Who sells Medicaid annuities and how much do they cost? Only a few insurance companies in the United States are said to sell Medicaid annuities. Allstate, Allianz Life, ELCO Mutual Life & Annuity, Genworth Financial, Nationwide, and MetLife are among the companies.
What are Medicaid compliant annuities?
A Medicaid Compliant Annuity (MCA) is a single premium instant annuity (SPIA) with no cash value that pays the owner income. When properly arranged, this annuity acts as a spend-down strategy, allowing the nursing home resident to become eligible for Medicaid payments by removing excess countable assets.
Can you have an annuity and still qualify for Medicaid?
In most states, purchasing an annuity is treated as a purchase of an investment rather than a transfer for the purposes of Medicaid eligibility. It converts otherwise countable assets into a stream of non-countable revenue. It’s not a problem as long as the money is in the name of the community spouse.
To avoid being labeled a transfer, the annuity purchase must meet the following basic requirements:
- It must be irrevocable—you must be able to withdraw funds from the annuity only through monthly payments.
- During your actuarial life expectancy, you must receive at least the amount you paid into the annuity. For example, if you pay $60,000 for an annuity with an actuarial life expectancy of 10 years, you must receive at least $500 every month ($500 x 12 x 10 = $60,000).
- If you buy a term certain annuity (see below), the term must be less than your actuarial life expectancy.
- Up to the amount of Medicaid paid on the annuitant’s behalf, the state must be identified as the residual beneficiary.
Mrs. Jones, the community spouse, resides in a state where the most money she may keep for herself while still qualifying for Medicaid for Mr. Jones, who is in a nursing home, is $130,380 (her maximum resource allocation) (in 2021). Mrs. Jones, on the other hand, has $240,380 in countable assets. She can use the $110,000 difference to buy an annuity, allowing her spouse in the nursing home to qualify for Medicaid right away. The annuity check would be sent to her every month for the rest of her life.
In most cases, purchasing an annuity should be postponed until the sick spouse enters a nursing home. Furthermore, if the annuity has a term certain — a set number of payments regardless of the annuitant’s lifespan — the term must be shorter than the healthy spouse’s life expectancy. In addition, if the community spouse dies with guaranteed payments remaining on the annuity, the state must compensate the state up to the amount of Medicaid paid for either spouse.
Whether the annuity is irrevocable or recognized as a countable asset, all annuities must be disclosed by a Medicaid application. If a person, their spouse, or a representative refuses to reveal enough information about an annuity, the state must either deny or terminate long-term care coverage, or deny or terminate Medicaid eligibility.
Annuities are less beneficial for a single person in a nursing home since he or she would have to pay the nursing home the monthly income from the annuity. In some areas, however, immediate annuities may have a place for single people who are looking to transfer assets. During the Medicaid penalty period that comes from the transfer, annuity income can be utilized to assist pay for long-term care. The annuity is normally short-term in these situations, only long enough to cover the penalty period.
What is an actuarially sound annuity?
The actuarial soundness of an annuity is one of the prerequisites for it to be considered Medicaid compliant. The word “actuarially sound” refers to the annuity’s owner receiving a return on their investment within their Medicaid life expectancy. The life expectancy is calculated using either state-specific life tables or life tables provided by the Social Security Administration’s Chief Actuary.
In many states, there is no requirement that an annuity be built for a certain amount of time; however, we advocate structuring the annuity for a reasonable amount of time. Many carriers have a minimum term length requirement, however you might be able to get away with as little as two months.
Two states do stipulate the length of an annuity that must be paid in order to be compliant. The following are the details:
- Oregon – The annuity must be within 12 months of the Medicaid life expectancy of the individual.
- Washington – If the annuitant’s life expectancy is at least five years, the annuity must have a term of at least five years, or a term equal to the annuitant’s life expectancy if the annuitant’s actuarial life expectancy is less than five years.
- Read our blog “What is the Meaning of ‘Actuarially Sound’?” to learn more about these specific conditions and what they mean for the actuarially sound criteria.
Take your client’s monthly payout and multiply it by the annuity duration to see if the annuity is actuarially sound in all other states. The annuity is actuarially sound if this sum surpasses the initial investment and the term of the annuity is within the owner’s life expectancy. Consider the following scenario:
Rose is 85 years old and resides in Texas. The Social Security Actuarial Life Table is used in Texas to calculate life expectancy. Rose’s life expectancy is 6.91 years or 82.92 months, according to this data. Rose’s lawyer suggests that she structure her annuity for a 24-month duration. She invested $100,000 in an annuity with a $4,195 monthly payment.
