Can prepaying funeral with life insurance help a Medicaid recipient apply for auxiliary grant in assisted living?

Well, let me put it this way--you should use some of the spend down money on pre payment of funeral before applying for Medicaid. That will be easier when you apply. You'll have spent a good portion of the applicant's fund because they're only allowed to own $2K.

In Minnesota I used a special insurance policy to prepay for my Husband's funeral.

Our state has a site where you can find most answers concerning Medicaid. You may want to consult an elder law lawyer for assistance in "spending down" to become qualified. It usually requires financial records from several years (5 here)

Ollie, first you need to know if the facility even accepts Medicaid. Many places don't. Virginia does pay for assisted living but not through the primary EDCD Waiver. Instead, individuals with Alzheimer's have a specific waiver called the Alzheimer's Assisted Living (AAL) Waiver.
Prepaying a funeral has limits too. You need to know what Virginia allows you to spend; last checked it was $3500. Not all funeral directors want the responsibility of holding those funds in a funeral trust.