Life Insurance and Long-Term Care Medicaid

Life insurance is meant to help loved ones after a death. But some policies have a cash value, and Long-Term Care Medicaid can count that value as an asset. A policy can push someone over the asset limit without the family realizing it. This guide explains which policies count, how they are valued and what families commonly do with them.

Figures change periodically. Double-check current amounts before relying on them.

Two numbers that matter

Every life insurance policy has a face value, and some also have a cash value.

Face value (death benefit): the amount paid to the beneficiary when the insured person dies.
Cash surrender value: the amount the owner would get if they cancelled (“surrendered”) the policy today, minus any surrender charges and loans against it. Only permanent policies, such as whole life, build cash value.

Medicaid uses the face value to decide whether a policy counts, and the cash value to decide how much counts.

The face-value test

Most states follow the federal SSI rule:

The test is applied per insured person: if the total face value of all policies on that person’s life (owned by the person) is $1,500 or less, the policies are exempt. Term insurance and burial insurance are not added into this total.
If the total face value is more than $1,500, the cash surrender value of those policies counts as an asset.

Some states use a higher face-value limit. Each state guide explains its rules.

Note that life insurance can also reduce the separate $1,500 burial fund exclusion. See Exempt assets.

How each type of policy is treated

Type of policy	Has cash value?	Counted?
Term life	No	No. Term policies have no cash value, so they never count as assets
Whole life	Yes	Exempt if total face value is $1,500 or less; otherwise cash value counts
Universal life	Yes	Same as whole life
Variable life	Yes	Same as whole life
Group life through an employer or retirement plan	Usually no	Usually not counted, since it typically has no cash value
Burial or final-expense insurance	Sometimes	Depends on whether it is irrevocable and assigned to a funeral home

Examples

Example 1: small policy. Ann owns one whole life policy with a face value of $1,200 and a cash value of $900. Because the face value is $1,500 or less, the policy is exempt.

Example 2: larger policy. Ben owns a whole life policy with a face value of $25,000 and a cash value of $11,000. Because the face value is over $1,500, the $11,000 cash value counts. In a state with a $2,000 limit, this alone would make him ineligible.

Example 3: several small policies. Carla owns three policies with face values of $800, $600 and $500. Together they total $1,900, which is over $1,500. The cash values of all three count.

Example 4: term policy. Dan has a $100,000 term life policy. It has no cash value, so it does not count.

Who owns the policy matters

Medicaid counts a policy as the applicant’s asset if the applicant owns it, meaning they can cash it in or change the beneficiary. The insured person and the owner are not always the same.

A policy owned by a child on the parent’s life is the child’s asset, not the parent’s.
A policy owned by the spouse at home counts as part of the couple’s assets when figuring the spouse’s allowance.

Changing ownership of a policy with cash value to someone else is a transfer and can cause a look-back penalty.

What families commonly do with countable policies

If a policy’s cash value pushes someone over the limit, common options include:

Cash it in and spend down. Surrender the policy, then use the money on care or other allowed costs. Surrendering may create taxable income if the cash value exceeds the premiums paid.
Assign it to a funeral home. In many states, a policy can be irrevocably assigned to a funeral home to fund a prepaid funeral, making it exempt (within state limits). See Irrevocable funeral trusts.
Borrow against it. Taking a loan against the policy lowers the cash value. The loan money becomes an asset if not spent.
Reduce the face value. Some insurers allow converting to a smaller paid-up policy.
Use the spouse’s allowance. For married couples, a policy may fit within the spouse at home’s protected share.

Each option affects taxes, the beneficiary and the family differently. Families often work through the choice with a Certified Medicaid Planner (CMP).

Life insurance and estate recovery

When the insured person dies, the death benefit goes to the named beneficiary. In most states, a death benefit paid to a named beneficiary is not part of the probate estate. Some states use a broader definition of “estate” for estate recovery. If the estate is named as beneficiary, the proceeds may be subject to recovery.

Records to gather

A copy of each policy, or the most recent annual statement.
A letter from the insurer showing the current cash surrender value and any loans.
Proof of ownership and beneficiary.
For funeral assignments, the assignment form and funeral contract.

Common questions

My policy has a cash value of only a few thousand dollars. Does it matter? Yes, if the face value is over the exclusion. In a $2,000 state, even a small cash value can push someone over.

Do I have to cancel my policy? Not necessarily. Options such as funeral assignment or using the spouse’s allowance may let you keep some benefit.

Will my beneficiary still get the money? If the policy is kept and the beneficiary is a person, generally yes. If the policy is cashed in, there is no death benefit.

A step-by-step check of your policies

Find every policy. Look through papers, bank statements (for premium payments) and tax records. Ask former employers about group policies.
Identify the type. Term, whole life, universal life or burial insurance.
Find the owner. The owner, not the insured, is who Medicaid looks at.
Add up face values for cash-value policies the applicant owns.
Ask each insurer for the current cash surrender value, in writing, net of any loans or surrender charges.
Compare the face value total with the state’s exclusion (often $1,500), and add any counted cash value to the other countable assets.

Life insurance and the spouse at home

For married couples, a policy owned by the spouse at home counts as part of the couple’s assets when figuring the CSRA. After approval, the spouse at home’s policies are generally not counted against the applicant. Some couples keep a policy on the spouse at home because it fits within the protected share.

Burial insurance and funeral planning

Small “final expense” or burial insurance policies are common. Whether they count depends on whether the policy has cash value and whether it is assigned to a funeral home. An irrevocable assignment to a funeral home, as part of a prepaid funeral contract, usually makes the policy exempt within state limits. A policy that can still be cashed in by the owner usually counts if the face value is over the exclusion.

If you are already on Medicaid

If a policy is discovered after approval, it must be reported. If the cash value puts the person over the limit, the state may end coverage or ask for repayment for months when the person was over. Reporting promptly, and spending the cash value on allowed costs, helps limit the damage.

Life insurance decisions can affect the beneficiary, taxes and eligibility all at once. A {L} can help a family weigh the options before cashing in or changing a policy.

How the burial fund and life insurance work together

The $1,500 life insurance exclusion and the $1,500 burial fund exclusion are separate rules, but they interact. Under the SSI rule, the burial fund exclusion is reduced by the face value of life insurance that is excluded, and by any irrevocable burial arrangements.

Example. Ed owns a whole life policy with a face value of $1,000, which is excluded because it is $1,500 or less. He also has a savings account set aside for burial. His burial fund exclusion is reduced from $1,500 to $500. Only $500 of the burial account can be excluded, and anything above that counts.

This is why it is important to look at insurance and burial money together, not one at a time. A spouse has a separate exclusion of their own.

What to gather

the most recent policy statement for each policy, showing face value and cash surrender value;
the name of the owner and the insured on each policy;
any assignment to a funeral home;
records of any policy loans.

Last updated for 2026. General information only, not legal or financial advice. Medicaid Answers is a free educational resource published by Medicaid Answers Foundation.