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Having a No Cash Value funeral or burial policy done by a funeral home within a set maximum (8-10K) is usually allowed within Medicaid.

But what might be a issue is that just changing life insurance policy beneficiary to the funeral home isn't allowed by the life insurance company OR since beneficiary can be changed by the owner of the policy that it won't be compliant for Medicaid OR that its whole life and the cash value just has to be taken out & spent down as a separate action. try to find out soon as doing a policy surrender can take a bit of time. BTW 5K is about 50% of what traditional funeral & burial costs....
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Under the Medicaid rules, any amount of life insurance earmarked for burial expenses of the applicant or spouse, if any, where the proceeds can only be used for burial expenses, is an excluded asset.
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Check with your state. When going thru the spend down for my Mother to qualify the state of Pennsylvania had certain amounts depending on the county she lived in. The monies (as least in PA) actually goes to an irrevocable trust that is actually an insurance company that holds the money and not a certain funeral home.
Hope that helps.
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