As an elder care attorney practicing in the Detroit area, my clients come to me with a variety of legal needs based on their own unique situations.  However, there are also some needs that are common to many of my clients, including how to pay for long-term care, reimburse a child who has provided care to their parent before the parent moved to a nursing home, and how to protect the financial security of the spouse living in the community when their spouse becomes a nursing home resident. 

Another common issue I see is that many of my clients come to me with life insurance policies that pay a small death benefit or that have a small cash surrender value.  By cash surrender value, I mean the owner of the policy can get money from the life insurance company now instead of having a death benefit paid when they die.  These small life insurance policies can be a problem from a Medicaid qualification perspective because, if the face value of all the policies the nursing home resident owns are more than $1,500.00, then the cash surrender values of those policies are countable assets that count toward the $2,000.00 limit. 

Here's an example of how this can be a problem.  Betty, age 85, has been a nursing home resident for two years.  While Betty had a decent income of $2,000 per month in retirement from her Social Security and a small pension, with the nursing home costing $7,000 per month, Betty had to cover the $5,000 difference between the costs of her care and her income from her savings and, as such, has spent down her $134,000 in savings to just under $2,000.  Then, her daughter, Jennifer, decided to apply for Medicaid for Betty.  Jennifer knew that Betty had a small life insurance policy that she had owned for years, but since it only will pay a $4,200 death benefit when Betty dies, Jennifer did not think it would be an issue for Medicaid qualification purposes.  The life insurance policy has a $2,500 cash surrender value.

Jennifer prepares the application for Betty, answering “yes” to the question about if Betty has any life insurance and then submits the application to the Department of Human Services.  Two weeks later, Jennifer receives a letter from the Department of Human Services asking for details about the life insurance policy, so Jennifer sends in a copy of the statement her mother receives every year from the life insurance company.  One of the items on the statement is that the policy has a cash surrender value of $2,500.00.  7 weeks after first submitting the application, Jennifer receives a Notice of Case Action indicating Betty's application was denied due to having “excess assets.”  Jennifer is flabbergasted and thinks this must be an error.  After all, Betty spent down $132,000 on her savings until she had just under $2,000, her clothes, and the life insurance policy left.  How could she have excess assets?

Jennifer decides to meet with an elder law attorney and it is then that she learns the $2,500 cash surrender value of the life insurance counts towards her mother's $2,000 countable asset limit.  Since the Medicaid application was denied, there is now a nursing home bill for nearly $14,000, which was incurred during the time the application was pending.  The big problem now is how this bill will be paid when Betty only has a little under $2,000 in the bank.  Unfortunately, this problem cannot be fixed retroactively, which is why I tell people to never apply for Medicaid until you know you qualify.

What are the alternatives to this situation?  Let's back up and assume that Jennifer met with me, the elder law attorney, to discuss Medicaid qualification before submitting the application and spending down all of Betty's savings.  I could have then advised her that the life insurance had to be dealt with before Betty spent down to under $2,000 and the application was filed.  What could have been done instead? 

One step that could have been taken is that Betty, or Jennifer acting for her under a general durable power of attorney, could have assigned ownership of the life insurance policy to a funeral director in order to pay for Betty's funeral. The funeral home agrees to be paid by receiving the death benefit of the policy later, instead of cash now.  In order for this to work, a written contract listing the funeral services and items purchased with the life insurance must be prepared.  The life insurance must be irrevocably assigned to the funeral director, meaning this arrangement cannot be canceled.  If those steps are taken, the value of the life insurance is considered an excluded asset, meaning it's an asset you can have while qualifying for Medicaid, provided that the amount of insurance does not exceed the value of funeral services and items purchased.  In effect, Michigan's Medicaid rules include a provision to deal with these small, potentially problematic life insurance policies by irrevocably assigning them to pay for the nursing home resident's final burial and funeral needs.  However, you have to have this arrangement in place before spending down and applying for Medicaid; it cannot be applied retroactively.

This post is by Andrew Byers, a lawyer focusing his practice on Medicaid and other elder care issues.