What Is a Burial Fund Exclusion?

Ruth’s Numbers on the Day She Applies

Ruth is 82 and entering a nursing home in early 2026. Her son is filling out the Medicaid application. Her countable side of the ledger looks like this:

• A checking account with $1,100 in it.
• A savings account with $900 she has always thought of as her funeral money, but which is titled in her name with no designation of any kind.
• A paid-up whole life policy with a $10,000 face amount and a cash surrender value of $4,200.
• A prepaid cemetery plot bought in 1998.
• Household goods and a 2011 sedan.

The resource limit for an individual under SSI rules is $2,000, a figure unchanged since 1989, and most states use that same $2,000 limit for long-term care Medicaid. A handful of states use their own more restrictive methodology, and a small number of states set materially higher limits. Confirm your state’s current figure with the state Medicaid agency, because it is one of the numbers that changes.

On paper Ruth looks close to eligible. She is not, and the reason is the policy.

The $1,500 Life Insurance Rule That Breaks the Application

There is a separate exclusion for life insurance, and it works on an all-or-nothing basis. If the total face value of all life insurance policies on a person’s life is $1,500 or less, those policies are excluded entirely and their cash value does not count. If the total face value exceeds $1,500, none of it is excluded and the entire cash surrender value of the policies counts as a resource.

Ruth’s face amount is $10,000. That is over the line, so the full $4,200 of cash value counts.

Now add it up: $1,100 checking, plus $900 savings, plus $4,200 cash value, equals $6,200 in countable resources against a $2,000 limit. Ruth is over by $4,200, and the burial fund exclusion has not helped her at all yet.

This is the single most common reason a small, decades-old whole life policy blocks a nursing home Medicaid application. Nobody thinks of a $10,000 policy as wealth. The rules do, because it has cash value and its face amount exceeds a threshold set in 1979 and never revisited. Note the direction of the test: it looks at face value, but it counts cash value. Both numbers appear on the policy annual statement, and you need both before anyone can advise you.

Applying the Burial Fund Exclusion to What Is Left

Now the burial fund exclusion enters, and here is the part families get wrong. The $1,500 burial fund exclusion is reduced by the face value of any life insurance on the person’s life that is already excluded under the $1,500 life insurance rule, and by the value of amounts in an irrevocable burial contract or trust.

Because Ruth’s policy is not excluded at all, it does not reduce her burial fund allowance. So the full $1,500 remains available to her. Her son can designate the $900 savings account as a burial fund, and it stops counting. Interest earned on a properly designated burial fund and appreciation on it are also generally excluded, provided the fund is kept separate and not commingled with other money.

Two mechanics matter here and they are the ones caseworkers actually check. The funds must be identifiable as set aside for burial, which in practice means a separate account, clearly designated, not mixed with grocery money. And the designation is generally effective from the first day of the month in which the person states the intent, so the timing of the paperwork matters.

After the burial fund designation Ruth’s countable resources are $1,100 plus $4,200, or $5,300. She is still $3,300 over. The savings account is handled. The policy is not.

Step in Ruth’s application	Amount	Countable?
Checking account	$1,100	Yes
Savings, before burial fund designation	$900	Yes
Savings, after burial fund designation	$900	No, within the $1,500 allowance
Whole life policy, $10,000 face	$4,200 cash value	Yes, because face value exceeds $1,500
Cemetery plot bought in 1998	Not valued	No, burial space exclusion, no cap
Countable total against a $2,000 limit	$5,300	Over by $3,300

What Ruth Can Actually Do About the $4,200

Four routes exist, and they have very different consequences.

Surrender the policy. The carrier pays the $4,200 cash surrender value, the coverage ends, and the $10,000 death benefit is gone. The cash is now countable and has to be spent down on care or converted into an exempt item. This is the default choice and it is often the worst one, because $4,200 is less than half the face amount.

Irrevocably assign the policy to a funeral home. Most states permit an irrevocable assignment of a life insurance policy to fund a prepaid funeral contract, which converts a countable resource into an excluded burial arrangement. Many states cap the amount of an irrevocable funeral contract, with caps commonly running from several thousand dollars to figures above $15,000, and some states impose no cap at all. This is frequently the single best move for a policy of Ruth’s size. Confirm the current cap and the assignment rules with the state Medicaid agency, and use a licensed funeral establishment.

Sell the policy. A secondary-market sale can pay more than surrender value when the insured is older or in poor health, but the proceeds are cash and cash is countable, so a sale solves the size problem only if the money is then spent down or converted appropriately. It also takes time, commonly 60 to 120 days, which a household in a nursing home admission usually does not have. See how surrendering compares to selling.

