What is Medicaid Spend Down and How Does it Work?
Medicaid, the state-run healthcare program for low-income individuals, came into existence in 1965. Today, the insurer provides healthcare coverage for nearly 65 million people. Generally, individuals are eligible for Medicaid when their income and assets are below certain thresholds. Under federal law, states can offer Medicaid eligibility to adults with income at or below 138% of the federal poverty level or FPL. For reference, the 2019 FPL for an individual is $12,490 and $25,750 for a family of four.
But here’s where things start to get confusing. First, each state sets its own eligibility requirements within the federal guidelines. And second, those state requirements aren’t exactly set in stone. If you or a family member doesn’t qualify for Medicaid currently, you might be able to pursue a loophole strategy called Medicaid Spend Down to get the coverage you need.
Medicaid Spend Down Overview
Medicaid spend down is a financial strategy used to qualify for Medicaid nursing home coverage. In short, “spending down” involves reducing one’s income or assets to the point of eligibility. Medicaid law allows you to do so under some complex guidelines. You would typically pursue a spend down on behalf of a family member who needs pricey, long-term care.
There are two types of Medicaid spend down strategies: the income spend down and the asset spend down. An income spend down is allowed through what the states call a “medically needy pathway” or “surplus income program.” These terms refer to another set of eligibility requirements that considers income and ongoing medical expenses. Those who are using nearly all of their income to cover medical costs are good candidates for an income spend down.
An asset spend down involves reducing an applicant’s asset base to fall within Medicaid’s eligibility requirements. While that sounds simple on the surface, the rules governing asset spend downs are — you guessed it — confusing. Medicaid defines countable assets and exempt assets, and there are allowed and disallowed ways to spend down. As you might expect, you can’t achieve eligibility by simply giving money away to a relative.
Each state defines specifically which expenses can be used to spend down excess income or assets. Generally, expenses for medically necessary services and equipment are allowed. These include doctor visits, therapy appointments, co-payments and deductibles for medical insurance, surgeries, medical equipment, eye exams, and prescriptions.
As it relates to life insurance, a permanent policy with a face value of less than $1,500 won’t be counted as an asset for Medicaid eligibility. However, a policy with a face value above $1,500 will have its cash surrender value counted as an available asset. To avoid this issue, some people may instead choose to lapse their policy so they can become eligible for Medicaid benefits. This is a major mistake, as choosing to sell the life insurance policy may yield far more money than would be received through Medicaid benefits.
How much is my policy worth?
Rules, Limits, and Exemptions of a Medicaid Spend Down
Income Spend Down
If your income is higher than the state’s Medicaid eligibility threshold, it’s not as simple as making up the difference with healthcare costs. First, not all states even allow for an income spend down. And, the medically needy pathway actually defines a different income level for those who want qualify net of healthcare costs.
As an example, the standard income threshold for a single Florida resident to qualify for institutional/nursing home Medicaid is $2,349 monthly. But the medically needy income limit is $187.35. This means an applicant can qualify for Medicaid in Florida by making no more than $2,349 monthly. Otherwise, the applicant has to show that his or her income after medical costs is no more than $187.35 monthly. So an applicant could earn $5,000 and still qualify — as long as the medical costs are at least $4,812.65 monthly.
Medicaid income limits
For most states, the Medicaid income cap applied to individuals aged 65 and older for nursing home coverage is $2,349 monthly. For married couples with both spouses applying, that cap goes up to $4,698 monthly. New York has the lowest individual income cap at $859. Minnesota, Nebraska, and North Dakota are also fairly restrictive, limiting individual income to $1,041.
Only 32 states plus Washington, D.C., allow for an income spend down. These lower thresholds for income less expenses can range from $114.49 in Arkansas to $1,134.51 in Vermont.
What is considered income for Medicaid purposes?
