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It depends on who is the beneficiary of the life insurance. Life insurance only goes through the estate of the deceased when the estate is designated the beneficiary of the insurance policy. If that happens then the nursing home, along with any other creditors of the deceased could potentially file a claim against the estate and therefore the life insurance proceeds.
Normally a life insurance policy has a designated beneficiary. That beneficiary receives the policy amount upon the death of the insured. The money is not subject to the estate of the deceased, the will of the deceased, or inheritance taxes or other claims because it is not part of the estate. It passes directly to the beneficiary without passing through the estate.
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The state shouldn't be able to take it. The life insurance proceeds will pass outside the estate (if worded correctly) and directly to the individual family member. Unless that family member has some obligation to pay the nursing home (cosigned... etc) then the nursing home and the state should not be able to touch the proceeds. I recommend having an estate attorney look over the insurance policy to make sure it complies.
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