Retirees: Prevent Medicare for Taking Your Life Insurance Benefits

SmartAsset: Can Medicaid Take Life Insurance From a Beneficiary?
SmartAsset: Can Medicaid Take Life Insurance From a Beneficiary?

Medicaid provides a way to pay for medical costs. But it can also lay claim to the assets that you leave behind, including life insurance if you do not have a designated beneficiary. Let’s break down what Medicaid can claim and how to protect your assets. A financial advisor can help you create an estate plan that protects your assets for your family.

What Is Medicaid?

Medicaid is a government-sponsored health insurance program, it’s run by the federal government in conjunction with state governments. Importantly, the program is designed for Americans in need.

Each state sets income limits for Medicaid eligibility. Although the exact qualifications vary, you likely qualify for Medicaid if your modified adjusted gross income (MAGI) is less than 100% to 200% of the federal poverty level. As of 2022, the federal poverty line sits at $18,310 for a two-person household.

Medicaid Estate Recovery Program

Medicaid coverage can assist with both short-term and long-term healthcare services. So, as you can imagine, the costs for the program can add up quickly.

The Medicaid Estate Recovery Program works to recoup the costs of benefits. Although the details of the program vary by state, it means that Medicaid can pursue payment for benefits provided through the recipient’s estate.

Ultimately, the results of the Medicaid Estate Recovery Program can lead to smaller inheritances for estate beneficiaries.

Can Medicaid Take Life Insurance From Beneficiary?

SmartAsset: Can Medicaid Take Life Insurance From a Beneficiary?
SmartAsset: Can Medicaid Take Life Insurance From a Beneficiary?

The Medicaid Estate Recovery Program can lay claim to a number of assets you leave behind. But, can Medicaid take life insurance from beneficiary? Generally, Medicaid cannot take a life insurance payout from a beneficiary. That’s because the life insurance company will send the funds of your death benefit directly to the beneficiary. However, it’s critical to name a beneficiary on your life insurance policy.

If you don’t specify a beneficiary on your life insurance policy, the proceeds of the policy will go to your estate. Since Medicaid has the right to recoup its costs from your estate, a life insurance benefit that winds up in your estate could end up in the hands of Medicaid.

How to Protect Your Financial Legacy

If you use Medicaid funds, it’s possible the program will seek reimbursement from your estate after you pass away.

The reality of extremely high medical costs can mean that the Medicaid Estate Recovery Program can take a big bite out of your financial legacy.

The good news is that careful planning can protect your assets to pass on to beneficiaries. Here are three common options to consider when protecting your financial legacy from medical costs:

  • Medicaid trust. A Medicaid trust is specifically designed to protect your assets in the event that you or your spouse require long-term care. This irrevocable trust can help protect qualified retirement accounts, personal assets, life insurance policies, real estate, and more.

  • Give financial gifts. While you are still alive, you can make gifts to your heirs to lower your estate’s assets. Although there’s a limit to the amount you can give, it will get some of the funds into your family’s hands. As of 2022, you can gift up to $16,000 in assets or cash to a family member without filing a gift tax return.

  • Buy long-term care coverage. Long-term care can be financially devastating. Long-term care insurance allows you to avoid working with Medicaid altogether. Instead, your insurance policy will pay for the care you need. Of course, this is an expensive option upfront. But it could give your estate the protection it needs.

Before moving forward with any of these strategies, discuss your options with a financial advisor. The right professional can help you craft an estate plan that takes your specific wishes and assets into account.

Bottom Line

SmartAsset: Can Medicaid Take Life Insurance From a Beneficiary?
SmartAsset: Can Medicaid Take Life Insurance From a Beneficiary?

The Medicaid Estate Recovery Program gives Medicaid the ability to lay claim on the assets you leave behind. If you designate a beneficiary on your life insurance policy, the funds should be distributed directly to your beneficiary. Without this clear designation, the funds will be considered fair game for Medicaid as a part of your estate.

Financial Planning Tips

  • A financial advisor could answer questions about how Medicaid impacts your financial legacy. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • A Medicaid trust is a type of irrevocable trust that can provide some protection for your financial assets against healthcare costs. The complex legal structure might come in handy for your beneficiaries.

  • Healthcare costs can have a big impact on your retirement nest egg. If mapping out your retirement dreams, take advantage of our free retirement calculator.

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