How To Protect Your Life Insurance From Creditors
There are a few guidelines that can guarantee your loved ones get the protection you planned for.
Be as clear as possible when naming beneficiaries: You can designate beneficiaries by name and title , or using broader terms . Being specific when naming is always better, because it leaves no room for ambiguity.
Donât list your estate as a beneficiary: Naming your estate exposes the death benefit to creditors and ties the money up in legal proceedings.
Keep your beneficiaries up to date: If none of your beneficiaries can accept the death benefit, the payout is subject to probate. Update the designations during major life events, like a divorce, marriage, or death in the family to keep your policy current.
Name a contingent beneficiary: Name a secondary tier of beneficiaries to accept the death benefit if none of your primary beneficiaries can do so.
Why An Insurer Might Not Pay
It’s possible for an insurer to refuse to pay out benefits under some circumstances, but generally only if the policy provides for it.
Insurers will generally not pay out when the deceased has committed suicide within the first two years. They might also decline to pay if the insured smoked, regularly engaged in and died engaging in dangerous activities such as drag racing, or died during the commission of a crime.
All these terms are typically spelled out in the policy, but health-related issues can be tricky. Maybe the deceased didn’t smoke at the time he took out the policy, but then he started. Insurers can refuse to pay out benefits if the policy was conditioned on the insured not being a smoker.
The same can apply to undivulged health conditions, such as high blood pressure or cancer, but the insurance company would most likely have to prove that the insured was aware of the condition at the time the policy was taken out if and wasn’t diagnosed for the first time years later.
What Assets / Property Can Medicaid Recover From After Medicaid Recipient Dies
42 USC 1396p : Medicaid can recover from the âestateâ of the Medicaid recipient, however, the term âestateâ is defined in the stateâs probate laws. Estate is either defined as those assets/property that pass through probate or some expanded estate recovery definition. Luckily, in Florida, Medicaid is limited to recovering from probatable assets only.
Your Florida Medicaid lawyer can significantly reduce the assets Medicaid will be able to take from the estate. In fact, in pre-planning cases, Medicaid estate recovery can legally and ethically be completely avoided altogether!
If there is no probatable estate, there is no Medicaid estate recovery.
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Mechanics Of A Funeral Trust
Now that we know how to transfer money to a funeral trust, how does it work?
It is rather simple. As we mentioned earlier, the purpose of the funeral trust is really to protect assets for your burial and funeral expenses.
The value in the trust grows at a predefined interest rate. Upon death, the value is paid out directly to the funeral home. The payout is income tax-free.
That is it. No worries from your surviving family about how to pay. Moreover, no worries that Medicaid accesses the money because they cant.
Upon death, your family simply needs to call the trust company. Provide them with the funeral home information and they will send a check to the funeral home.
It is easy.
And, the drawbacks, if any?
Well, one drawback is there are a few states that do not allow this funeral trust. . Another drawback is the other 44+ states allow up to $15,000 to be placed into the trust. Some states allow less.
Is this a bad thing?
Not really. Consider that the average funeral cost is around $15,000. Moreover, remember, the trust protects the money from Medicaid among others. See the illustration below.
Another drawback is that any money left over in the trust and not paid to the funeral home goes into your gross estate. State laws differ, but this means the money is subject to probate law. For example, the funeral trust contains $15,000. Your funeral costs $10,000, $5,000 remains in your estate.
Access Life Insurance Annuity Funds And Social Security Benefits
By , J.D.
After a loved one dies, beneficiaries need to know how to collect life insurance and Social Security payments they’re entitled to, because the executor of the estate doesn’t usually handle this task. Especially if survivors depended on the deceased person for financial support, they may need to quickly get cash for urgent, ongoing expenses such as the mortgage and credit card payments. Knowledgeable survivors can usually get access to many sources of cash, which may include life insurance or Social Security survivors benefits. To learn about other benefits that may be available to family members, see Claiming Pensions, Veterans, and Other Benefits: Information for Executors and Beneficiaries.
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Do Life Insurance Policies Affect Medicaid Eligibility
In order to qualify for Medicaid to cover nursing home care, an elders countable assets cannot exceed $2,000 for a single person, or up to $126,420 for married couples in which only one spouse is applying for Medicaid. However, not all assets are considered countable for these purposes. For example, the biggest asset exemptions are an applicants home, car and personal property. Another exemption is life insurance owned by the elder.
