Can Medicaid Take Life Insurance From a Beneficiary?

Medicaid can sometimes claim life insurance proceeds from a beneficiary, but this depends on factors like policy ownership, cash value and state rules on estate recovery. If a life insurance policy has a named beneficiary, the payout typically bypasses Medicaid claims. However, if proceeds go to the deceased’s estate, Medicaid may seek reimbursement for long-term care costs. Certain states also have estate recovery programs that could impact a beneficiary’s inheritance.

A financial advisor can help you create an estate plan that protects your assets for your family.

What Is Medicaid?

Medicaid is a government-funded health insurance program that provides coverage for low-income individuals, including seniors, people with disabilities, and families with limited financial resources. It is jointly administered by federal and state governments, meaning eligibility rules and benefits can vary depending on the state.

The exact qualifications vary, but you likely qualify for Medicaid if your modified adjusted gross income (MAGI) is less than 100% to 200% of the federal poverty level. As of 2022, the federal poverty line sits at $21,150 for a two-person household.

The program covers a wide range of healthcare services, including hospital visits, prescription medications, nursing home care and in-home support for qualifying individuals. Unlike Medicare, which primarily serves those 65 and older regardless of income, Medicaid is need-based and considers factors such as income, assets, and medical needs.

Medicaid Estate Recovery Program

The Medicaid Estate Recovery Program (MERP) allows states to recover funds spent on a recipient’s long-term care by making claims against their estate after death. This typically applies to individuals who received Medicaid benefits for nursing home care, home health services, or other long-term care expenses. Each state has its own approach to enforcing recovery, but federal guidelines require attempts to recoup costs from the estates of deceased beneficiaries aged 55 and older.

Life insurance proceeds can be subject to estate recovery if they become part of the recipient’s estate – such as when no beneficiary is named or when the estate itself is the beneficiary. In these cases, Medicaid may claim a portion or all of the payout to cover outstanding care costs. Some states offer hardship exemptions for heirs, and certain types of irrevocable trusts may shield assets from recovery. Beneficiaries should review state-specific rules to understand potential liabilities.

Ultimately, the outcome of the Medicaid Estate Recovery Program can lead to smaller inheritances for estate beneficiaries.

Can Medicaid Take Life Insurance From a Beneficiary?

The Medicaid Estate Recovery Program can lay claim to a number of assets you leave behind. But, can Medicaid take life insurance from a beneficiary? Generally, Medicaid cannot take a life insurance payout from a beneficiary. That’s because the life insurance company will send the funds of your death benefit directly to the beneficiary. However, it’s necessary to name a beneficiary on your life insurance policy.

If you don’t specify a beneficiary on your life insurance policy, the proceeds will be distributed to your estate. Since Medicaid has the right to recoup its costs from your estate, a life insurance benefit that winds up in your estate could ends up in the hands of Medicaid.

How to Protect Your Financial Legacy

If you use Medicaid funds, it’s possible the program will seek reimbursement from your estate after you pass away.

The reality of extremely high medical costs means that the Medicaid Estate Recovery Program can take a big bite out of your financial legacy.

The good news is that careful planning can protect your assets so they can be passed on to beneficiaries. Here are three common options to consider when protecting your financial legacy from medical costs:

Medicaid trust: A Medicaid trust is specifically designed to protect your assets in the event that you or your spouse require long-term care. This irrevocable trust can help protect qualified retirement accounts, personal assets, life insurance policies, real estate, and more.
Give financial gifts: While you are still alive, you can make gifts to your heirs to lower your estate’s assets. Although there’s a limit to the amount you can give, this strategy allows you to transfer funds to your family members tax-free. As of 2025, you can gift up to $19,000 in assets or cash to a family member without filing a gift tax return.
Buy long-term care coverage: Long-term care can be financially devastating. Long-term care insurance allows you to avoid working with Medicaid altogether. Instead, your insurance policy will pay for the care you need. Of course, this is an expensive option upfront, but it could give your estate the protection it needs.

Before moving forward with any of these strategies, discuss your options with a financial advisor. The right professional can help you craft an estate plan that takes your specific wishes and assets into account.

Bottom Line

The Medicaid Estate Recovery Program gives Medicaid the ability to lay claim to the assets you leave behind. If you designate a beneficiary on your life insurance policy, the funds should be distributed directly to them. Without this clear designation, the funds may be subject to Medicaid as a part of your estate.

Financial Planning Tips

A financial advisor could answer questions about how Medicaid impacts your financial legacy. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
A Medicaid trust is a type of irrevocable trust that can provide some protection for your financial assets against healthcare costs. The complex legal structure might come in handy for your beneficiaries.
Healthcare costs can have a big impact on your retirement nest egg. If mapping out your retirement dreams, take advantage of our free retirement calculator.