How Purchasing a Medicaid Compliant Annuity Impacts One’s Eligibility for Medicaid Long-Term Care

Last updated: January 07, 2020

 

Overview

An annuity, also called an income annuity, is a financial contract between an individual and an insurance company. In simple terms, buying an annuity enables one to give the company a lump sum of cash and have it converted into a stream of income that comes back to the individual who gave the lump sum.

To be eligible for Medicaid long term care, such as nursing home care, an applicant must have a very limited amount of financial resources or “countable assets” in Medicaid-language. Medicaid has firm and fixed asset limits (which vary by state). A Medicaid compliant annuity is a planning strategy that allows one to lower his/her countable assets, and therefore, meet Medicaid’s asset limit. To be clear, this planning technique is about one’s financial situation. Contrary to what one might think, having a health condition, such as Alzheimer’s disease or a related dementia, should not deter one from utilizing this planning strategy.

Each state runs its own Medicaid program(s), and not all states treat annuities the same. This article will explain the various types of annuities, how Medicaid’s asset limit (and income limit) factors in, the general rules of how states treat annuities, as well as point out some differences between how various states view them.

 

Medicaid’s Asset & Income Limits

In order to be eligible for long-term care Medicaid, there are eligibility requirements that must be met. This includes financial (income and assets) and functional (medical) need. For the purposes of this article, both Medicaid’s asset and income limits are relevant. Functional need is not.

Assets
As of 2020, most states set an asset limit of $2,000 for a single elderly applicant. For married couples, with just one spouse applying for long-term care Medicaid, the couples’ assets are considered jointly owned. What this means is that all assets owned between the couple are added up and considered when determining the applicant spouse’s eligibility for Medicaid. Said another way, even assets only in the non-applicant’s name are used to calculate the eligibility of the applicant spouse.

Some assets are considered exempt (non-countable towards Medicaid’s asset limit). Examples include one’s primary home, household items, personal belongings, and a vehicle. In addition, retirement savings accounts, such as IRAs, 401(k)s, and pensions, of a non-applicant spouse are not always counted towards an applicant spouse’s Medicaid eligibility. Furthermore, some states do not count the applicant spouse’s IRA. To see which states exempt an applicant spouse’s and / or non-applicant spouse’s IRA from countable assets, click here.

It’s important to note that there are spousal impoverishment rules in place when just one spouse of a married couple is applying for long-term care Medicaid. One such provision is a Community Spouse Resource Allowance (CSRA), which allows the non-applicant spouse to retain a higher amount of the couples’ joint assets. As of 2020, most states allow a community spouse to retain up to $128,620 in assets. This spousal allowance is in addition to the $2,000 the applicant spouse is able to retain.

Income
In 2020, the majority of states allow a single senior applicant up to $2,349 / month in income. The income limit is relevant to the discussion of annuities because the purchase of an annuity by a single Medicaid applicant can put him / her over Medicaid’s income limit. Remember, annuities lower an applicant’s countable assets by converting them into a stream of income.

 

How Annuities are Relevant to Medicaid Eligibility?

If an applicant is over the Medicaid asset limit, he/she must spend down excess assets in order to meet the limit. Please note: One must not give away assets or sell them for less than they are worth in order to meet Medicaid’s asset limit. Doing so violates Medicaid’s look back rule, which will result in a period of Medicaid ineligibility.

That said, purchasing a Medicaid compliant annuity is one way to spend down assets without violating the look back rule. (Learn more about Medicaid Spend Down). Annuities give applicants an option to convert countable (non-exempt) assets into non-countable (exempt) assets. By turning assets into an income stream, Medicaid no longer counts the assets towards the asset limit. However, for Medicaid applicants, income from an annuity is counted towards Medicaid’s income limit.

 

Types of Annuities

There are several types of annuities. When considering an annuity as a means to qualify for Medicaid, it is imperative one purchase a Medicaid Compliant Annuity (MCA), also called a Single Premium Immediate Annuity (SPIA), a Medicaid Qualified Annuity, or a Medicaid Friendly Annuity. (See below under “Medicaid Compliant Annuity Rules” to learn more about MCA’s).

 When considering an annuity to become asset eligible for Medicaid, it is critical to choose one that is Medicaid compliant. Said another way, not all annuities are allowed for Medicaid eligibility purposes. Choosing one that is not Medicaid compliant may cause one to be ineligible for Medicaid.

 

Immediate Annuity

*An immediate annuity is a Medicaid compliant annuity. Therefore, this type of annuity is a good planning strategy to lower one’s assets to meet Medicaid’s asset limit. An immediate annuity allows a Medicaid applicant to take assets that normally would be counted towards Medicaid’s asset limit and turn them into non-countable assets. Simply stated, a single large payment of money is made to an insurance company in exchange for an immediate monthly stream of income. The payments, which can be for a pre-determined period of time or for the life expectancy of the individual receiving the annuity (called the annuitant), start immediately upon the transaction. An immediate annuity is irrevocable, meaning it cannot be canceled or cashed in.

 

Deferred Annuity

*A deferred annuity is not a Medicaid compliant annuity. Therefore, it should NOT be used for Medicaid planning purposes. Said another way, Medicaid counts deferred annuities as assets. A deferred annuity is also called a longevity annuity or a tax-deferred annuity. With this type of annuity, one still invests a large amount of money, but rather than receive an income stream from the investment immediately, the funds are left in the annuity to grow. It might be several to many years later when one begins to receive payments. This type of annuity is revocable, which means the owner of the investment can cancel and withdraw the money in the account at any time.

