This article is a section taken from MA for People Who Are Age 65 or Older or People Who Are Blind or Have a Disability (MA-ABD), a part of the revisions and additions to the Minnesota Health Care Program Eligibility Policy Manual.
Life Insurance Policies
A life insurance policy is a contract that may be turned into cash. The basic concept of the contract is that the policy owner pays the premiums during the insured’s lifetime and, when the insured dies, the life insurance company will make one or more payments to the designated beneficiary.
Treatment of Non-Term Life Insurance Policies
The cash surrender value (CSV) of non-term life insurance policies (sometimes referred to as “whole” or “universal” policies) owned by one person that insure only one person count toward the asset limit if the face value (FV) of all the policies for the person is more than $1,500. The CSV of life insurance policies owned by one person that insure only one person are excluded if the cumulative FV of all the policies held on that person amount to $1,500 or less. The FV of term life insurance and burial insurance policies are not counted when determining the total FV of the life insurance policies owned on a specific insured person.
The interest or dividend additions that have accumulated on the FV are not included when determining whether a life insurance policy is a countable or excluded asset.
Life Insurance Policies and the Burial Fund Exclusion
Life insurance policies may affect the amount of the burial fund exclusion (BFE). See MA-ABD Burial Fund Exclusion for more information.
Face Value of Life Insurance
The FV is the contracted value at the time the life insurance policy is purchased; it is the amount to be paid out when the insured dies. The FV may also be known as the “amount of insurance,” “the amount of this policy,” “the sum insured,” etc. A life insurance policy’s FV does not include:
- Any dividend additions, which are added after the life insurance policy is issued
- Additional sums payable in the event of accidental death or because of other special provisions
Cash Surrender Value
The CSV is the monetary or equity value that a life insurance policy acquires over time as the policy owner pays the premiums and dividend additions and interest are added to the policy. The policy owner can take out loans against this amount and can obtain the full CSV by canceling the life insurance policy before the insured dies or the policy matures. A loan against a life insurance policy reduces its CSV.
Dividend accumulations and other available cash vehicles (such as annuities) attached to the life insurance policy must be evaluated separately.
Treatment of Other Insurance Policies
Term Life Insurance Policies
Term life insurance policies have FV but do not have a CSV or dividends. The insured can cancel the policy but there is no cash value to receive. The death benefit is only available upon the insured’s death.
Term life insurance policies are not counted toward the asset limit.
Burial insurance is a contract whose terms preclude the use of its proceeds for anything other than payment of the insured’s burial expenses. If a policy has a CSV to which the owner has access, the policy is not burial insurance.
Burial insurance policies are not counted toward the asset limit.
Accelerated Life Insurance Payments
Some life insurance policies, in certain circumstances, allow the policy owner to receive some or all of the proceeds of the life insurance policy in the form of accelerated life insurance payments prior to the death of the insured. Payments are considered income when received, and an asset if retained in the month following the month of receipt.
Accelerated life insurance policies can provide three basic types of payments:
- Long-term care model – policy owner can access the death benefit of the contract to pay for extended care in a facility or for home health care.
- Dread disease or catastrophic illness model – policy owner can access the death benefit of the contract in order to care for the insured during any specified covered condition.
- Terminal illness model – policy owner can access the death benefit of the contract when a terminal illness is diagnosed for the insured and death is expected to occur within a specified period.
Dividend Additions and Dividend Accumulations
Life insurance companies may offer their policy owners payment from the company’s annual surplus earnings, which they call dividends. Insurance companies pay these dividends in one of three ways:
- Issuing checks to the owners (usually annually)
- Applying the funds to premiums due
- Crediting the funds as an addition or accumulation to the existing policy
The insurance companies use surplus company earnings, called dividend additions, to buy more insurance protection for the life insurance policy owner.
The FV of dividend additions is not included when determining whether a life insurance policy is a countable or an excluded asset.
If the life insurance policy is a countable asset, the CSV of dividend additions is included when determining the asset value of the policy.
If the life insurance policy is an excluded asset, the CSV of dividend additions is not included when determining the person’s countable assets.
Dividend accumulations are surplus company earnings, which accrue in an account that the insurance company controls for the policy owner. The policy owner can access these funds without penalty at any time without affecting the FV or CSV. Therefore dividend accumulations may be countable assets unless they are excluded under another asset exclusion (for example, because they have been set aside for burial).
Dividend accumulations under the life insurance provisions are not excluded even if the life insurance policy paying the accumulations is excluded.
Unless the accumulations are excludable under another asset exclusion (for example, because they have been set aside for burial), they are counted as an asset, even if the life insurance policy itself is excluded, because the policy’s FV is $1,500 or less.
Income treatment of dividends
Dividends count as income if the life insurance policy is excluded as part of the $1,500 life insurance exclusion. Dividends are excluded as income if the life insurance policy is a countable asset. If the life insurance policy is used to meet the BFE, dividends are also excluded.
Minnesota Statutes, section 256B.056, subdivision 1a
CREDIT: The content of this post has been copied or adopted from the Minnesota Healthcare Programs Eligibility Policy Manual, originally published by the Minnesota Department of Human Services.
This is also part of a series of posts on Minnesota Healthcare Eligibility Policies.