Many Tennessee families are surprised to learn that a life insurance policy can affect eligibility for TennCare, Tennessee's Medicaid program. When an older adult needs nursing home care or assistance through TennCare's CHOICES program, the application process involves a detailed review of financial resources. Families usually understand that bank accounts, investments, and certain real estate may be considered when determining eligibility, but life insurance is frequently overlooked.
Even a life insurance policy purchased decades ago to provide for funeral expenses or leave something to loved ones may be considered a countable asset for TennCare eligibility purposes. Understanding how these policies are treated can help families avoid unexpected eligibility problems and make informed decisions before applying for benefits.
Why Does TennCare Look at Life Insurance?
For many applicants seeking TennCare long-term care benefits, eligibility depends in part on the value of the assets they own. These assets are commonly called countable resources. Although certain assets are excluded under TennCare's eligibility rules, others are counted toward the applicable resource limit.
Life insurance presents a unique issue because a policy may have two very different values:
· Face value (death benefit): The amount the insurance company pays to beneficiaries when the insured person dies.
· Cash surrender value: The amount the policy owner could receive by surrendering or cashing in the policy during their lifetime, after applicable deductions.
For TennCare purposes, the distinction between these two values is extremely important.
The $1,500 Life Insurance Rule
Under the resource rules generally applicable to TennCare's Aged, Blind and Disabled eligibility categories, certain life insurance policies may be excluded if their combined face value does not exceed $1,500, but if the total face value of applicable policies exceeds $1,500, the policies' cash surrender values may become countable resources. Here are some examples to help illustrate this point.
Example 1: A Small Life Insurance Policy
Mary owns a whole life insurance policy with a face value of $1,000 and a cash surrender value of $400. Assuming the policy otherwise meets the applicable exclusion requirements, its cash surrender value would generally be excluded from countable resources.
Example 2: A Larger Whole Life Policy
John owns a whole life insurance policy with a face value of $15,000 and a cash surrender value of $6,000. Because the face value exceeds the applicable $1,500 threshold, the $6,000 cash surrender value would generally be considered a countable resource if John owns the policy and can surrender it.
The important point is that TennCare generally would not count the entire $15,000 death benefit as an available resource; it would count the amount John could access during his lifetime.
Example 3: Multiple Life Insurance Policies
Susan owns two whole life insurance policies: Policy A with a $1,000 face value and Policy B with a $2,000 face value. Because the combined face value is $3,000, the applicable exclusion threshold is exceeded. As a result, the cash surrender values of both policies may be considered countable resources.
Families should not assume that each policy receives a separate $1,500 exclusion.
What About Term Life Insurance?
Term life insurance generally provides a death benefit only if the insured person dies during the policy's coverage period. Unlike traditional whole life insurance, term insurance typically does not accumulate cash surrender value. Consequently, a term life insurance policy with no cash surrender value generally does not create a countable resource for TennCare purposes, regardless of the amount of the death benefit. Applicants should verify the actual terms of their policies rather than assuming that a policy has no accessible value.
Does It Matter Who Owns the Policy?
Yes, it matters a lot. Ownership is one of the most important considerations in determining whether life insurance is a countable resource. The person whose life is insured is not necessarily the person who owns the policy. For example, an adult daughter may own a life insurance policy insuring her mother's life. If the daughter is the legal owner and the mother has no authority to surrender the policy or access its cash value, the policy generally would not be treated as an available resource belonging to the mother solely because she is the insured person.
Similarly, naming children as beneficiaries does not remove a policy from the applicant's countable resources if the applicant remains the owner and retains access to its cash surrender value. TennCare may examine ownership documents, assignments, beneficiary designations, and the policyholder's legal rights.
Can Life Insurance Be Used to Pay for Funeral Expenses?
Many families purchase life insurance specifically to pay funeral and burial expenses, but simply intending to use life insurance proceeds for a funeral does not automatically make the policy an excluded resource. TennCare has separate rules addressing burial funds, burial arrangements, and certain irrevocable assignments. Depending on the circumstances, an appropriately structured funeral or burial arrangement may receive different treatment from an ordinary life insurance policy. For this reason, families sometimes explore whether an existing life insurance policy can be used as part of a permissible prepaid funeral arrangement.
