Life Insurance, Funeral Expenses, & Medicaid
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There is an old saying that, “the two certainties in life are death and taxes.” Those certainties used to inspire life insurance purchases to provide money for funeral expenses and “death taxes.” Today, increased estate tax exemption and the Indiana inheritance tax repeal have eliminated tax concerns for most Hoosiers, while long-term care cost inflation (an average cost of $72,936 per year as of July 1, 2016, in Indiana) has replaced the tax threat for many disabled retirees. In some cases, the long-term care threat also jeopardizes certain life insurance policies that people purchased to pay death taxes and funeral expenses. We are blogging this week to clarify misinformation that is leading people to take ill-advised and detrimental actions to pay funeral expenses and protect their life insurance policies.
Retirees often experience health crises that require expensive long-term care at home, in assisted living, or in nursing homes. Long-term care expenses consume wealth and income rapidly, requiring many disabled retirees to apply for Medicaid assistance. Indiana Medicaid requires applicants to reduce the total value of most assets below $2,000, including the cash surrender values of many kinds of their life insurance policies. Thus, disabled life insurance owners often have to cash out their life insurance policies or transfer ownership of the policies according to the Medicaid rules. Unfortunately, some people transfer life insurance policies the family members or other people without seeking advice from an experienced elder law attorney, and they end up creating big problems.
The provisions of the Indiana Health Coverage Program Policy Manual (IHCPPM) allows a life insurance owner to transfer certain life insurance policies with cash surrender values to funeral directors (we have added for emphasis):
2615.25.05.15 Life Insurance Exemption (MED 1): Effective 7-1-99, when an applicant/recipient is insured by a life insurance policy with a face value of $10,000 or less and the beneficiary of the policy is the applicant’s/recipient’s estate or the funeral director who will be providing services, the cash surrender value is exempt. This also applies if there is more than one policy and the total face value of all policies is $10,000 or less. If the face value of one or more policies (excepting term policies) exceeds $10,000, the cash surrender value must be considered, regardless of who is designated as the beneficiary.
Effective June 1, 2014, if the total value of an AG’s irrevocable funeral trust, irrevocable prepaid funeral agreement, and the face value of one or more policies (excepting term policies) exceeds $10,000, the cash surrender value of the life insurance policy or policies that exceeds the $10,000 exception is countable, regardless of who is designated as the beneficiary of that policy.
Each applicant/recipient is entitled to the $10,000 insurance exemption.
So far, we have not encountered a funeral director that was aware of the $10,000 face value rule for Indiana Medicaid eligibility. This disturbing problem has emerged in cases where people have transferred life insurance policies with combined face values totaling more than $10,000 to funeral homes to qualify for Medicaid because neither the applicants nor their funeral directors realized that the combined policy face values were too big.
We can usually correct life insurance transfer mistakes, but the mistakes often cost thousands of dollars worth of Medicaid financial assistance unnecessarily. It is always better to consult with an experienced elder law attorney before purchasing or transferring insurance policies to protect the policies or other assets from long-term care expenses, because a more valuable old saying is that, “an ounce of prevention is worth a pound of cure.”
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators; and he was the 2014-15 President of the Indiana State Bar Association.
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