Rose will be repaid more than her $100,000 investment, and the 24-month term falls within her 82.92-month life expectancy. This annuity satisfies the actuarially sound criteria.
Let’s take Barbara as an example. She is 85 years old and resides in South Carolina. Her life expectancy, however, will be different from Rose’s because South Carolina has its own table of life expectancy. Barbara has a 6.59-year or 79.08-month life expectancy. She decides to spread the annuity over her whole life expectancy after consulting with her attorney, thus the duration will be 79 months. She makes a $100,000 investment in the annuity. Her payment will be $1,300 per month.
The annuity has a period that corresponds to her life expectancy, and she receives a return on her investment that is greater than her initial investment; the annuity is actuarially sound.
When using Medicaid Compliant Annuities and planning for Medicaid, the actuarial soundness criterion is critical. To plan properly, make sure you grasp this word.
What are the four types of annuities?
Immediate fixed, immediate variable, deferred fixed, and deferred variable annuities are the four primary forms of annuities available to fit your needs. These four options are determined by two key considerations: when you want to begin receiving payments and how you want your annuity to develop.
- When you start getting payments – You can start receiving annuity payments right away after paying the insurer a lump sum (immediate) or you can start receiving monthly payments later (deferred).
- What happens to your annuity investment as it grows – Annuities can increase in two ways: through set interest rates or by investing your payments in the stock market (variable).
Immediate Annuities: The Lifetime Guaranteed Option
Calculating how long you’ll live is one of the more difficult aspects of retirement income planning. Immediate annuities are designed to deliver a guaranteed lifetime payout right now.
The disadvantage is that you’re exchanging liquidity for guaranteed income, which means you won’t always have access to the entire lump sum if you need it for an emergency. If, on the other hand, securing lifetime income is your primary goal, a lifetime instant annuity may be the best solution for you.
What makes immediate annuities so enticing is that the fees are built into the payment – you put in a particular amount, and you know precisely how much money you’ll get in the future, for the rest of your life and the life of your spouse.
Deferred Annuities: The Tax-Deferred Option
Deferred annuities offer guaranteed income in the form of a lump sum payout or monthly payments at a later period. You pay the insurer a lump payment or monthly premiums, which are then invested in the growth type you chose – fixed, variable, or index (more on that later). Deferred annuities allow you to increase your money before getting payments, depending on the investment style you choose.
If you want to contribute your retirement income tax-deferred, deferred annuities are a terrific choice. You won’t have to pay taxes on the money until you withdraw it. There are no contribution limits, unlike IRAs and 401(k)s.
Fixed Annuities: The Lower-Risk Option
Fixed annuities are the most straightforward to comprehend. When you commit to a length of guarantee period, the insurance provider guarantees a fixed interest rate on your investment. This interest rate could run anywhere from a year to the entire duration of your guarantee period.
When your contract expires, you have the option to annuitize it, renew it, or transfer the funds to another annuity contract or retirement account.
You will know precisely how much your monthly payments will be because fixed annuities are based on a guaranteed interest rate and your income is not affected by market volatility. However, you will not profit from a future market boom, so it may not keep up with inflation. Fixed annuities are better suited to accumulating income rather than generating income in retirement.
Variable Annuities: The Highest Upside Option
A variable annuity is a sort of tax-deferred annuity contract that allows you to invest in sub-accounts, similar to a 401(k), while also providing a lifetime income guarantee. Your sub-accounts can help you stay up with, and even outperform, inflation over time.
If you’ve already maxed out your Roth IRA or 401(k) contributions and want the security and certainty of guaranteed income, a variable annuity can be a terrific complement to your retirement income plan, allowing you to focus on your goals while knowing you won’t outlive your money.
Can an annuity protect assets from Medicaid?
If an applicant’s assets exceed the Medicaid asset limit, the excess assets must be spent down in order to meet the limit. Please keep in mind that in order to fulfill Medicaid’s asset cap, you cannot give things away or sell them for less than they are worth. This would be a violation of Medicaid’s look back rule, resulting in a term of Medicaid ineligibility.
