What is a Medicaid Life Settlement?

Exploring an innovative intersection of finance and healthcare, Medicaid life settlements have emerged as a viable option for individuals seeking to optimize their financial situations while dealing with Medicaid eligibility requirements. This article delves into the concept of Medicaid life settlements, shedding light on how they work, their potential benefits, and factors to consider.

What is a Medicaid Life Settlement?

A Medicaid life settlement is a different type of life settlement designed for people who need long-term care services and want to qualify for Medicaid. A life settlement is selling your existing life insurance policy to a third party for a lump sum payment over the cash surrender value but less than the death benefit.

A Medicaid life settlement differs from a regular life settlement because it does not give you a lump sum payment. Instead, it converts your policy into an irrevocable trust or annuity that pays for your long-term care expenses directly each month. This way, you can keep your life insurance coverage and receive monthly payments to cover your care costs. It also helps you preserve your assets and delay your entry into Medicaid, a government program that provides health care for low-income individuals.

Impact of life insurance policies on Medicaid eligibility

The impact of a Medicaid Life Settlement on Medicaid eligibility depends on how the fund is structured and managed. Generally, the fund is set up as a trust or an annuity that pays the policyholder a fixed monthly amount. The fund is irrevocable, meaning the policyholder cannot access or change it once it is established. The fund is also non-assignable, meaning the policyholder cannot transfer or sell it to anyone else.

A Medicaid life settlement can be a valuable option for some people with a life insurance policy who need long-term care services, but it may not be suitable for everyone. There are some advantages and disadvantages of this option, such as:

Advantages

• You can use your life insurance policy to pay for your long-term care needs and improve your quality of life.
• You can avoid the risk of lapsing or surrendering your policy due to high premiums or changing needs.
• You can protect your policy from Medicaid estate recovery, a program that seeks reimbursement of long-term care costs from your remaining estate after you pass away.
• You can choose any licensed care provider that meets your needs, such as a nursing home, an assisted living facility, a hospice, or a home health agency.
• You can designate a beneficiary to receive any remaining balance from the trust or annuity after you pass away.

Disadvantages

• Depending on your income level and the cost of care in your state, you may reduce the benefits you can receive from Medicaid. The monthly payments from the trust or annuity are counted as income for Medicaid eligibility purposes, and they may exceed the income limit in some states.
• You may affect the eligibility of your spouse or dependents, who may have to share their income with you under Medicaid rules.
• You may lose some tax benefits associated with life insurance policies, such as the tax-free death benefit or the tax-deferred cash value growth.
• You may have to pay fees or commissions to the company that offers this service, which may reduce the amount of money you can receive from the conversion.

Process of Medicaid life settlement conversion

The actual Medicaid life settlement conversion process works as follows:

The process of doing a Medicaid life settlement involves the following steps:

• Find a life settlement broker: Contact a company that offers this service, such as Settlement Benefits Association or Amrita Financial. They will ask you for basic information about your life insurance policy, such as the type, face value, cash value, premium amount, and insurer's name. They will also ask about your health condition, long-term care needs, and preferred care provider.
• Determine if you qualify for the settlement: The company will evaluate your policy and determine if it allows for a Medicaid life settlement. They will also calculate the amount of money you can receive from the conversion, which is usually higher than the cash value but lower than the face value of your policy. The amount depends on several factors, such as your age, life expectancy, care costs, and the market value of your policy.
• Transfer the policy ownership: If you agree to the offer, the company will help you complete the necessary paperwork and transfer the ownership of your policy to them. They will also set up a trust or annuity to pay for your long-term care services each month. The trust or annuity is irrevocable and non-assignable, meaning you cannot access or change it once it is established. The company will also take over paying the premiums for your policy.
• Start receiving monthly payments: You can receive monthly payments from the trust or annuity to cover your long-term care expenses. You can choose any licensed care provider that meets your needs, such as a nursing home, an assisted living facility, a hospice, or a home health agency. The company will pay the provider directly on your behalf. You can also use some payments for other qualified expenses, such as personal care items or transportation.

Note: if you exhaust the funds from the trust or annuity before you pass away, you can apply for Medicaid to cover the remaining costs of your care. The trust or annuity does not count as an asset for Medicaid eligibility purposes as long as you spend down the payments each month on qualified expenses. However, the payments count as income for Medicaid eligibility purposes and may affect the benefits you can receive from Medicaid or other programs.

Qualifying for Medicaid after a Medicaid life settlement

To qualify for Medicaid after doing a Medicaid life settlement, you need to follow these steps:

1. Apply: Apply for Medicaid through your state's Medicaid agency or the Health Insurance Marketplace. You must be a resident of the state where you apply for benefits. You must provide information about your income, assets, household size, and health condition. You must also report the monthly payments from the trust or annuity as income for Medicaid eligibility purposes.
2. Wait for approval: Wait for the decision from the Medicaid agency or the Marketplace. They will review your application and determine your eligibility for Medicaid based on your state's rules and regulations. They will also calculate the benefits you can receive from Medicaid, which may vary depending on your income level and the cost of care in your state. They will notify you of their decision by mail or online.
3. Begin receiving health care services: If you are approved for Medicaid, you can start receiving health care services from providers who accept Medicaid. You can find a doctor or care provider who accepts Medicaid or CHIP by checking with your state's Medicaid agency. You can also use some of the monthly trust payments or annuity payments for other qualified expenses, such as personal care items or transportation.

Note: if you are denied Medicaid, you can appeal the decision by following the instructions on the notice that you receive. You can also contact a legal aid organization or an attorney for assistance. You can continue to receive monthly payments from the trust or annuity until you exhaust the funds or pass away.

Asset limits for Medicaid eligibility

Medicaid limits the amount of assets you can own to qualify for it. Assets are things you own, such as cash, bank accounts, stocks, bonds, real estate, vehicles, personal property, etc. Some assets are considered exempt or non-countable, so they do not affect your Medicaid eligibility. Other assets are countable, meaning they count towards your Medicaid eligibility and must be below a specific limit.

This limit varies based on Medicaid type and state, split into MAGI-based (income-focused, no asset limit) and non-MAGI-based (assets and income both matter). Non-MAGI asset limits are typically $2,000 for an individual and $3,000 for a couple, with state variations.

Exempt assets include:

• Primary home (<$603,000 or $906,000 in some states), if lived in
• One usable vehicle
• Household goods, personal effects
• Burial plots, prepaid funerals within value limits
• Life insurance (<$1,500 face value)
• Certain retirement accounts (IRAs, 401(k)s with periodic payments)

Countable assets encompass:

• Cash, bank accounts
• Stocks, bonds, mutual funds, CDs
• Non-primary real estate
• Additional vehicles
• Life insurance (> $1,500 face value)
• Certain annuities
• Revocable trusts

Medicaid spend down

If your countable assets exceed your Medicaid limit, you must spend down or reduce them to qualify. This can be done by paying for medical expenses, transferring assets (with possible penalties), or converting them to non-countable assets. But be cautious not to give away or sell your assets for less than fair market value, which may also incur a penalty period.

A penalty period is when you are ineligible for Medicaid because you have transferred your assets for less than fair market value within the look-back period. The look-back period is 60 months (five years) for all transfers except those made to or from certain trusts, which have a Medicaid look-back period of 36 months (three years).

A note from Givers

Medicaid life settlements present a unique avenue for individuals to leverage the value of their life insurance policies, offering a potential solution to address financial needs while navigating the complexities of Medicaid eligibility and regulations. As with any financial decision, careful consideration, consultation with professionals, and a comprehensive understanding of the implications are essential to make an informed choice that aligns with one's circumstances and goals.