Find Cheap Life Insurance Quotes In Your Area
When you purchase a life insurance policy, youll be given the option of designating one or multiple beneficiaries to receive a death benefit in the case you pass away. There are almost no rules restricting who you can pick. In addition, you can easily change your beneficiary if, for example, you get divorced. The only real restriction is for minors, as you would need to designate a trust or legal guardian as the beneficiary to provide them the death benefit.
While you can name anyone as a beneficiary, just make sure to notify them and provide them with a copy of your life insurance policy. Otherwise, they may not know to or be able to file a claim when the time comes.
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What Happens If You Dont Have A Life Insurance Beneficiary
If you dont name a life insurance beneficiary, or all your beneficiaries pass away before you do, your estate becomes the beneficiary. This means the life insurance proceeds go into estate probate, a long legal process during which your debts are settled and your estate is divided.
Since estate probate can take months and creditors can come after the life insurance death benefit, we recommend naming beneficiaries and keeping the list regularly updated. Otherwise, your family may not receive money when they need it or their payout might be reduced. This is also why, while you can name your estate as a beneficiary, we dont recommend this option.
Mechanics Of Permanent Life Insurance
To understand how a funeral trust works, you first need to understand how permanent life insurance works. This is important to understand so you understand what Medicaid and nursing homes go after.
Permanent life insurance policies have cash value. This cash value is yours. At every point, your policy is made up of part cash value and part insurance. When you die, the carrier pays the insurance part. The cash, again, is yours.
For example, if you have a $25,000 whole life insurance policy and $10,000 is cash value, $15,000 is the insurance.
Your cash value grows over time. Every year, your policy earns more cash. And, every year, the carriers insurance responsibility is less and less. This is for whole life insurance.
Universal life operates its cash a little differently. Your cash and insurance component are separate, and your cash has the ability to grow independently. However, premiums for universal life are variable and the carrier may, at some point, require a premium increase for proper funding.
Understand that Medicaid is after the cash value in your life insurance policy, not the insurance component. The cash value is yours, and this is what Medicaid forces you to liquidate upon the spend down process.
The cash is what we want to protect and transfer to the trust.
You may think, John, I have a whole life policy for $25,000 with $20,000 cash. You mean I can only transfer the $20,000, and not the $25,000?
Yes, only the $20,000.
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How To Obtain Life Insurance And Medicaid The Right Way
Medicaid and life insurance. These arent like peas and carrots. More like oil and water!
You may have heard different information about Medicaid eligibility and life insurance. Frankly, a lot of the stuff you read on the internet is inaccurate.
In this article, we dispel the inaccuracies and tell you what you need to know about how Medicaid works with life insurance. More specifically, how Medicaid eligibility for nursing home affects life insurance you own. We also describe how Medicaid/SSI recipients obtain life insurance. The quick answer to everything: it really depends on your situation.Read on to learn how Medicaid and life insurance interact with one another. We discuss:
But first, we discuss Medicaid basics and eligibility. This is important so you can see how life insurance ownership affects your Medicaid eligibility.
What If You Are Entering A Nursing Home And Have Life Insurance
If you are entering a nursing home without long-term care insurance coverage, youll have to spend down your assets in order to qualify for Medicaid nursing home assistance. As we mentioned, permanent life insurance is an asset.
I know what you are thinking:
John, this all sounds good, you say. But I have a current permanent life insurance policy, and I need to protect the cash value NOW.
Its true. You may have a whole life insurance policy or an indexed universal life insurance policy now. Maybe due to age, health, time, money, or needs you just dont want to apply for a term life insurance or GUL policy. I can understand that.
Good news is that you can transfer the current permanent life insurance policy you have whether it is a whole life insurance policy or universal life to a funeral trust or an estate planning trust.
Before we get into the mechanics of both, know that a funeral trust protects the cash value of the life insurance from the Medicaid spend-down process.
Thats right. Medicaid cant force you to use the cash in your life insurance policy to pay for nursing home costs. They cant touch it. It is completely legal and through us, the set up and application are free.
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Alternatives To A Funeral Trust Or Estate Planning Trust
Of course, you dont have to go this route. But, the options are rather limited. We discussed a few above. There is term life insurance and GUL. These types of life insurance usually are not subject to Medicaid. However, they require pre-planning and good health.
And, lets say you want to keep that money sitting in the CD or annuity. You just dont want to bother transferring and protecting the money. What are the drawbacks? Well, there are plenty.
As you can tell, a funeral trust or an estate planning trust works rather nicely when it comes to protecting your assets from Medicaid.
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Can Creditors Go After My Life Insurance Proceeds
Insurance regulations prevent creditors from taking the death benefit from your beneficiaries, even if you have outstanding debts. Only the people listed in your policy can receive a payout, so life insurance companies wonât pay out to an unlisted creditor.
