Add up the face value of every life insurance policy on one insured person. If the total is $1,500 or less, those policies are excluded from countable resources entirely. If the total is even one dollar over, the exclusion is lost and the full cash surrender value of all of them becomes a countable resource. That is the whole rule, and it is an on-or-off switch rather than a sliding scale, which is why a family can be blindsided by a policy they considered too small to matter.
The authority is 20 CFR 416.1230, the Supplemental Security Income resource regulation that most states apply to Medicaid eligibility for applicants who are aged, blind, or disabled. The Social Security Administration’s operating guidance in the POMS manual works through the mechanics caseworkers actually follow.
Two features of the rule cause almost all the confusion. The threshold is measured on face value, but the amount that counts against you is cash surrender value — two different numbers on the same document. And $1,500 has never been indexed for inflation. It was set at the founding of the SSI program in the 1970s and, as of 2026, is unchanged, which is why almost any policy issued in the last fifty years fails the test.
In This Article
Running the Test Correctly, Step by Step
Work it in this order, because reversing the steps produces the wrong answer.
Step one: pick one insured person. The test is applied per insured, not per household and not per owner. Policies insuring a husband are totaled separately from policies insuring a wife.
Step two: total the face value of every policy the applicant owns on that insured. This includes small burial or industrial policies bought decades ago, group life the applicant owns outright, and any paid-up additions or dividend additions that have increased the death benefit above the original face amount. A $1,000 whole life policy from 1968 that has grown to $1,700 of death benefit through paid-up additions fails the test on its own.
Step three: compare that total to $1,500. At or under, stop — the policies are excluded and their cash value is invisible to the resource calculation. Over, continue.
Step four: total the cash surrender value of those same policies. That figure, net of any outstanding policy loan and accrued interest and net of any surrender charge still applicable, is what gets added to the applicant’s countable resources.
The arithmetic is unforgiving. Against a $2,000 individual resource limit — the figure most states use, and the federal SSI limit that has been unchanged since 1989 — a policy with $9,000 of net cash value is a denial with no room for argument.
The Term Insurance Trap
Here is the interaction most families miss. Term life insurance has no cash surrender value, so on its own it contributes nothing countable. But its face value is still face value, and SSA guidance aggregates the face value of policies on the same insured when running the $1,500 test.
The practical result: a retiree owns a $50,000 group term policy converted from an old employer plan, plus a $1,200 whole life burial policy with $900 of cash value. Looked at alone, the burial policy would be excluded. Aggregated with the term policy’s face value, the total is far over $1,500, the exclusion is lost, and the $900 of cash value becomes countable. It is a small number, but in a case sitting near the resource limit it can be the difference.
Because state agencies vary in how they apply this aggregation in practice, confirm the treatment with your state’s Medicaid agency in writing rather than assuming. Our broader page on when life insurance counts as a Medicaid asset covers how the resource categories fit together.
How the Rule Interacts With the Burial Funds Exclusion
SSI rules also allow a separate burial funds exclusion of up to $1,500 in designated funds set aside for the applicant’s burial, under 20 CFR 416.1231. Families often assume they get both exclusions in full. They do not.
The burial funds exclusion is reduced dollar for dollar by the face value of any life insurance on the applicant that has already been excluded under the $1,500 life insurance rule. If a $1,400 burial policy is excluded under the insurance rule, only about $100 of additional designated burial funds can be excluded separately. The two exclusions share a ceiling rather than stacking.
Irrevocable funeral contracts are a different instrument and are generally treated more favorably. Most states exempt a properly drafted irrevocable prepaid funeral contract, often in an amount tied to the reasonable cost of the goods and services purchased rather than to the $1,500 figure. That is why converting cash value into an irrevocable funeral contract is a standard planning move — it is a purchase of goods and services, not a gift, so it does not create a transfer penalty. State caps and drafting requirements differ substantially, so this belongs with an elder law attorney rather than with a funeral home form.
| Situation | Total face value on the insured | Countable resource | Practical result |
|---|---|---|---|
| One $1,200 burial policy, $700 cash value | $1,200 | $0 | Excluded; nothing counts |
| Two $900 policies, $1,100 combined cash value | $1,800 | $1,100 | Exclusion lost; cash value counts in full |
| $50,000 term plus $1,200 whole life with $900 cash value | $51,200 | $900 | Term adds face value but no cash value |
| $250,000 whole life, $40,000 net cash value | $250,000 | $40,000 | Far over limit; needs a real plan, not a fix |
| Policy owned by an irrevocable trust | Not the applicant’s | Generally $0 | Ownership on carrier records controls |
What to Do If You Are Over the Line
Ranked from least disruptive to most, with the honest cases where each is right.
1. Verify the number before you act. Get a carrier letter dated in the application month showing gross cash surrender value, outstanding loan and accrued interest, surrender charge, and net amount payable today. Many denials are based on the face amount or an illustrated value rather than the net surrender figure. Fixing an error costs a phone call.
2. Reduce the face value below the threshold. Some carriers will allow a reduction in face amount on a small whole life policy, which can bring the total under $1,500 and restore the exclusion. This works only on very small policies and generally reduces cash value along with it.
