How New Jersey Medicaid Treats Life Insurance

HNWElder Law, Medicaid Eligibility and Asset Protection Planning

  • Many people applying for Medicaid own life insurance
  • The type of life insurance the applicant owns determines eligibility
  • This article discusses how to deal with life insurance under NJ Medicaid laws

Life Insurance is an Asset Under NJ Medicaid Law

The question comes up frequently about life insurance. Is it an asset, and if so, how is it treated by New Jersey Medicaid? New Jersey requires all persons to spend down his/her assets to under $2000 before approving an application for Medicaid benefits.

Know the Type of Life Insurance Policy in Place

All Medicaid applicants must examine what kind of life insurance exists. Term life insurance is a type of insurance in which a premium is charged and paid usually on an annual basis and if the insured dies while the policy is “in force”; the death benefit is paid to the designated beneficiary.  For Medicaid purposes, this type of life insurance has no monetary value to the owner while he/she is alive, so it is not an asset and does not count towards the asset limitation.

There are other life insurance policies, however, that have a cash value.  With this Life Insurance as the premium is paid to the insurance company some of that amount goes towards building cash value which increases in value over time.  This cash value can be taken out by the policyholder as a loan.  If the policy is no longer needed or desired, then the policy can be cancelled and the owner will receive the cash surrender value amount.  This is different than term policies which, if cancelled, do not entitle the owner to any money back.

Cash Value of Life Insurance Under New Jersey Medicaid

It is the cash value of Life Insurance that counts as an asset towards the $2000 asset limit for Medicaid eligibility purposes.  We often see clients who are needing Medicaid benefits to pay for long term care that have one or more life insurance policies with cash surrender value.  A decision must be made as to how to dispose of them before Medicaid eligibility can be achieved. Cancelling the policy and then spending down the cash surrender value is one option.  But is it the best one?  It depends on the situation.

Life Insurance and Understanding Your Options Under New Jersey Medicaid

What are the Medicaid applicant’s options then if he/she owns a policy with cash value?  One is to surrender the policy for its cash surrender value and then spend down the cash in accordance with Medicaid’s spend down rules.  When the applicant dies there will be no death benefit because the policy has been surrendered.

This is a reasonable option where the cash surrender value is the same – or close to the same – value of the death benefit.  If, for example, the cash surrender value is $9500 and the death benefit is $10,000 not much is lost in value if the policy is surrender.  In fact, if the policy is not “paid up” but requires continued premium payments, the death benefit minus the continued premiums may turn out to be less than the surrender value.

But, what if the cash surrender value is $9500 but the death benefit is $40,000 or $100,000?  If it is surrendered the death benefit will be lost. Do you know how long your mom or Dad will live? 80 or 90 year’s old? What about a younger person, say age 62, with a life ending condition?  What if we surrender it and he passes away 3 months later?  It would be a shame to lose the death benefit on a policy he paid premiums on for many years.

Another option could be for a family member to buy the policy.  If you have the financial means to buy Dad’s policy pay him the cash surrender value which he must then spend down.  However, you will have the death benefit to keep, which can cover funeral bills and pass on a small inheritance if that is something important to your parents.

There are some potential costs to be aware of.  If the policy is not paid up then if you purchase the policy you will need to continue to pay the premiums to keep the policy in force.  If Dad/mom lives 5 or 10 more years you need to factor that into whether it makes financial sense to keep the policy.  The other issue is income taxes.  While life insurance proceeds are received income tax free, that is not necessarily the case when the owner of the policy purchased a policy on the life of someone else.   The proceeds become taxable income, although how much is taxable depends on what was paid for the policy and how much in premium payments they made prior to death.

In most cases, even when factoring these costs into the equation, if the spread between the cash value and death benefit is large enough it will still make good financial sense to purchase the policy instead of letting it lapse.  However, consulting with an accountant and elder law attorney before making the decision is advisable because each instance has a different set of facts and variables to examine.

To discuss your NJ Medicaid Eligibility matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at  Please ask us about our video conferencing consultations if you are unable to come to our office.

By Fredrick P. Niemann, Esq., of Hanlon Niemann & Wright, a Freehold Township, Monmouth County NJ Medicaid Attorney

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