Life Insurance is a useful Estate Planning investment device since it allows your family easy access to money upon your death. In most cases, the proceeds of the Policy are distributed to the named beneficiaries upon proof of death and the proceeds can be used to pay for expenses such as funeral costs and other expenses. If you own Life Insurance, this can impact your eligibility for Medicaid and can also affect estate taxes. In order to qualify for government benefits such as Medicaid, there is usually a resource limit ($14,850 in New York). Many people forget about Life Insurance when calculating their assets, but depending on the type of insurance, it may count as an assets. Life Insurance policies are usually either “term” or “whole”. Term policies are usually not considered assets for Medicaid purposes because they do not have a cash value or surrender value. Term policies usually have only a death benefit. Whole Life policies (sometimes known as “Universal Life”) do have an accumulated cash value in addition to a death benefit. Since the cash value is available to the owner, the cash value of the insurance policy is considered an asset and counts as a resource for purposes of determining Medicaid eligibility.
In any event, the cash value of the policy can be excluded from your assets with some planning. In many cases, you can transfer the ownership of the policy to a family member or to a living trust to start to protect the policy for Medicaid purposes. You would remain the “insured”, meaning that the policy would still be on your life, but you would no longer be the owner of the policy. The death benefit of your Life Insurance can also impact Estate Taxes on your estate when you pass away. Most insurance policies are marketed to people as “tax-free” investments. While the proceeds of the policy are not considered income, and not taxable as income, the death benefit is considered part of your taxable estate for estate tax purposes. Therefore, when you pass away and your executor is determining whether your estate is taxable for estate tax purposes, the value of the death benefit of your policy is included if you owned the policy. In order to exclude the death benefit from your taxable estate, the ownership of the policy can be transferred to a family member or to an Irrevocable Life Insurance Trust and, provided at least 3 years passes from the time of the transfer, then the proceeds will not be counted as part of your taxable estate. You should consult with an experienced attorney in your area to get advice on the impact of Life Insurance on your estate plan.
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