A cost of care survey in 2019 from insurer Genworth pegs the median monthly cost of private-room, nursing home care at $8,517. A full-time home health aide costs about half that amount. While those numbers are staggering today, they're only expected to rise in the future. That can be incredibly stressful for anyone struggling to afford the cost of care for a loved one.

The reality is that many households don't qualify for Medicaid's institutional coverage because they make too much or they have too many assets. But even high levels of income and assets can be consumed pretty quickly by long-term care bills. If you're wondering how to keep funding those medical expenses, it might be time to consider a Medicaid spend down.

Medicaid spend down defined

A Medicaid spend down involves reducing one's income and/or assets to meet Medicaid eligibility requirements. Thanks to fairly complicated rules that differ from state to state, there are right ways and wrong ways to proceed with a spend down. And, the stakes are high. If you take a financial misstep, the applicant could be deemed ineligible for a period of time. That's why it's advisable to work with an experienced financial advisor to plan and implement your spend down.

The income spend down

Income spend downs are more straightforward than asset spend downs. There's one way to spend down your excess income, and that's by using it to pay for qualified healthcare expenses. Only 32 states plus Washington, D.C., allow for income spend downs, and these states vary in how they require you to document those expenses. You may need to provide receipts, or you may be able to pay your excess income directly to Medicaid in the form of a premium.

In many states, the maximum income allowed for a senior individual applying for Medicaid long-term care in 2020 is $2,349. But there is a different, lower limit for those who qualify by way of an income spend down. This is another detail that varies by state, and the limit ranges from about $100 monthly in Arkansas up to over $1,000 in Vermont.

The asset spend down

Asset spend downs can be as simple as using cash to cover medical expenses, but there are other strategies as well. Medicaid differentiates countable assets from non-countable, exempt assets, and that differentiation creates other ways to spend down. An applicant, for example, could convert countable assets into exempt assets to achieve eligibility. Medicaid law also allows an applicant to reduce assets by paying down debt, including mortgage debt.

Countable assets typically include cash and investments, investment property, retirement accounts if the applicant isn't yet taking distributions from them, and some insurance policies. For example, a life insurance policy may be counted as an asset and because of this, some people think their only option is to let their policy lapse to prevent it from affecting their Medicaid eligibility. Instead, you could consider selling your life insurance for a lump sum of cash through a life settlement — which helps seniors enjoy greater financial freedom in their golden years. On the other side, primary residence, primary vehicle, household furnishings, and personal items are usually exempt and therefore don't affect Medicaid eligibility.

How life insurance affects Medicaid eligibility

Life insurance deserves its own discussion with respect to Medicaid eligibility. Most states view term life policies as exempt assets because they do not accumulate cash value over their lifetime. However, the cash surrender value of whole life and universal policies is considered a countable asset if the face value of the policy exceeds $1,500.

For example, if a person has a universal life insurance policy with a face value of $1,400 — it will not affect Medicaid eligibility because it does not meet the $1,500 face value threshold. However, if the policy has a face value of $1,600 — then the cash surrender value (say $800) would be counted as an asset and could prevent someone from qualifying for Medicaid because they exceed their state’s asset count limit. As a result, some people will choose to let their policy lapse to avoid becoming ineligible for Medicaid. Don’t think of this as your only option, selling your life insurance policy through a life settlement as detailed further down is a far better choice that can help you regain your financial footing and make the most of your retirement.

How to spend down life insurance

When your permanent life insurance coverage is impacting your eligibility, you do have a few options to spend it down safely. Most of these strategies will generate some cash, which you could use to pay off debt or cover medical expenses. You could borrow against your policy to lower the cash value. You could also transfer the unwanted policy to a spouse or convert it into a long-term care benefit plan. Canceling your coverage is an option also. You'd get a cash payout from your insurer, but your beneficiaries would no longer receive the death benefit when you pass.

If you don't need the coverage, however, you might consider selling the policy with the help of a life settlement company. Doing so will generate more cash than you'd get from simply canceling your policy. This is an option if the policyholder is at least 70 years old and the policy has a face value of $50,000 or more. Many factors determine how much cash you can raise by selling the policy, but your proceeds should be somewhere in between the cash value and face value.

A reputable life settlement company should price your policy free of charge and without obligation — and that's a worthwhile exercise for you. Once you know the full value of your policy, you can make an informed decision about how to spend it down.

Next steps

If you or a loved one has long-term care bills piling up, a Medicaid spend down can get you the coverage you need. Talk with an experienced financial advisor about eligibility requirements in your state. Whether you need to address your income, your checking account balance, or your life insurance policy — or all three — you have safe options to reshape your finances and become Medicaid eligible.