Life insurance is one of many tools utilized in estate planning. Whole life (or otherwise “permanent”) insurance specifically can often make up a significant portion of any given persons estate. Though life insurance can be quite beneficial in planning, the importance of who owns the policy is far too often overlooked. Carefully considering the ownership of a policy as well as beneficiary designation is crucial. As time goes by, cash values increase, and the potential need for long-term care is on the horizon, “whole life” can become the “whole problem.”

Generally, for purposes of qualifying for Medicaid, life insurance is only excluded if such policies have a cumulative face value of $1,500 or less. If a life insurance policy is not exempt per face value, then the countable value is based upon the cash value. That being said, whole life policies are typically non-exempt assets. The policy that was taken out for all of the right reasons, becomes merely a cash value of which is ultimately subject to Medicaid spend-down.

If you or a loved one has a life insurance policy that may result in a disqualification for purposes of Medicaid, there are a few options:

• Cash out the policy and invest the proceeds in an exempt asset;
• Take out a loan to reduce the cash value, and invest the remaining proceeds in an exempt asset;
• Assign ownership to a spouse, of which would be calculated into their spousal resource allowance; or
• Assign ownership to an Irrevocable Life Insurance Trust (ILIT) or Family Limited Liability Company (FLLC).

When assigning a policy to an ILIT or FLLC, it is important to make sure such falls within the IRS Transfer for Value safe-harbor rule to prevent proceeds from being taxable as gross income.

Depending on the circumstances, some options may not necessarily be available. Furthermore, divestments are subject to a 5 year look-back period. The best way to stay clear of this estate planning trap is to take action well in advance. Though the need for long-term care may seem distant, don’t let “whole life” become the “whole problem.”

It is important to discuss your options with an attorney to see how life insurance affects your estate planning.


Attorney Joseph C. Jones advises clients on estate planning, asset protection, business law, and real estate law matters. Joe can be reached at (906) 914-4181 or joe@joneslawplc.com. Jones Law PLC is a Michigan & Wisconsin based provider of legal services.