If my dad sells his insurance policies, can he use it to pay bills and then get Medicaid? - AgingCare.com

If my dad sells his insurance policies, can he use it to pay bills and then get Medicaid?

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He would like to pay the nursing home. He owes them for a short term stay and was not eligible for medicaid because of the insurance policies.

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There are two options: (i) he can borrow against the policy, thereby reducing the cash value of the policy. Since Medicaid only counts the cash value, he can reduce the value this way. (ii) he can sell the policy. In this case, you have to watch out for the transfer-for-value rule, which states that if someone purchases someone else's life insurance policy, when the proceeds are paid out, they will be taxed as ordinary income (normally life insurance proceeds are not taxed). One way to avoid this is to make the transfer partly a gift and partly a sale; this can be accomplished by paying less for the policy than it is worth (ask the insurance company for the value via a Form 712). Note, however, that the amount paid must be LESS than the insured's basis in the policy; you will need to get that number from the insurance company, too. Thus, the smaller the amount paid, the better, though that will increase the penalty period for Medicaid purposes.
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