Life insurance and Medicaid in Florida: policies, funeral plans and burial funds

DCF's rule for SSI-related Medicaid, which includes nursing home Medicaid and the long-term care waiver, has three parts (ESS 1640.0554):

A policy counts only to the extent of its cash surrender value, the amount the owner would receive by cashing it in. The death benefit itself isn't counted. If the face value of all policies on one person totals $2,500 or less, none of the cash value counts. Over $2,500, the cash value of all of them counts, not just the excess. Policies with no cash value, such as term or burial insurance, are left out entirely, including when adding up the face values.

Two details matter. The policy must be owned by the applicant, or by a spouse whose assets are counted with theirs. A policy your parent's child owns on your parent's life isn't your parent's asset. And the $2,500 is per person: one spouse can't have $5,000 of coverage on the theory that the couple gets $2,500 each.

For a married couple applying for nursing home Medicaid, the cash value of policies owned by either spouse is generally part of the couple's assets in the spousal calculation. See If one spouse needs nursing home care.

Hypothetical: Dolores, 86, is widowed and lives in West Palm Beach. She is moving to a nursing home and applying for Medicaid. She has $1,500 in checking, a $10,000 whole life policy she bought in 1979 with a cash value of $6,200, and a $15,000 term policy through an old employer.

A prepaid burial contract, called a preneed contract in Florida, is an agreement with a funeral home or cemetery to pay now for services and merchandise later. DCF doesn't count it as an asset if it is irrevocable, if the seller refuses to cancel it, or if cancelling would cause significant hardship (ESS 1640.0509). Otherwise, DCF counts the amount your parent would get back by cancelling, minus any penalty, which is often different from the face value (ESS 1640.0511.02).

Florida preneed contracts are generally cancelable. A purchaser can cancel within 30 days for a full refund, and can cancel the services portion later. But Florida law lets a purchaser who is the beneficiary and who is applying for or receiving Medicaid or SSI make the contract irrevocable. Once that is done, it can't be cancelled, and any money left over after the funeral goes to the state's Medical Care Trust Fund (Fla. Stat. 497.459). DCF's policy confirms that any Medicaid applicant may make a contract irrevocable and exclude it (ESS 1640.0510).

Practical points:

Ask the funeral home for an itemized contract and a written statement that it is irrevocable. DCF will want a copy (ESS 1640.0513). Buy for fair value. Paying a reasonable price for a funeral is spending on your parent's own needs. A contract worth far more than the services may draw questions. An irrevocable burial trust set up with a funeral home is treated like an irrevocable contract. One that isn't connected to a funeral home is treated as a transfer, apart from up to $2,500 that can be excluded as a burial fund (ESS 1640.0512).

Separately from a funeral contract, your parent, and their spouse, can each set aside up to $2,500 for burial expenses. The money must be kept separate, not mixed with other savings. DCF accepts your parent's statement of how much is set aside and for whom, or form CF-ES 2302, Designation of Resources for Burial Funds. Interest left to grow in the fund is also excluded. The $2,500 isn't reduced by excluded life insurance or an irrevocable funeral contract. Funds can even be designated for the three months before the application (ESS 1640.0514).

Burial spaces, meaning a grave site, crypt, mausoleum or urn, aren't counted if they are for your parent, their spouse or an immediate family member, which includes children, stepchildren, siblings, parents and their spouses. Caskets, headstones and the cost of opening and closing the grave are excluded too (ESS 1640.0516). A deed or sales contract for the plot is the usual proof.

For which other property is counted or excluded, see What assets are exempt for Medicaid in Florida.

Some older policyholders can sell a policy to a third party for more than its cash value. Florida regulates those sales under Part X of Chapter 626, "Viatical Settlements" (Fla. Stat. 626.991–626.99295). A provider must be licensed by the Office of Insurance Regulation (Fla. Stat. 626.9912).

For Medicaid, a sale doesn't make the value disappear. The money from the sale is your parent's and counts as an asset once it is received, so it needs to be planned for just like a cash surrender. A sale at a fair price generally isn't a gift. A sale may also have income tax consequences, and the family loses the death benefit. Compare the offer, the cash value and the policy's role in the estate plan before deciding, and check the buyer's Florida license.

Don't let a policy lapse or cancel it in a hurry. A policy that is part of the plan may be worth keeping, and the choices differ for each policy. Check who the beneficiary is. If it names the spouse in care, see When the healthy spouse dies first. Report changes. If your parent is already on Medicaid, cashing in a policy or buying a funeral contract is a change to report within 10 days. See Medicaid renewals and reporting. Insurance agents can find more on product rules in our guide for insurance agents.