Spend down refers to a process, in a broad sense, that applies to Medicaid's rules concerning qualification for benefits. As a practical matter, spend down often refers to those who need to be placed in a nursing home and need to know what their financial position must be before they qualify for benefits from Medicaid. Life insurance is considered a financial asset when calculating assets for spend down.
Types
There are, generally, two types of life insurance--term and permanent. Permanent policies have cash-value potential and are the type of policies most closely looked at by Medicaid. Medicaid wants to know that they are not giving money to those who do not need assistance, so all cash value policies are used in the calculation for benefits. Term life insurance (as well as the death benefit amount from permanent life insurance) is not considered.
Significance
Spending down the cash value of your life insurance could cause your policy to lapse or force a surrender if the policy's cash values are not enough to support future premium payments, or if the interest on policy loans would cause the policy to lapse. For this reason, spend-down provisions are potentially disastrous to a life insurance policy.
Rules
If you have more than $1,500 in cash value in your policy, you must deplete the cash value until it is under $1,500. This can be accomplished in several ways. You can make a withdrawal, you can take a policy loan or you can surrender the policy for the cash surrender value.
Misconception
A common misconception is that because life insurance cash values are afforded protection from creditors, and are exempt from the calculation of gross income by the Internal Revenue Service, that this might extend to Medicaid benefits. However, calculations for benefits are based on all money that is available to you, including cash surrender values of life insurance policies.
Considerations
To avoid spend-down provisions and save your life insurance policy, you can opt to place your life insurance policy in a life insurance trust. This option must be done five years prior to claiming Medicaid benefits. This time frame is called the five-year look-back. Any assets that you have held within the last five years will be considered in the calculation for benefits.
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