If you have over $2000 of cash value in a life insurance policy and are going through a Medicaid spend down, it is possible that the State could have you spend down the life insurance cash value to $2000. However, you are allowed to set aside a burial fund, and they can allow up to $25,000 in that, depending on where you live. So it may be possible to simply designate your life insurance as the burial fund, if you do have too much cash value in it to qualify for Medicaid, and do indeed wish to get on Medicaid.
The state does not take away your life insurance or even your cash value. You life insurance will just prevent you from qualifying for state assistance such as Medicaid. Your cash value doesn't need to be $2,000 or more to be a problem because if you have any money in a savings or checking account or any other countable assets, the combination of all of them can not be over $2,000.
You can assign your policy to a funeral home but the secondary beneficiary for money left over after the funeral is paid must run through your estate. Medicaid will usually be the 1st creditor that will get anything that runs through your estate.
Insurance Adviser - Broker, SC Insurance Services, Oahu, Hawaii
Unless illegal activities can be proved neither the State nor the Feds nor any creditor or liens can take your life insurance money. That's one of the things that makes whole life insurance policies so attractive. Once the beneficiary of a life insurance policy has been paid the benefit proceeds from a policy, while that money is transferred to the beneficiary tax-free it may thereafter be subject to liens if the receiving beneficiary has unpaid liabilities.
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You can assign your policy to a funeral home but the secondary beneficiary for money left over after the funeral is paid must run through your estate. Medicaid will usually be the 1st creditor that will get anything that runs through your estate.