This problem shows up at the far end of a long life. It's the one situation where a policy built to be an asset turns into an obstacle. Apply for long-term care Medicaid in Oregon, for yourself or a parent, and the cash surrender value of a life insurance policy counts as an asset. Cash surrender value means what you'd actually receive if you cashed the policy in today.
The threshold is small. Oregon ignores life insurance when the total face value across all policies on that person is $1,500 or less. Go over that line and the cash surrender value counts, and it counts against an asset limit of $2,000 for a single applicant. A policy sitting on $80,000 of cash value puts somebody over that limit until the money gets dealt with.
Term insurance isn't the problem. No cash value means nothing to count, so a term policy generally doesn't affect eligibility. It's permanent insurance with real cash value that creates the conflict, which is to say the kind of policy this whole site is about.
Then there's the look-back. Oregon reviews the 60 months before your application, looking for anything you gave away or sold for less than it was worth. Cashing the policy out and gifting the money to your kids, or signing ownership over to a child, counts as a transfer. A transfer produces a penalty period, which means a stretch of months where Medicaid won't pay even though the money is already gone. The penalty gets calculated off the amount you transferred, so a large gift produces a long one. Five years and a day is clean. Fifty-nine months is not clean.
There are options, and every one of them needs to go past an elder law attorney before it happens. I'm a licensed insurance broker. This is legal and benefits work, the rules differ by state, and they change. The common ones are these. Move the policy into an irrevocable funeral expense trust. Oregon lets that one sit outside the asset count, up to a limit, and it's the reason those trusts exist at all. Borrow against the policy and spend the money on the applicant's own care, medical bills, home modifications, or paying down a mortgage. That turns a countable asset into allowed spending, and it isn't a transfer at all. Or sell the policy in a life settlement for more than the surrender value, then spend the proceeds down properly.
The version I like least is cashing the policy in and spending the money. It's the easiest one to do, and it throws away the death benefit at exactly the moment the family is about to need it.
One piece of good news at the end of this. Oregon does pursue estate recovery. That means the state can come after the probate estate to get back what it paid out. A death benefit paid to a named living beneficiary isn't part of the probate estate. So keeping the policy in force and letting it pay usually leaves the most for the family. So plan years ahead of an application rather than during one. And keep the beneficiary form current, which is the point of the beneficiary form outranks your will. If it's a parent's old policy in question, start with found an old policy in the drawer. Find out what it's worth before anybody decides anything.