These income limits are more meaningful when you know that Medicaid defines “income” as your Modified Gross Adjusted Income or MAGI. The formula for MAGI is as follows:
- Total taxable income (including wages, Social Security retirement income, disability insurance, pensions, investment income)
- Less deductions
- Plus foreign earned income
- Plus tax-exempt interest
- Plus any Social Security benefit amount not included in your gross income under Section 86 of your income taxes
Note that Supplemental Security Income, Veterans’ disability benefits, worker’s compensation, loan repayments, child support, and alimony finalized after January 1, 2019 are not counted as taxable income.
Asset Spend Down
While an income spend down relies on medical expenses to offset excess income, an asset spend down is a slightly different animal. Yes, you could spend excess cash on medical expenses and that would be an appropriate strategy. But you can also use Medicaid’s differentiation of countable assets vs. non-countable assets to achieve a spend down. Countable assets affect your eligibility. Non-countable assets are exempt and do not have to be spent down.
Medicaid countable assets and non-countable assets
Unfortunately, there are no hard-and-fast definitions of countable and non-countable assets. This is because each state defines these terms for its Medicaid program. The examples shown below are generally accurate, but you’ll need to confirm the laws in your state before taking action.
Countable assets typically include cash in checking and savings accounts, assets within investment accounts, investment property, boats, RVs, plus extra cars. 401(k) and IRA retirement accounts are usually countable assets if the accountholder hasn’t begun taking distributions. If distributions are being made, those funds are counted as income.
Universal life insurance policies are countable assets, and whole life policies may be countable. If the face value of a whole life policy exceeds $1,500, then the cash surrender value of that policy is a countable asset.
Examples of non-countable, or exempt, assets are:
- The applicant’s primary vehicle
- A primary residence (some states cap the home equity value for exemption purposes)
- Term life insurance
- Whole life insurance with a face value of $1,500 or less
- Up to $1,500 in prepaid burial and funeral costs
- Household furnishings
- Personal items like clothes and jewelry
You should also know that Medicaid law allows an applicant to reduce countable assets by paying off debt. This means there are three general strategies for asset spend downs:
- Spend excess countable assets on medical expenses
- Spend excess countable assets on debt payoff
- Use excess countable assets to purchase non-countable assets
Medicaid asset limits
Medicaid in most states limits an individual applicant’s total countable assets to $2,000. The outliers are Connecticut’s threshold of $1,600 and New York’s cap of $15,450. Married couples are usually held to 150% or 200% of the individual asset limit. In Alaska, for example, an individual must have less than $2,000 in countable assets to qualify for Medicaid, while a married couple with both spouses applying must have less than $3,000 in countable assets.
When one spouse of a married couple applies for Medicaid, the state typically allows the other spouse to retain a larger portion of assets. As an example, Kansas allows the non-applying spouse to have up to $128,640 in countable assets, but the applicant spouse has to own less than $2,000 in countable assets.
How to Calculate Your Income/Assets for Spend Down
Medicaid sets income and asset limits for individuals, married couples with both spouses applying, and married couples with only spouse applying. The examples provided below are for illustration purposes only. Please check with the laws in your state to assess your eligibility.
A simple scenario for an individual applicant demonstrates how you might calculate your income and assets for Medicaid eligibility. Say the individual seeking Medicaid is your father, who lives in Illinois and requires nursing home care. His MAGI is $27,600 or $2,300 monthly, consisting of Social Security income and distributions from his IRA. Notable assets are as follows:
- A home worth $450,000
- Cash and investments worth $3,000
- A whole life policy with a face value of $2,000 and a cash surrender value of $850
- Primary vehicle valued at $9,500
Dad is currently not eligible for Medicaid because his income and his assets are too high. His income of $2,300 monthly exceeds the Illinois maximum for individuals by $300. That means he’d have to qualify via Illinois’ medically need pathway, which caps income after healthcare expenses at $1,040.83. Given that he needs nursing home care, he’ll easily have enough medical expenses to offset the excess $1,259.17 in income.
The asset cap for an individual seeking Medicaid nursing home coverage in Illinois is $2,000. Most of dad’s assets are non-countable, except for the $3,000 in cash and investments and the whole life insurance policy with a face value of $2,000. Since the insurance policy has a face value over $1,500, the policy’s cash value of $850 is considered a countable asset. That brings dad’s countable asset value to $3,850. He’d need to spend down $1,850 of that to meet the $2,000 asset cap.