But, creditors can seize the death benefit if it becomes part of your estate, which happens if:
All of your beneficiaries predecease you and you never name new ones
You list your estate as a beneficiary
Your estate and assets go through probateâlegal proceedings that determine where your assets goâwhen you die. Lenders are entitled to those assets and can claim any life insurance proceeds that become part of your estate before your loved ones get their share. If, after this process, there is any death benefit left, it will be disbursed as stated in your will.
Note that regulations protect your beneficiaries from your creditors, but if theyâre in debt, they may not be protected from their own lenders. Once they receive the death benefit, it becomes part of their assets, which can be seized if theyâre past due on their own payments.
About Senior Legal Line
Senior Legal Line is a legal question and answer line for Seniors.
The column is written by the Senior Citizensâ Law Project. It is not meant to give complete answers to individual questions. If you are 60 years of age or older and live within the Minnesota Arrowhead Region, you may contact the Legal Aid Service of Northeastern Minnesota with questions for legal help by writing to: Senior Citizensâ Law Project, Legal Aid Service of Northeastern Minnesota, 302 Ordean Bldg., Duluth, MN 55802. Please include a phone number and return address. To view previous articles, go to: www.lasnem.org. Reprints by permission only.
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Can Life Insurance Affect Your Medicaid Eligibility
When applying for Medicaid many people often forget about life insurance. But depending on the type of life insurance and the value of the policy, it can count as an asset.;
In order to qualify for Medicaid, you can’t have more than $2,000 in assets .;Life insurance policies are usually either “term” life insurance or “whole” life insurance. If a Medicaid applicant has term life insurance, it doesnt count as an asset and won’t affect Medicaid eligibility because this form of life insurance does not have an accumulated cash value. On the other hand, whole life insurance accumulates a cash value that the owner can access, so it can be counted as an asset.
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That said, Medicaid law exempts small whole life insurance policies from the calculation of assets. If the policy’s face value is less than $1,500, then it won’t count as an asset for Medicaid eligibility purposes. However, if the policys face value is more than $1,500, the cash surrender value becomes an available asset.
For example, suppose a Medicaid applicant has a whole life insurance policy with a $1,500 death benefit and a $700 cash surrender value . The policy is exempt and won’t be used to determine the applicant’s eligibility for Medicaid. However, if the death benefit is $1,750 and the cash value is $700, the cash surrender value will be counted toward the $2,000 asset limit.
What Happens If The Community Spouse Dies First
But even if the community spouse refuses to support the Medicaid-recipient , what happens if the community spouse dies first?
State law will not allow the community spouse to completely disinherit the sick spouse through the spouses of the deceasedâs estate. Medicaid can assume the right the institutionalized spouse had to that elective share.
In this case, again, your elder care lawyer can explain options on how to prevent the surviving spouse from losing their Medicaid benefits if the well spouse passes away first.
How to Get Medicaid to Pay for Some or All of Your Long-Term Care Expenses:âWithout having to wait 5 years | without having to sell your house | without have to go broke first!
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How To Designate A Life Insurance Beneficiary
Once youve determined who you would want as your beneficiaries, you should specify them on the life insurance beneficiary designation form. A beneficiary designation form is a legal document and will be used by the insurer to determine who will receive the death benefit if you pass away during the period of coverage . This designation overrides any other estate planning you may have, such as a will, so you need to be certain the listed beneficiaries are those you actually want to receive a benefit.
There are typically two levels of beneficiary: primary and contingent. A primary beneficiary is essentially your first choice to receive the death benefit if you pass away. A contingent beneficiary is the backup; theyre the person you would want to receive the payout in the case the primary beneficiary is deceased as well. So, if your spouse is your primary beneficiary and you both pass away in a car crash, the contingent beneficiary would receive the death benefit.
Its important to be specific when designating a beneficiary, otherwise, you can end up with disputes between your loved ones. For example, just saying “husband” or “wife” on a life insurance policy would cause problems if you get divorced and remarried. The details needed will change according to the entity listed as a beneficiary but, for a person, youll want the following details:
- Full name
Who Takes On Your Debt
Even though a creditor canât take the death benefit from your beneficiaries, your family can still become responsible for your loans. This is why itâs important to buy enough life insurance to cover not only your lost income but also any debts your loved ones might have to pay off.
Some states with filial responsibility laws will hold you responsible for a parentâs debt. Thirty states and the District of Columbia currently have filial responsibility laws. The specifics vary by state, so consult a financial professional if your parents are carrying debt.
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