One option to spend down assets without breaking the look back rule is to purchase a Medicaid compliant annuity. (Find out more about Medicaid Spend Down and how to calculate an applicant’s “spend down.”) Countable (non-exempt) assets can be converted into non-countable (exempt) assets through annuities. Medicaid no longer counts assets against the asset limit when they are converted into an income stream. Annuity income is included against Medicaid’s income limit for Medicaid applicants.
Is an irrevocable trust protected from Medicaid?
Any asset under an irrevocable trust that the trustee can choose to donate to the beneficiary will be recognized as a countable resource by Medicaid, according to the basic rule for irrevocable trusts created today. The trust will be viewed as a transfer of resources subject to Medicaid’s transfer penalty if it does not allow for any distribution to the beneficiary.
While irrevocable trusts can safeguard assets from being counted by Medicaid (depending on whether the trustee has discretion over how the assets are used), Medicaid will still consider the transfer of the assets to the trust to be a disqualifying transfer. This is how it goes.
If the individual or the individual’s spouse creates an irrevocable trust with a discretionary clause and the individual or the individual’s spouse is a beneficiary, Medicaid will count some or all of the assets in the trust as available to the individual.
Assets that are subject to the trustee’s discretionary power are those that Medicaid will deem available to the beneficiary and/or spouse (Medicaid will assume the trustee will exercise maximum discretion to distribute the assets to the beneficiary or the spouse). Assets that the trustee does not have the authority to distribute will not be counted as resources for Medicaid purposes.
Unfortunately, assets that are not classified as resources may be subject to a transfer penalty, which would prevent the recipient from receiving Medicaid benefits for a period of time. Since 2005, the penalty period has begun when the individual applies for Medicaid, rather than when the transfer is completed. Learn more about the Medicaid transfer penalty and how long it lasts.
It’s worth noting that some irrevocable trusts include both the individual’s and his or her spouse’s assets, as well as resources belonging to other people. In these cases, Medicaid will decide the proportionate share of the individual. Any distribution that is not for the individual’s benefit and is not distributed to others will be regarded a transfer of resources, and Medicaid will apply a penalty period.
What assets are exempt from Medicaid?
The regulations that determine whether or not a person qualifies for Medicaid are complicated and difficult to comprehend. When assessing Medicaid eligibility, your overall assets will be taken into account. Some of your assets, however, may be exempt and will not be considered when determining your eligibility. Personal property, for example, is normally exempt, as is equity in a homestead up to a limit of $500,000 (under Michigan law). There are a variety of additional excluded assets, including some of the trusts described elsewhere on this site (see below for more detail).
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What Assets are Exempt from Medicaid?
When an asset is declared exempt, it indicates that it is not included in the individual’s total assets when determining Medicaid eligibility. The following are examples of exempt assets in Michigan:
- Furniture, appliances, jewelry, and clothing are examples of household and personal goods.
- Exemptions for burial: Some prepaid irrevocable funeral contracts and other burial monies are exempt.
- Cash value of life insurance policies: Cash surrender values of up to $1,500, as well as term life insurance, may be exempt depending on your situation.
Nonexempt Assets
Unless it is one of the items specified above as exempt, an asset that may be valued and converted into cash counts for Medicaid eligibility in many circumstances. The following are examples of non-exempt assets:
Can you lose your money in an annuity?
Variable annuities and index-linked annuities both have the potential to lose money to their owners. An instant annuity, fixed annuity, fixed index annuity, deferred income annuity, long-term care annuity, or Medicaid annuity, on the other hand, cannot lose money.
How can I protect my money from Medicaid?
There is a rigorous income limit when applying for Medicaid. If your income exceeds the limits, you must handle it properly in order to gain and maintain Medicaid eligibility. Establishing a qualifying income or pooled income trust can help you solve this difficulty. The amount of your income that exceeds the Medicaid income restrictions is held in a qualifying income trust, which is irrevocable. In some states, people are allowed to spend down their surplus income in order to meet Medicaid eligibility standards. In some cases, you are not permitted to spend down your funds in order to qualify.
Another sort of irrevocable account that holds surplus income is a pooled income trust. This sort of trust is intended for disabled persons. The extra money is combined with the extra money of other disabled persons. A non-profit organization that handles the funds distributes the funds to the citizens. Any funds left over go to the trust, which will be utilized for philanthropic reasons.
What is a non assignable annuity?
Previously, elder law experts would urge their clients to buy an annuity to help them qualify for Medicaid. When planning for a married pair, purchasing an annuity was a usual strategy.