In the aforementioned scenario, the father had a whole life policy — but what about other types of policies such as universal or convertible term life insurance? These policies accumulate cash value over time (assuming the term policy has flexed the option to become a whole life policy), so their cash surrender value would be counted as an asset if the policy has a face value above $1,500.
For example, say an individual has a convertible term life insurance policy with a face value of $3,000 that is expiring soon. Rather than let the policy lapse and lose their benefits, the individual decides to convert it into a whole life insurance policy which now has a cash surrender value of $1,000. However, doing so now means the policy’s cash surrender value can now be counted as an asset that affects Medicaid eligibility.
If the now countable cash surrender value puts the individual over their state’s asset cap and makes them ineligible for Medicaid, they may contemplate letting their policy lapse so they can avoid this issue and continue receiving Medicaid benefits.If you’re in this situation, know that this isn’t your only option. Instead, you can sell your life insurance policy for a lump sum of cash through a life settlement. Rather than living from check-to-check, you can sell your life insurance policy for a lump sum of cash that gives you greater flexibility to manage your finances and enjoy retirement.
Don’t let your policy lapse.
In fact, you can even set money aside in a trust that can help pay for long term care or designate how you want money to be distributed to family members after passing.
Both spouses applying for Medicaid
If your parents are married and both are applying for Medicaid, the limits are slightly different. For this example, let’s assume your folks live in Minnesota and also need Medicaid nursing home coverage. Their joint MAGI is $39,000 annually or $3,250 monthly, consisting of Social Security and pension payments. Notable assets are:
- A home worth $300,000
- Cash and investments worth $5,000
- Two term life insurance policies with a combined death benefit of $200,000
- Two cars valued at $22,000 total
In Minnesota, the income limit for married couples with both spouses applying is $1,400 monthly and the asset limit is $6,000. Your parents’ assets are all non-countable, except for the cash and investments of $5,000. Since the $5,000 is less than Minnesota’s cap of $6,000, your folks don’t need an asset spend down to qualify.
They do need to address their income, however. At $3,250 monthly, it’s more than double the Medicaid cap in Minnesota. Fortunately, this state does allow for income spend downs. The threshold for income less medical expenses is $832.67. That means your parents will need to spend all but $832.67 of their income on their healthcare costs to qualify for Medicaid.
One spouse applying for Medicaid
When one spouse of a married couple applies for Medicaid, the income limits are generally the same as those applied to a single applicant. The asset limits, however, get more complicated. States will typically set an asset threshold for the applicant and a second, higher asset threshold for the spouse. This allows the spouse to retain some of the couple’s joint assets.
In Arizona, for example, a married applicant whose spouse is not applying for Medicaid is subject to a $2,000 asset limit. The applicant’s spouse is allowed up to $128,640 in countable assets such as cash, investments, and universal life policies.
Medicaid Spend Down Strategies
Medicaid’s Look-Back Period
In case you’re wondering, giving away or selling off assets cheaply isn’t a viable strategy to fall in line with Medicaid’s asset limit. As part of the application process, Medicaid looks back at your previous financial transactions to ensure you didn’t do anything shifty to qualify. Most states will look at the prior 60 months. Only California has a shorter look-back period of 30 months.
Transactions that would violate Medicaid’s policy include asset transfers to relatives, asset donations, and even payments made to a home health aide without a formal care agreement. Applicants are allowed to transfer assets to children under the age of 21 or who are disabled or legally blind.
Note that not all Medicaid programs are subject to a look-back period — but Medicaid’s nursing home coverage is.
The penalty for violating your state’s look-back policy is ineligibility for Medicaid for a period of time, called the “penalty period.” The penalty period is calculated by dividing the average monthly cost of private patient care in the applicant’s state into the total value of transferred assets. Say an applicant gives away an extra car valued at $50,000 and the average monthly cost of care in the area is $5,000. If this transaction happens within the look-back period, that applicant would be ineligible for Medicaid for 10 months.
