We have addressed in earlier articles the assignment to funeral homes of existing life insurance policies to fund preneed funeral contracts for Medicaid applicants. However, questions still arise, especially with regard to excess insurance proceeds that may remain after the funeral is provided to the Medicaid recipient. What obligations do funeral homes have with those excess insurance funds and may they be applied toward the pre-payment of funeral expenses of immediate family members?
To obtain clarification on these issues, OFDA has been in contact with the Ohio Department of Job and Family Services ("ODJFS"). We have forwarded this article to ODJFS and requested that they review it and provide us with any feedback.
Unfortunately, the Director of the Department has informed us that they are not comfortable performing this task. Therefore, we are presenting this information to OFDA members based upon our examination of Medicaid laws and regulations, but cannot guarantee that our views are consistent with those of the ODJFS.
Unlike the typical preneed scenario where trust funds are deposited or a single-pay insurance policy is purchased to fund a preneed contract, the assignment of an existing insurance policy poses some unique problems. First, the face amount of the policy typically has no connection to the price of the funeral goods and services selected. For example, a Medicaid applicant may be seeking to assign a $15,000 policy to cover a $6,000 funeral. The second dilemma is that the assigned policy rarely has any type of built-in growth factor. Therefore, while the face amount of the policy may be sufficient to cover increases in funeral prices over the next several years, if the Medicaid recipient lives long enough, there may not be sufficient insurance proceeds to pay for funeral goods and services that were arranged.
Ohio Medicaid regulations recognize that assigned insurance policies will seldom match up with the cost of the funeral goods and services to be purchased upon the Medicaid recipient's death. The regulations also permit Medicaid applicants to use assigned insurance policies to fund not only their own and their spouse's preneed contracts, but also to purchase burial space items for immediate family members. Another key regulation in this area requires preneed funeral contracts funded by assigned insurance policies to contain a provision that any funds in excess of the cost of funeral goods and services set forth in the contract shall be paid to the decedent's estate.
It is important for OFDA members to understand the ramifications of these Medicaid regulations, the planning options they provide, and the restrictions they impose. With that in mind, we look at four common scenarios below and how funeral directors may want to advise Medicaid applicants in each case.
1. Medicaid Applicant with No Relatives.
An elderly man in a nursing home with no relatives is depleting his assets and has only a $15,000 insurance policy remaining. Before applying for Medicaid benefits, he meets with a funeral director and assigns the ownership of the policy to fund a $6,000 funeral. He wants the funeral home to use the proceeds of the insurance policy to pay for his funeral services and then pay any remaining insurance proceeds to a charitable foundation.
Unfortunately, the wishes of the elderly gentlemen cannot be followed by the funeral home under Medicaid regulations. While the consumer is able to assign ownership of the policy to the funeral home in payment of funeral goods and services to be delivered in the future, Medicaid will not allow the excess proceeds of the insurance policy to be paid to a charitable organization. In fact, Medicaid Regulation 5101:1-39-30(H)(2)(a)(vi) requires the funeral home to include a provision in the preneed contract that stipulates any insurance funds remaining after payment of the funeral expenses shall be paid to the decedent's estate. When funds are paid to the decedent's estate, it will allow the Ohio's Estate Recovery Program to make a claim against the funds. OFDA members should routinely include a written clause in preneed contracts that are funded by assigned insurance policies providing: "any excess insurance proceeds remaining after the payment of the obligations provided for in this contract shall be paid to the decedent's estate."
2. Medicaid Applicant and Spouse.
A Medicaid applicant has a $15,000 life insurance policy he wants to use to fund preneed funeral contracts for his spouse and himself. Medicaid Regulation 5101:1-39-30(H)(2) allows ownership of the policy to be irrevocably assigned to a funeral home to fund an irrevocable preneed contract for the Medicaid applicant and his or her spouse. Therefore, the funeral home may accept ownership of the policy and indicate in the preneed contract that it will be used to purchase funeral goods and services for the husband and the wife.
Since the funeral home will not know what the price of the funeral goods and services will be at the time of the death of the husband and wife, Medicaid allows the funeral home to stipulate in the contract the particular funeral goods and services to be provided at need will commensurate with the amount of insurance proceeds that are paid under the policy. Therefore, the preneed contract may contain a contract provision such as the following:
"The proceeds of the insurance policy shall be applied toward the price of the funeral goods and services that prevail at the time of the contract beneficiary's death. In the event the proceeds of the insurance policy are insufficient to pay for the funeral goods and services set forth in this contract, any shortfall may be paid for by the next-of-kin or others, or the next-of-kin may substitute funeral goods and services that are commensurate with the insurance policy proceeds."
3. Medicaid Applicants and Immediate Family Members.
A widow with two sons has a $20,000 insurance policy. She assigns that policy to a funeral home to pay for funeral goods and services that cost approximately $5,000. She asks what her options are with regard to the excess insurance proceeds that will remain after the payment of her funeral.
Medicaid regulations permit a Medicaid applicant to assign an insurance policy to pay not only for her own funeral expense, but also to cover the costs of burial space items for immediate family members. Note that there are two critical definitions here "burial space items" and "immediate family members."
While Medicaid regulations allow a Medicaid applicant to use assets to fund complete preneed funerals for spouses, they only permit the purchase of burial space items for immediate family members. Immediate family members include the applicant's parents, minor or adult children, including adoptive and stepchildren, siblings, including adoptive and stepsiblings, and the spouses of immediate family members. As far as the definition of "burial space items," they include burial plots, gravesites, crypts, mausoleums, caskets, urns, niches, vaults, headstones, markers, or plaques, and arrangements for opening and closing the grave.
In this situation, the widow could assign the $20,000 insurance policy to the funeral home to fund her $5,000 funeral. She could then provide in the preneed contract that all excess funds are to be used to purchase burial space items for her two sons. The contract should list those burial space items, such as grave spaces, caskets, vaults and markers for each son.
The preneed contract should provide that upon the death of the Medicaid applicant, and after payment of her funeral expenses, the excess insurance proceeds will be placed into trust and used to purchase the burial space items listed in the contract for the two sons. It is important that the preneed contract specifically provide that the excess funds will be used to purchase the burial space items for the two sons.
4. Arrangements for Immediate Family Members.
Using the same scenario as set forth in example 3, assume the Medicaid applicant does not provide in the contract for the purchase of burial space items for her two sons when she originally assigns the insurance policy to the funeral home. Instead, after the Medicaid applicant dies and her funeral is paid for, her surviving sons wish to use the excess insurance proceeds to purchase burial space items for themselves.
Unfortunately, it is too late to utilize the excess insurance proceeds to purchase burial space items for the two sons. In order to take advantage of Medicaid regulations which allow the purchase of burial space items for immediate family members, those purchases must be arranged for at the time the insurance policy is assigned to the funeral home. Because Medicaid Regulation 5101:1-39-30(H)(2)(a)(vi) requires any excess funds not addressed in the preneed contract to be paid to the decedent's estate, it would be too late to use those funds to purchase burial space items for the two sons.
This review of Medicaid regulations demonstrates how important it is for OFDA members to be knowledgeable of Medicaid regulations and advise families in a timely fashion what their options are when using assigned life insurance policies to funds preneed contracts. If any OFDA member has questions regarding this article, please contact Scott Gilligan at 513-871-6332.