A $400 Problem Almost Cost This Kansas Family $100,000 -- Here Is What You Need to Know About Life Insurance and Medicaid

Most families do not find out about the life insurance rule until after a Medicaid application has already been denied. By then, they are stressed, confused, and often one bad piece of advice away from losing a significant inheritance. If your parent has a life insurance policy and is approaching a nursing home admission in Kansas, this is one of the most important things you can read.

The Rule Most Families Have Never Heard Of

Kansas Medicaid has a strict asset limit of $2,000 for a single individual. Most people know that. What many families do not know is that life insurance counts toward that limit.

Specifically, if a life insurance policy has a cash surrender value of more than $1,500, the cash surrender value is counted as a resource for Medicaid purposes. If that value pushes the applicant over the $2,000 limit, the application will be denied.

The cash surrender value and the death benefit are two very different numbers. A policy could have a $2,400 cash surrender value and a $100,000 death benefit. Medicaid looks at the cash surrender value. But as you will see below, the decision your family makes about that policy will determine what happens to the death benefit -- and it is a decision that cannot be undone.

How a $400 Problem Almost Became a $100,000 Loss

Advanced Legal Planning recently worked with a family facing exactly this situation. Their mother had been admitted to a nursing facility. The facility, trying to help, filed a Medicaid application on her behalf without consulting an attorney first. The application was denied -- and then denied again after being refiled without addressing the underlying issue. The reason: mom had a life insurance policy with a cash surrender value of $2,400 -- just $400 over the limit.

The standard advice given to families in this situation is simple: irrevocably assign the policy to a funeral home. The reasoning is that prepaid funeral expenses are an exempt asset, so assigning the policy eliminates the countable resource and mom qualifies for Medicaid.

The problem is that this policy had a death benefit of $100,000. In Kansas, when a person irrevocably assigns a life insurance policy to a nursing home, they are also signing away the excess proceeds to Medicaid at the time of that assignment. If the family had followed that standard advice, the remaining death benefit after funeral costs would have gone to Medicaid -- not to the children mom intended to leave that money to.

One phone call to the wrong person, and the family would have irrevocably signed away $100,000.

What Advanced Legal Planning Did Instead

Rather than assigning the policy to a funeral home, Advanced Legal Planning structured a sale of the policy to its beneficiaries for the cash surrender value of $2,400. The beneficiaries purchased the policy from mom for $2,400. That $2,400 can be used to pay down mom's outstanding balance with the facility, which has been holding her since August of the prior year while waiting on the Medicaid application to be approved.

The result: mom's countable assets dropped below the $2,000 limit, she immediately qualified for Medicaid, and the $100,000 death benefit remained intact for her beneficiaries -- going exactly where mom always intended it to go.

The difference between the standard advice and the right advice in this case was $100,000.

Why the Standard Advice Falls Short

Medicaid caseworkers and facility staff are not attorneys. They know the rules well enough to process applications, but they are not paid to find the strategy that protects your family's assets. When they suggest assigning a policy to a funeral home, they are giving you a technically valid option -- one that solves the Medicaid problem. What they are not telling you is that in Kansas, signing that funeral home assignment form also means signing away the excess proceeds to Medicaid at that moment. It is not a future risk. It happens at the time of signing.

An experienced Medicaid planning attorney looks at the whole picture: the policy type, the cash surrender value, the death benefit, who the beneficiaries are, what else is in the estate, and what the consequences of each option actually are. Then they find the strategy that protects as much as possible.

This is also why timing matters. Once a policy has been irrevocably assigned, the decision cannot be undone. If you are in the middle of a Medicaid application -- or if one has already been denied -- call a competent Medicaid planning attorney before taking any action on a life insurance policy.

What to Check Before a Medicaid Application Is Filed

Before any Medicaid application is submitted on behalf of a parent or loved one, review the following:

Do your parents have any life insurance policies? What is the cash surrender value of each policy? What is the death benefit? Who are the named beneficiaries? Has anyone already taken action on the policy -- such as assigning it to a funeral home?

If the cash surrender value is over $1,500 and you have not yet spoken with a competent Medicaid planning attorney, that conversation should happen before you file anything.

Frequently Asked Questions

Does life insurance count as an asset for Medicaid in Kansas?

Yes. If a life insurance policy has a cash surrender value above $1,500, that cash surrender value is counted as a resource for Medicaid eligibility purposes. Term life insurance with no cash value is not counted.

What happens to life insurance after a Medicaid recipient dies?

If the policy is still owned by the Medicaid recipient at the time of death, it may be subject to Medicaid estate recovery. How the policy is handled before and during the application process determines whether the death benefit is protected or at risk.

Is assigning a life insurance policy to a funeral home always the wrong move?

Not always. For policies with low death benefits where the funeral costs would consume most or all of the proceeds, assigning to a funeral home can make sense. The problem arises when the death benefit is significantly higher than the funeral cost. In Kansas, when a family signs a funeral home assignment form, they are signing away the excess proceeds to Medicaid at that moment -- not at some point in the future. Many families do not realize this until it is too late.

What if a Medicaid application has already been denied because of a life insurance policy?

Act quickly. In some circumstances there is a window of time from the date of denial to address the issue and save the application without having to reapply. Contact a competent Medicaid planning attorney as soon as possible after receiving a denial.

Can I still get help if a Medicaid application has already been filed -- or denied?

Yes. Some families come to Advanced Legal Planning after a denial or after a facility has already filed an application on their loved one's behalf. Even at that stage, there are often options. The sooner you call, the more tools are available.

Talk to a Kansas Medicaid Planning Attorney Before You Make Any Decisions

Life insurance decisions made during a Medicaid application are often permanent. Before taking any action -- assigning a policy, cashing it out, or surrendering it -- get an attorney's eyes on the situation first. A short conversation could protect tens of thousands of dollars for the people your parents intended to leave it to.

Call Advanced Legal Planning at (316) 252-2233 or schedule a consultation online. Virtual meetings available.