Give the policy away. This is the trap. Transferring a policy for less than fair market value generally triggers the Medicaid look-back and a period of ineligibility. Read how the look-back applies to a policy before anyone signs a change of ownership form.

Terms This Is Constantly Confused With

The burial space exclusion. Different rule, different limit. Burial spaces such as a plot, a vault, a casket, a marker and the opening and closing of the grave are excluded with no dollar cap for the person, their spouse, and members of the immediate family. Ruth’s 1998 cemetery plot falls here and never counted at all. Because the space exclusion is uncapped and the fund exclusion is $1,500, converting cash into burial spaces is a legitimate and commonly used step. See how the burial space exclusion differs.

An irrevocable burial trust or prepaid funeral contract. A funded, irrevocable arrangement with a funeral establishment. Broader than the $1,500 fund and generally capped by state law rather than federal.

A payable-on-death account labeled funeral. Labeling an account does nothing by itself. A revocable POD account is still the applicant’s money and still countable unless properly designated as a burial fund.

The funeral expense deduction on an estate tax return. Unrelated. That is a tax concept for a deceased person’s estate, not an eligibility concept for a living applicant.

What This Means for a Policy You Already Own

The honest summary is that the burial fund exclusion protects a very small amount of money, and it is a poor reason to make a decision about a life insurance policy on its own. What it does is expose a threshold most families have never heard of: total face value above $1,500 makes the entire cash value countable.

Three practical steps follow. First, get the current face amount and cash surrender value of every policy in writing from each carrier, because the eligibility question cannot be answered without both numbers. Second, if the household is heading toward a Medicaid application, raise the policy with an elder law attorney before anything is surrendered or transferred, since the irrevocable funeral assignment route is frequently better than surrender and is easy to foreclose by acting quickly.

Third, be clear about when selling is the wrong answer. A term policy with no cash value is already not a countable resource and should generally be left alone. A small policy that can be assigned to a funeral home is usually better used that way than sold. A policy a healthy surviving spouse still needs should stay in force. Selling belongs in the conversation when the face amount is substantial, the insured is older or in declining health, and the coverage is genuinely no longer needed.

Pine Lake Legacy will review a policy cover page at no cost and with no obligation at (732) 978-9575. We provide education and reviews only. For eligibility questions contact your state Medicaid agency or your State Health Insurance Assistance Program, and for planning around any transfer, work with your own elder law attorney.

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Frequently Asked Questions

Why is the burial fund exclusion still only $1,500?

Because it was set at $1,500 in 1979 and was never indexed to inflation. A funeral that cost a fraction of that figure then costs many times it now, which is why the exclusion rarely covers a full funeral today and why irrevocable prepaid funeral contracts and burial spaces do most of the actual work in eligibility planning.

Does my life insurance policy reduce the burial fund exclusion?

Only if the policy is itself excluded. If the total face value of all policies on the person is $1,500 or less, that face value reduces the available burial fund allowance dollar for dollar. If total face value exceeds $1,500, the policies are not excluded at all, so they do not reduce the allowance, but their full cash value counts as a resource.

How do I actually designate a burial fund?

Keep the money in a separate account that is clearly identified as set aside for burial, and state the intent in writing when you apply. Do not commingle it with everyday spending money, because commingling is the most common reason a designation is rejected. Ask your caseworker exactly what documentation the state wants before you open the account.

Is a prepaid funeral contract better than a burial fund?

Often, because an irrevocable prepaid funeral contract with a licensed funeral establishment is generally excluded up to a state-set limit that is usually far higher than $1,500. The trade-off is that irrevocable means irrevocable. Confirm your state’s cap and the contract requirements with the state Medicaid agency before signing anything.

Should I surrender a small policy to get under the resource limit?

Not before asking about an irrevocable assignment to a funeral home, which in many states converts the policy into an excluded burial arrangement while preserving more value than a surrender would. Surrendering typically pays far less than the face amount and closes off that option permanently. Talk to an elder law attorney first.

Do these rules work the same in every state?

No. Most states apply the federal SSI methodology, but some use their own more restrictive rules, some set higher resource limits, and prepaid funeral contract caps vary widely. Treat every figure on this page as a starting point and confirm the current numbers with the Medicaid agency in the state where the application will be filed.

Related Reading

• What Is A Burial Space Exclusion
• Surrender Vs Sell Policy
• Medicaid Lookback Selling Policy
• Life Insurance Counts Medicaid Asset
• Nursing Home Medicaid Spend Down
• Industrial Burial Policy Old
• What Is Cash Surrender Value
• Keeping The Policy Is The Right Answer

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Pine Lake Legacy 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.