Before making any changes, it is important to answer the following questions:
Does the policy have a cash surrender value?
Can the policy be assigned?
Does the proposed funeral arrangement qualify for an exclusion?
Does the transaction create a transfer-of-assets issue?
An irrevocable assignment of a life insurance policy should not be undertaken without understanding its legal consequences because improper transfers can create additional Medicaid eligibility problems.
What If There Is a Loan Against the Policy?
Some permanent life insurance policies allow owners to borrow against accumulated cash value. An outstanding policy loan generally reduces the net cash surrender value available to the owner.
For example, suppose a policy has a cash surrender value of $8,000 and an outstanding policy loan of $3,000. The remaining net cash surrender value may be $5,000, assuming the insurer's figures reflect those amounts. The applicant should obtain written verification from the insurance company rather than estimating the policy's value.
What Documents Will TennCare Need?
Applicants who own life insurance should be prepared to provide documentation identifying the policy and its financial characteristics. This commonly includes the insurance company's name, policy number, policy owner, insured person, face value, current cash surrender value, and any outstanding policy loans. If a policy has been assigned, transferred, or made subject to restrictions, documentation of those arrangements may also be necessary.
Providing complete information early in the application process can help avoid delays and requests for additional verification.
Should You Cash Out or Transfer a Life Insurance Policy Before Applying?
Not without first understanding the consequences. Families sometimes assume that surrendering a policy or transferring ownership to a child will solve a TennCare eligibility problem. Unfortunately, these actions can create other issues. Surrendering a policy converts its cash value into money, which may remain a countable resource unless properly spent or otherwise excluded.
Giving a policy away for less than fair market value may trigger Medicaid transfer-of-assets rules, particularly when applying for long-term care benefits. For many long-term care applicants, TennCare examines certain asset transfers during a five-year look-back period. A transaction that appears straightforward can therefore have consequences beyond the immediate value of the insurance policy.
Not Every TennCare Applicant Is Subject to an Asset Test
It is also important to understand that TennCare has different eligibility categories. Certain TennCare applicants qualify under Modified Adjusted Gross Income (MAGI) rules, which generally do not impose an asset test. Other applicants, including many individuals seeking nursing facility or CHOICES long-term care benefits, are subject to resource eligibility requirements. The life insurance rules discussed here are primarily relevant to applicants whose eligibility category includes a resource test.
Where Can You Find the Official Rules?
Families and professionals can consult the following authorities:
TennCare Aged, Blind and Disabled Eligibility Policy Manual, Policy 110.050, Countable and Excluded Resources
This policy addresses life insurance, the applicable face-value threshold, and the treatment of cash surrender value.
https://www.tn.gov/content/dam/tn/tenncare/documents/ABDCountableAndExcludedResources.pdf
Tennessee Administrative Rules, Tenn. Comp. R. & Regs. 1200-13-20-.06
This regulation addresses financial eligibility determinations for TennCare.
https://www.law.cornell.edu/regulations/tennessee/Tenn-Comp-R-Regs-1200-13-20-.06
Social Security Administration, POMS SI 01130.300, Life Insurance
This federal guidance explains important concepts involving life insurance ownership, face value, and cash surrender value. It is useful background authority, although TennCare's applicable rules control the Tennessee eligibility determination.
https://secure.ssa.gov/poms.nsf/lnx/0501130300
Review Life Insurance Before Applying for TennCare
Life insurance can play an important role in a family's financial and estate plan. But when someone needs TennCare long-term care benefits, an existing policy may affect financial eligibility. The most important questions are who owns the policy, whether it has cash surrender value, whether an exclusion applies, and whether the owner can access the policy's value. A policy with a substantial death benefit but no cash value may present no resource problem. Meanwhile, a smaller permanent policy with accessible cash value could affect eligibility.
Before surrendering, assigning, transferring, or otherwise changing a life insurance policy, consider consulting a Tennessee elder law or estate planning attorney familiar with TennCare eligibility and long-term care planning.
Proper planning can help families understand their options, avoid costly mistakes, and preserve available benefits.
Disclaimer: This article provides general educational information about Tennessee Medicaid eligibility and is not legal advice. TennCare rules vary by eligibility category and may change. Eligibility depends on each applicant's individual circumstances and the applicable law and policy at the time of application.