Spend Down Ideas
Income spend downs are fairly straightforward. If your MAGI is too high and the state has a medically needy pathway, you have to cover your own healthcare costs to bring your income down to the medically needy limit. You may need to submit receipts for these expenses to Medicaid, or you may be allowed to pay the spend down amount directly to Medicaid as a premium. Check with your state to confirm how income spend downs are handled.
There are many different ways to implement an asset spend down. An obvious approach would be to pay off credit card debt, car loans, and the mortgage on the primary residence. You could also invest in necessary home or vehicle repairs and pay for healthcare costs. If insurance policies are affecting your eligibility, enlist the help of a trusted financial advisor to rework them. It’s not advisable to make insurance moves without an experienced advisor’s assistance — if you don’t structure these changes properly, you could inadvertently violate the look-back period.
Learn More About How Life Insurance Impacts Medicaid Eligibility
Cash Value vs. Face Value
Permanent insurance policies have both face values and cash values. Since Medicaid eligibility rules touch on both, it’s critical to know the difference before you design an asset spend down strategy.
Face value is the same as the death benefit of your policy. If your whole life policy pays out $50,000 to your beneficiaries when you pass, the face value is $50,000. Cash value, on the other hand, is the value assigned to the investment portion of your policy. Medicaid considers this a countable asset because it’s fairly liquid — depending on the type of policy, you can borrow against or withdraw cash balances.
Term Life Insurance vs. Whole and Universal Insurance
A term life policy is in force for a specific period of time, and guarantees a stated payout to your beneficiaries when you pass. Term life insurance has no investment component and no cash value. These policies are not countable assets and do not affect your Medicaid eligibility.
Whole life and universal life insurance are both types of permanent life policies. They are called “permanent” because the policies remain in force over your lifetime as long as the premiums are paid. As noted above, permanent life policies accumulate cash value over time — and that cash value may be considered a countable asset for Medicaid eligibility. Most states do allow you to hold a small whole life policy with a face value of less than $1,500. But larger whole life policies and all universal life policies are countable assets and do affect your Medicaid eligibility.
Because these policies can affect Medicaid eligibility, some people may lapse their policies to prevent the cash surrender value from counting against them. Don’t let your policy lapse, cash out through a life settlement — which allows you to sell your life insurance policy for a lump sum that can be used as you see fit.
Insurance strategies for spending down
With the help of a financial advisor, you can safely spend down your countable insurance assets. Your advisor might recommend:
- Cashing out your policy and spending down the proceeds
- Taking a loan against your whole life or universal life policy and spending down those funds
- Transferring your permanent life policy to your spouse (if the spouse is not also applying for Medicaid)
- Selling your life insurance policy
Selling your life insurance is a good choice for maximizing the cash return. This is usually an option if the policyholder is 70 years old or has been diagnosed with a terminal illness. When you sell that policy, you can often get more than the cash value — although not as much as the full death benefit. As a full-service life settlement company, Harbor Life specializes in getting maximum value for life insurance policies.
We work with life settlement providers around the country to find a buyer for your policy. We’re also happy to price your policy free of charge, with no obligation from you. All you have to do is provide some health documents and answer a few questions. We’ll market the policy and come back to you with a price. Should you decide to sell, you could then spend down the proceeds on debt repayment, healthcare expenses, or needed home repairs.
Get maximum return on your policy.
Now that your head is spinning, first things first: verify the Medicaid eligibility rules in your state.
If you or a loved one is a candidate for an income or asset spend down, talk with a trusted financial advisor before making any moves on your own. This is the best way to protect your wealth while getting the Medicaid coverage that you need. If you’d prefer a simpler process than Medicaid spend down, consider selling your life insurance policy to cover retirement expenses through a life settlement or viatical settlement. Our experts will help determine the value of your life insurance policy and provide you with a no-obligation, FREE cash estimate should you choose to sell.