Texas life insurance law breaks new ground

By Maryalene LaPonsie on September 1st, 2013

For seniors without long-term care insurance, paying for nursing home care may mean exhausting all their income and assets before getting any help from the government. In addition, it could require them to surrender their life insurance policies in order to receive Medicaid coverage.

However, with the passage and enactment of House Bill 2383, Texas became the first state in the nation to allow individuals to sell their life insurance and keep their Medicaid eligibility. Known as the Medicaid Life Settlement Law, the statute is breaking new ground and being considered as a model in other states.

Law allows life insurance to be used for long term care

Rather than surrendering their life insurance coverage before becoming Medicaid eligible, Texas residents with policies that have a value in excess of $10,000 will be able to enter into life settlement contracts. Proceeds from the contracts can then be used to pay for long term care services.

By using a life settlement rather than cashing in the policy, individuals can, by some estimates, receive ten times the proceeds. In addition, the cash value of a life insurance policy must be spent down to meet Medicaid eligibility requirements. However, settlement funds will be exempt from the eligibility requirements since that money will be used for long-term care costs.

Other provisions of the law allow individuals to set aside five percent of the settlement money or $5,000, whichever is less, to pay for funeral and other final expenses. In the event a person dies before the settlement money is exhausted, the remaining amount would pass to a beneficiary or estate.

Other states may follow suit

Medicaid life settlement laws are considered a win-win for both life insurance policyholders and states. Policyholders get some benefit from their life insurance rather than surrendering the plan. At the same time, states can delay the need for Medicaid to pick up the entire cost of an individual's long term care.

Texas is the first state to enact a Medicaid settlement law, but it may not be the last. According to industry news website LifeHealthPro, at least seven other states are considering their own settlement laws: California, Florida, Kentucky, Louisiana, Maine, New Jersey and New York.

Until those and other states pass their own laws, residents will likely have to continue to surrender their life insurance policies before applying for Medicaid coverage. An alternate option for those who are younger may be to check with life insurance companies for the available of long-term care riders that can be attached to whole life coverage.

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