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Taking a new approach to endowment contracts

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Modified Endowment Contracts have been used for purposes of establishing Medicaid eligibility for a number of years. But is an MEC a type of life insurance policy, a trust, or a similar legal device?

Readers should know that some states are taking a new approach to these products. Some states argue that the MEC is not life insurance since the policies fail to pay a “face amount” on death of an insured prior to the expiration of the term. The rationale is that only an amount that might be paid on the insured’s death is a post mortem dividend in an unspecified amount not a specific face amount.

This characteristic, it is argued, fails the traditional federal definition of life insurance for Medicaid eligibility. That definition states “Life insurance is a contract under which the insurer agrees to pay a specified amount upon the death of the insured.” (20 C.F.R. section 416.1230(b) (1)). So is an unspecified amount specified? Is there a guarantee of payment to a beneficiary? Is that enough?

Other states argue that the MEC is a trust since the property is available and thus it should count as a resource to determine Medicaid eligibility. That is, the funds used to purchase the MEC are not transferred to or for the benefit of a third party because the insured does not change ownership interests in the property to another. The insured is guaranteed a return of the premium paid plus interest.

Since the insured retains a beneficial interest in the MEC, there is no transfer. Next, since the insured merely gives their dollars to a third party (insurance company) to hold it for the insured’s benefit (say, for five years), the insurance company will give the money back later and is merely holding it. The argument goes on to say that since the “trust” term includes any legal instrument or device similar to the trusts described in section 50489 (b)(9) and (b)(10), the MEC meets the definition of a similar legal device under Federal Medicaid eligibility rules, and therefore qualifies as a trust.

Of course, the better argument is that MECs are a type of life insurance policy. A recent California case suggested they are “an insurance on the life of the party.”

Readers should be aware that the states are taking a hard look at this now. If you are considering using this type of product in your planning, make sure to consult with an elder law attorney in your area who should be familiar with these new interpretations.


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