If you are currently in a nursing home and covered by Medicaid (i.e., the Medicaid program is paying part or all of your bills), what happens if you receive a lump sum cash payment as the proceeds of a life insurance policy? Unfortunately, since Medicaid only allows you to have no more than $2,000 in cash, this would cause you immediately to become disqualified from Medicaid. By law, you would have to report the receipt of the money to the state Medicaid agency, and it would let both you and the nursing home know that you are no longer eligible for Medicaid until you have "spent down" that money.
At that point, you could (i) spend the money on your nursing home bills until you are once again down below the $2,000 limit and then re-apply for Medicaid, or (ii) engage in some asset protection planning to preserve some if not all of that lump sum payment, before re-applying for Medicaid.
For example, you may want to use the money to purchase a car. As long as the car is used for the transportation of you or another household member, it will be excluded, no matter how much it costs (within reason). Another use of the proceeds would be to purchase a pre-paid funeral/burial plan. Again, there is no limit to the cost, so long as it is all actually to be used for your funeral and burial.
If there is quite a lot of money from the insurance policy, then other more complicated planning techniques can be employed, some of which are discussed in my other articles on this site. For instance, a gift combined with purchase of a "Medicaid annuity" can generally protect at least one-half of the money.
Finally, note that if the insurance proceeds are paid to the at-home spouse of the nursing home resident, then such money will NOT count against the Medicaid eligibility of the nursing home spouse. Beginning with the start of the month after the nursing home spouse is initially deemed eligible for Medicaid, the assets of the at-home spouse are not considered available to the nursing home spouse.
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