3. Convert cash value into an exempt irrevocable funeral contract. The most commonly used solution for small policies, and the one that produces the least collateral damage. Some funeral providers will accept an assignment of the policy itself.
4. Surrender and spend down. Straightforward, but the resulting cash is countable the following month and must be directed to exempt purchases or to care, as described in spend-down versus selling the policy.
5. Sell the policy in the secondary market. Only relevant when the face amount is large — see the next section.
Never gift the policy or the proceeds. A transfer for less than fair market value inside the 60-month look-back created by the Deficit Reduction Act of 2005 produces a penalty period, which is worse than the original problem.
When Selling Is the Wrong Answer Here
This page is about small policies, and small policies are precisely where a life settlement does not apply. Be direct about it: a $1,500 burial policy, a $10,000 final expense policy, or a $25,000 industrial policy from the 1960s has no secondary market. Transaction costs — two independent life expectancy reports, escrow, legal review, carrier verification of coverage — consume more than the asset is worth, so no institutional buyer will bid. Pine Lake works with policies of roughly $100,000 or more of death benefit, and below that the honest answer, covered in when a policy is too small to sell, is that there is nothing to sell.
A settlement becomes relevant only in the opposite fact pattern: the applicant owns a substantial permanent policy, say $250,000 or $500,000 of death benefit with $40,000 of cash value, and is being told to surrender it. There the pricing difference matters, because secondary market offers are driven by death benefit and health rather than by account value. The GAO study of the market, GAO-10-775, found sellers typically received several multiples of cash surrender value.
Even then, a sale is wrong when the timeline is urgent — a settlement commonly takes 60 to 120 days — or when the insured is terminally or chronically ill and an accelerated death benefit rider would pay out faster, with qualifying payments generally excluded from income under Internal Revenue Code section 101(g). And it is wrong whenever the household has not first checked whether an exempt destination for the money exists.
State Variation You Cannot Ignore
The $1,500 figure is the SSI baseline, and most states follow it, but not all. A group of states known as 209(b) states are permitted under federal law to apply eligibility criteria more restrictive than SSI’s. Connecticut, Hawaii, Illinois, Minnesota, Missouri, New Hampshire, North Dakota, Ohio, Oklahoma, and Virginia have historically operated under that authority.
Separately, several states have moved away from asset testing for some Medicaid populations in recent years, and long-term care eligibility rules are set state by state. Some states apply a higher life insurance exclusion; some apply the SSI rule but with different treatment of aggregation. Do not plan off a national number you read anywhere, including here — confirm with your state Medicaid agency or an elder law attorney in your state.
What travels everywhere: face value is the test, cash value is the count, the two exclusions for insurance and burial funds share a ceiling, and gifting is the mistake that turns a solvable problem into a penalty period. If you want to know whether a larger policy in the picture has any market value before anyone surrenders it, send the policy cover page for a free, no-obligation review or call (305) 209-7183. Pine Lake Life Solutions provides education and policy reviews only and does not provide legal, tax, or benefits advice.
Frequently Asked Questions
Is the $1,500 limit based on face value or cash value?
Both figures matter but at different stages. The $1,500 threshold is measured against total face value of all policies on one insured. If that total is exceeded, the amount actually added to your countable resources is the net cash surrender value of those policies after loans and surrender charges. Confusing the two is the most common error on denial notices.
Has the $1,500 amount ever been increased?
No. The figure dates to the early years of the SSI program in the 1970s and, as of 2026, has never been indexed for inflation. The companion SSI resource limits of $2,000 for an individual and $3,000 for a couple have been unchanged since 1989. This is why policies that felt modest when purchased now routinely break the exclusion.
Do all of my policies get added together?
All policies you own on the same insured person are aggregated by face value. Policies insuring your spouse are totaled separately. Paid-up additions and dividend additions that increased the death benefit above the original face amount are included, which is how an old $1,000 policy can quietly exceed the threshold.
Can I just reduce the face amount to get back under $1,500?
Sometimes, on very small whole life policies where the carrier permits a face reduction. It generally reduces cash value proportionally, so confirm the resulting numbers in writing before requesting the change. On larger policies this is not a realistic path and the planning has to go a different direction.
Does an irrevocable funeral contract solve this?
It is the most commonly used solution for small policies. Purchasing an irrevocable prepaid funeral contract converts a countable resource into an exempt one and is treated as a purchase rather than a gift, so it does not create a transfer penalty. State caps and drafting requirements vary widely, so use an elder law attorney rather than a standard form.
Is a $10,000 final expense policy worth selling instead of surrendering?
No. There is no secondary market at that size. Fixed transaction costs, including two independent life expectancy reports, escrow, and legal review, exceed what the asset is worth, so institutional buyers do not bid. Surrender, assignment to a funeral provider, or an irrevocable funeral contract are the realistic options for policies that small.
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Related Reading
- Life Insurance Counts Medicaid Asset
- Cash Value Counts Toward Medicaid
- Medicaid Application Denied Life Insurance
- Nursing Home Medicaid Spend Down
- What Is Cash Surrender Value
- Policy Too Small To Sell
- Industrial Burial Policy Old
- Spend Down Vs Selling Policy
- What Is Medicaid Estate Recovery
Pine Lake Life Solutions does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.