age who is blind or permanently disabled.

There are also undue hardship waivers and other circumstances that can prevent estate recovery from happening.

Frequently Asked Questions

1. Is a life insurance policy considered an asset by Medicaid?

Yes, a life insurance policy is considered an asset by Medicaid if it has cash value. Whole life or Universal Life Insurance policies can affect Medicaid eligibility. This happens if their cash value is above the state’s asset limit.

2. Can I keep my burial insurance and still get Medicaid?

Yes, in many cases, you can. Many states allow an exemption for burial funds or a funeral trust up to a certain dollar amount. Prepaid burial policies can also be an exempt asset.

3. What is Medicaid asset spend down?

Medicaid Asset Spend Down is the process of spending non-exempt assets to meet Medicaid’s limits. For example, a person can cash out a life insurance policy to pay for medical bills or home improvements.

4. What is the difference between term and whole life insurance for Medicaid?

Term life insurance has no cash value, so it does not count as an asset. Whole life insurance accumulates cash value that is considered a countable asset, which can affect Medicaid qualification.

5. What is a life settlement, and does it affect Medicaid?

A life settlement is the sale of a life insurance policy to a third party. The proceeds from the sale are considered a countable asset and would be subject to Medicaid limits and the Look-back Period.

6. Can I transfer a life insurance policy to a family member?

You can transfer policy ownership, but it is considered a gift. If completed during the Medicaid Look-back Period, the cash value of the policy can result in Transfer Penalties.

7. Will accelerated life insurance payments affect my Medicaid?

Yes, accelerated life insurance payments are generally considered income or a countable asset. A person must be careful because receiving accelerated benefits can put them over the Medicaid income threshold.

Planning Life Insurance for Medicaid and Estate Security

Effective Medicaid planning is about more than just numbers; it’s about protecting your financial future and providing peace of mind. The rules surrounding life insurance policies and Medicaid assistance are specific to each state. Having a good estate plan that includes all assets helps you meet medical assistance rules. It also protects your family’s security. You do not have to do it alone.

For a personalized strategy, book a free consultation with Chris.