Life insurance policies might represent a significant asset to you. Because of this, Medicaid might look at your policy as an asset used to disqualify you from receiving benefits. No lien is placed on your policy in most cases, but you won't receive benefits until you use up the money in your cash value policy.
Medicaid requires that you spend down your assets, selling them off or spending any cash on hand that you have, to meet certain guidelines before you apply for benefits. This medical assistance program provides funds for low-income individuals. One of the assets that Medicaid looks at is cash-value life insurance. Cash-value life insurance is a type of life insurance that builds a cash reserve that functions as a savings during your lifetime. The money in a cash-value policy can't be greater than $1,500, as of June 2011, or Medicaid won't approve you to receive benefits.
Term life insurance and permanent life insurance, with no or low cash value associated with it — i.e. universal life with secondary guarantees — is unaffected by Medicaid; no lien is placed on the policy to reclaim benefit payments later on. This means you get to pass your death benefit on to your heirs intact without worrying about whether your beneficiaries will receive the money they need.
Any cash value policy puts you at a great disadvantage. You can't have more than $1,500 in your cash value policy. If you do, then you must spend the money in the policy. However, doing so also reduces the death benefit by an equal amount. This could leave your spouse or children with significantly less money than you had hoped.
Consider transferring the ownership of your policy to another person you trust. You may also put the policy inside of a life insurance trust. Both of these actions result in you giving up total control over the policy. You can't make changes to the policy, and you can't later reclaim ownership over the policy. However, Medicaid can't deny you benefits, as you don't own the cash value. You must transfer the policy five years prior to applying for Medicaid, however, as Medicaid looks back five years for any assets that were transferred. Any asset not transferred more than five years ago counts as an asset.