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She has Masshealth and Medicare coverage. We live in Massachusetts, and I'm afraid that the state may go after these policies. She is 90 and has paid for these policies for many years. How do I protect policies?

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You really can't if she needs to go on Medicaid within five years. Life insurance policies are countable assets if they are large enough and your grandmother is the owner of the policy. What may be helpful to you is to consult with an eldercare attorney to see what options are the best for your grandmother's property and policy. Make sure the attorney is knowledgeable about Medicaid rules for the state in case your gma needs assistance in the future.
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When your Grandmother purchased the policy what was the intent?
Was it not to provide an income or means to support or pay for her health, care and provide a way for her to live comfortably?
By using the policy to provide for her now, being able to choose a place that if for a while is private pay then when funds run out she may be able to remain on medicaid she is using the policy for what it was intended to be used for.
If the money is available why try to "hide" it and apply for Medicaid if that is what you are asking about?
Using the funds available you will have a wider choice of facilities.

I am not even going to get into the fact that you may be asking for taxpayers to provide funding for her housing/long term care when she can afford it.
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We bought my mom's policies from her for the current cash value, then she took that money and put it in a pre-paid funeral which qualified for exemption by being within the amount the state allowed. We are now the owners of the policies. When she dies, we will cash them in, repay our loan, and the balance will be added to the amount of the pre-paid plan. In this way, we were able to preserve the full face value of the policies. The easier way would have been for the insurance companies to agree to the policies being assigned to the funeral trust, but we couldn't get them to do it.
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When we put our mother on Medicaid, we used a family law firm to help us file and were told we could have the ownership of her policy changed to my name and I would take over the payments. This policy had no cash value so was of no interest to Medicaid. Our choices were to do this or cancel the policy.
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I think we've got two different threads going here. The original question was how to protect life insurance policies from Medicaid. Now we're talking about how best to use a policy to benefit a person before he dies. Good thoughts, but not pertinent to the original question.
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Do they have cash value? I'd see an expert as JessieBelle says. With those that I know, the cash value of the policy is counted towards their total asset limit. However, I'd question if prepaid burial packages count. I'm not sure. I'd get a full consult with an expert before you apply, so you know what to expect.
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From what I understand insurance policies have to be cashed in to go towards her care. The only policies that don't count are ones carried by employers. Upon cash in, monies can be used for funerals and I think expenses. Like flowers, Stone and luncheon.
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Digitalbanker, life insurance is only a concern if Medicaid is needed. Whole life insurance is a countable asset that has to be cashed in and spent down if Medicaid is needed.
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JessieBelle, thanks for the insight, I wondered how no one managed to touch my dad's life insurance policy when he went into a nursing home now that this question has surfaced.

If the insurance is a countable cash asset, I would definitely call the insurance company and see about cashing in. A smart move would be to use some of the money toward a preneed or go ahead and pay off his funeral so that very stressful expense is already out of the way. I would find out what his wishes are and take him to the funeral home to let him make his preneed ahead of time. Depending on how much time he may have left, it may actually be a smart move to let him go ahead and pay off his arrangements in full depending on how much money is in the policy. If he's been paying on this policy for long enough, then he probably has enough money to go ahead and just pay off his preneed ahead of time so the family doesn't get stuck with this particular expense. 

* If Medicaid must to get involved and pay for her care, it's a very good idea to let the funeral home own the preneed policy. That way, she won't have to worry about it being a cash as that if the funeral home owns it. I've known some people in the funeral industry and I know about this little trick

One thing to remember is to do your homework. We often don't find things out until we get stuck with a dilemma. Such was the case when my dad died and elder fraud was later discovered. This is only one good example of why it's always a good idea to do your homework and research things that involve you personally. Again, we often don't know what to look for until we get hit with a problem we were unprepared for. 
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I think we've got two different threads going here. The original question was how to protect life insurance from Medicaid. Now we're talking about using life insurance to enhance your life before you die. Good thoughts, but not pertinent to original question.
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