The statutes governing the Medicaid program allow the “community spouse,” who does not get Medicaid benefits, to keep a set amount of “countable resources.” “Cash and cash equivalent assets, such as bank accounts, stocks, bonds, and annuities, are examples of “countable resources.” The highest amount of countable resources a community spouse can keep at this time is $92,760.
But what if a couple has $200,000 in measurable assets? That’s about $107,000 more in countable assets than the spouse who needs long-term care needs to qualify for Medicaid. The pair would have to improvise if they didn’t plan ahead of time “Before the spouse in the nursing home could qualify for Medicaid, he or she would have to “spend down” the extra $107,000.
Many couples, understandably, are hesitant to spend more than half of their net worth on a nursing facility before Medicaid will help them pay for their care.
There are a number of techniques that the community spouse can use today to save most, if not all, of the $107,000 in excess countable resources; however, there was one more technique that the community spouse could use in the past to help him qualify his spouse for Medicaid eligibility – purchasing an annuity.
This is how it would go: Assume you and your partner have $107,000 in savings. In his name, the communal spouse would purchase a $107,000 annuity. An annuity is a type of investment. The annuity will return to the community spouse his initial contribution of $107,000 plus a certain interest rate, such as 4%.
The annuity distributions will be recognized as a stream of income, not an asset, if the annuity is irreversible, meaning that the conditions of the annuity cannot be changed, and non-assignable, indicating that the annuity cannot be given to another person. In other words, the community spouse will have essentially turned the $107,000 in excess resources into an income stream that belongs to him, not the nursing home spouse attempting to qualify for Medicaid benefits.
New Jersey began to take a dim view of this planning strategy in 1999. In effect, the current New Jersey regulation states that an annuity is a countable resource to the degree that it surpasses the maximum amount of countable resources that the community spouse can keep, which is $92,760.
There have been several ongoing challenges to New Jersey’s position on this topic, and as those challenges have grown more compelling, New Jersey has modified its position.
The current State position on annuities is that they are available resources because the annuity owner, i.e., the community spouse, could sell the stream of annuity payments on a secondary market. The State claims that an annuity owner may find a corporation or individual ready to purchase the stream of payments at a reduced price.
For example, if the community spouse may expect to earn $10,000 each year from the annuity for the next ten years, or $100,000 in payments, the State claims that the community spouse could find someone willing to buy that $100,000 in payments for $60,000. Because the annuity, or a derivative thereof, could be sold, the annuity is available, at least in the eyes of the State.
What are my thoughts on the State’s case? I believe the annuity would be available if the payments could be sold on a secondary market. For Medicaid purposes, the asset’s worth would be the amount that the community spouse could anticipate to get for his stream of payments, which would be $60,000.
Is the stream of payments from a Medicaid-type annuity saleable, or is this just a red herring that the State is using to deflect attention away from actual problems concerning annuities’ availability? It’s most likely the latter.
It’s tough to prove a negative, such as that a stream of payments cannot be sold. However, courts in other states that have addressed this issue appear to be putting the burden of proof on the community spouse to show that the stream of payments is unsellable, without requiring the State to show that there is even a market for the payments.
That is simply not true. If the government makes a claim, it should bear some of the burden of proof.
What are disadvantages of annuities?
When you buy an annuity plan, you’re putting a lot of trust in the insurance company’s financial stability. It’s essentially a bet that the company won’t go bankrupt; this is especially concerning if your annuity plan is for a long time, as many are. Even previously mighty companies can succumb to weak management and dangerous business practices, as financial institutions such as Bear Sterns and Lehman Brothers have shown. There’s no guarantee that your annuity plan won’t go bankrupt if you switch companies.
It appears that you are paying a lot for annuity contracts in the hopes of reduced risk and assured income. There is no such thing as a free lunch, however. Annuities lock money into a long-term investment plan with limited liquidity, preventing you from taking advantage of better investing possibilities as interest rates rise or markets rise. The opportunity cost of investing the majority of one’s retirement savings in an annuity is simply too high.
When it comes to taxes, annuities may appear to be appealing at first. An investment advisor is likely to focus on the tax deferral, but it is not as advantageous as you might assume.
When it comes to taxes, annuities employ the Last-in-First-Out technique. In the end, this means that your gains will be taxed at your marginal tax rate.
According to Bankrate, the income tax brackets for 2014 are listed below. Ordinary tax rates will force investors to pay the tax rate stated below on their usual income.
