Here’s the “411” on life insurance, funeral homes, and qualifying for Medicaid assistance for long-term care.
I can’t even begin to tell you the amount of times my husband’s funeral home receives a phone call from a life insurance agent or financial planner asking if we will allow their client or family member to name our funeral home as the primary beneficiary of a life insurance contract. What even perplexes me more, is that the answer to the question above, is clearly discussed when an individual participates classes prior to taking their life insurance exam, whether a person is taking a full life or limited life exam, this is directly addressed. Before the answer is addressed, it’s important to understand that there are two very different types of life insurance policies.
The first type of life insurance policy is the kind that this question is referring to - one that is written by a life insurance agent. An example of this would be an agent who represents insurance products from companies like Farmers, Prudential, USAA, State Farm, or Metropolitan. These companies offer consumers products like term life, whole life, universal life, annuities, long term care, etc... Professionals who work with these types of companies have what is referred to as a “full life license” as they can sell an array of products that typically don’t have caps on the dollar amount purchased. The second type of insurance policy is one that is sold by an individual who works at or is affiliated with selling what funeral homes refer too as pre-paid funeral plans. In Michigan, as well as many other states, this type of license is restricted to writing contracts of this nature only and in some cases have very limited dollar amount. The individuals/agents who write this type of contract/policy hold a “limited” life insurance license. Nationally, there are a handful of companies who sell this specific type of product as they are limited in scope, meaning there is usually a high average age, small commission and they have low dollar amounts in comparison to the traditional insurance mentions previously. Some of the most well-known pre-need insurance companies are Forethought, Homesteaders, NGL American, and Assurant.
To my point, the answer is “no,” funeral homes can not be designated as a beneficiary to a traditional type of insurance policy (translation -- a non-funeral related insurance policy). In the eyes of the law, this is a direct conflict of interest.
If the intent of the insurance policy is to pay for one’s funeral, there are some very simple legal solutions to accomplish paying for a funeral with a life insurance policy.
One of the most common methods is to have the beneficiary of the insurance policy, after the death has occurred, sign an insurance assignment for the amount of the funeral only and request the remaining amount be sent them. Most funeral homes have a generic version of this form. Many of the insurance companies will accept this along with a certified death certificate. If any additional forms are needed, the insurance company will see to it that either the beneficiary or the funeral home, and/or both, receive the proper forms. Another method, which is a bit more labor intensive is to contact the insurance company directly after the policy as been issued and ask them if they have an “Irrevocable Trust” form.
The purpose of an irrevocable trust is to hold the funds in an entity that can not be cashed in for any other purpose except the insured’s funeral. These types of forms are only generated if an insurance policy has some form of cash value and or pays dividends. What this does is eliminate is the ability for the insured to take out a policy loan against the cash value. By assigning any form of cash value to the irrevocable trust and then taking the insurance company’s irrevocable trust form, along with the enforce policy to your funeral home of choice, then asking them to accept the funds placed in the irrevocable trust to be assigned to a funeral that will be delivered in the future, the insurance plan is considered exempt as an asset for Medicaid.
Here are the steps that have to happen for an Irrevocable Trust.
- Traditional insurance policy must be issued and have some form of cash value.
- Policy owner must contact the writing insurance company and ask them for their irrevocable trust form and any funeral home assignment forms they may have.
- Policy owner must go to their funeral home of choice and ask the funeral home if they will accept the cash value as proceeds for their future funeral and will they “guarantee” merchandise or services for that amount. If the monies fall short of the funeral costs necessary the dollar amount can be placed towards the overall amount.
- The funeral home must generate a guaranteed funeral goods and service statement and also sign an insurance assignment form. This means upon death they will accept the money from the insurance company AND the insurance company will send the funeral home their assigned portion after receipt of a certified death certificate and funeral bill.
The controversy with the above method is that some rather well known and large insurance companies have irrevocable trusts available, but won’t make them available to their policyholders. This becomes problematic when a policyholder needs to qualify for financial aid for long term care (Medicaid) prior to death. If that policy can not be made irrevocable this places the entire policy in jeopardy, and potentially the ability to qualify for assistance.
If a policy holder is applying for Medicaid, one frequently used solution is to take out a policy loan against the cash value and immediately apply the cash value towards the purchase of a pre-paid funeral at a funeral home. This is much better than just surrendering the insurance policy over for the cash value. By doing this, the cash value is eliminated from the original life insurance policy; the cash value is placed in a specially designed funeral specific insurance policy that can be made irrevocable, therefore providing the policy owner with the best of both worlds. A life insurance that remains intact until death, a preplanned and pre-funded funeral, and the traditional insurance policy’s beneficiary will receive the balance left from the face amount of the insurance policy, minus the loan and any interest to cover the loan.
It looks like this:
$25,000 Face Value from ABC Insurance Company
Minus $10,000 Policy Loan (Zeroed out cash value, used to purchase a pre-paid Funeral insurance policy)
Equals $15,000 Balance at time of death
Minus $10,000 Loan amount ABC insurance company recovers from outstanding loan
Minus $300 interest (Whatever the interest rate is)
Equals $4,700.00 Back to beneficiary and funeral is paid in full.
So why all the fuss? There is disconnect in the law around this topic. There are laws that insurance companies follow. Laws that the funeral homes adhere too, caseworker guidelines/ manuals, and finally Medicaid qualification guidelines/ manuals, none of which are congruent in vernacular. This leaves the door wide open for subjective interpretation, as well as inconsistency between funeral homes and insurance companies.
What’s the end result? Confusion! Confusion between all individuals or parties involved, who simply want to do the right thing and provide a means to an end.
So please keep in mind, many good people who are trying to do the right thing, can and do receive misinformation, which can and often does end up being fixable. However, what may seem relatively simple may be a very difficult task.