  If one already has a deferred annuity, all hope to become Medicaid eligible should not be lost. There are ways to convert a deferred annuity into an immediate annuity. Find a professional Medicaid planner for assistance in converting your annuity here.

 

Fixed / Variable Annuities

Both immediate and deferred annuities can be either fixed or variable. With fixed annuities, payments are guaranteed to be the same amount each month. With variable annuities, on the other hand, payments vary based on how well the investments of the annuity do.  *In most cases, annuities that are variable are not Medicaid compliant.

 CAUTION: Lifetime annuities, also called life annuities, pay out until the death of the annuitant, and are not Medicaid Compliant. Instead, Medicaid compliant annuities are based on estimated life expectancy, which means payments are not guaranteed for the entirety of an annuitant’s life, but rather on an estimate of how long he/she will live.

 

Medicaid Compliant Annuity Rules & Exceptions by State

There are some general rules that must be met in order for an annuity to be Medicaid compliant. Please note: These rules, while fairly consistent across states, do not necessarily apply to all states. When considering an annuity as a means to qualify for Medicaid, it is imperative that one consider this option under the advisement of a professional Medicaid planner.

  • Must be Immediate – Once an annuity contract has been signed, payments must start right away.
  • Must be Irrevocable – The annuity cannot be changed or terminated, which means the money in totality cannot be withdrawn. The only way to receive money is through pre-determined monthly payments.
  • Must be Fixed – Payments, which must be of equal value, must be received every month. However, there is an exception to this rule in some states for community spouses who have purchased an annuity for themselves. Currently, Florida, Indiana, Louisiana, Maryland, Mississippi, South Dakota, Virginia, West Virginia, and Wisconsin do not require that payments to community spouses be in equal amounts.
  • Cannot be Transferrable – The annuity cannot be transferred or sold to someone else. Said another way, it is nontransferable or nonassignable.
  • The Beneficiary Must be the State – In most states, the state must be named as the remainder beneficiary (the individual / agency to receive any remaining annuity funds) upon his/her death. This is so the state can be paid back for the costs of long-term care for which it paid for the Medicaid recipient. (At a maximum, the state would receive an equal amount to that which it paid for the Medicaid recipient’s long term care). Exceptions might exist if the Medicaid recipient has a spouse, a disabled child, or a minor child. In these situations, the state may be named as the second remainderman. Please note: All states are required to attempt to recover funds in which it paid for long-term care through Medicaid estate recovery.
  • Must be Actuarially Sound – The length of payments must be “actuarially sound”, which means they cannot exceed the life expectancy of the individual receiving annuity payments. (Annuities can be for a period less than one’s life expectancy, just not more). The estimate of life expectancy is based on the SSA’s (Social Security Administration) life expectancy table, or depending on the state, another eligibility table specific to its Medicaid program may be used. While many states allow annuities to be shorter than the life expectancy of the person receiving annuity payments, Oregon is an exception. In this state, an annuity under 5 years is not allowed when one’s life expectancy is longer than 5 years.
  • Must Get Back What Was Paid – An annuitant must get back the investment of the annuity in its entirety during his/her life expectancy. As an example, if one’s life expectancy is 5 years and he/she purchases an annuity for $60,000, he/she must receive a payment of a minimum of $1,000 per month. (60 months divided by $60,000 = $1,000 month)

 

How Marital Status Factors In

Single Applicant

For a single applicant that requires Medicaid-funded nursing home, he/she is only allowed to keep a very small portion of his/her income (generally, not more than $50 / month). The rest is paid to the nursing home for his/her care. However, if the annuity results in more income than the cost of care, then there are no benefits. Said another way, he/she would not be eligible for Medicaid. (Remember, an annuity payment is counted as income in the month that it is received.)

For those who require long-term care through a Home and Community Based Services (HCBS) Medicaid waiver, applicants (in 2020) are able to retain up to $2,349 per month (in most cases) in income. That said, one needs to be cautious when purchasing an annuity. If annuity payments put an applicant over the income limit, he/she might be ineligible for Medicaid. Learn about how Medicaid counts income and planning strategies if one has income over the limit by clicking here.

 

Married Applicant with Non-Applicant Spouse

Annuities are an especially good planning tool for married couples in which just one spouse requires long-term care. Please note: This could be nursing home care or in-home care, assisted living assistance, or adult day care through a HCBS Medicaid Waiver. When just one spouse of a married couple is applying for long-term care Medicaid, income is not counted for the non-applicant spouse. Said another way, only the applicant’s income is counted towards the income limit. (Learn more about how Medicaid counts income here.) Recall from above, assets owned by either spouse are considered jointly owned. Since assets are considered jointly owned and income is not, this is what makes an annuity such a great option for a non-applicant spouse. It converts non-exempt assets into non-countable income for a community spouse, giving him/her a set income while allowing the applicant spouse to meet Medicaid’s asset limit.

 

Married with Both Spouses as Applicants

In the case where both spouses are Medicaid applicants and require nursing home care, the best thing to do is for each spouse to purchase a Medicaid compliant annuity. With the situation where both spouses need long-term care Medicaid, it becomes a bit more complicated, as most states consider each spouse as an individual applicant, but some states don’t. This holds true when both spouses require home and community based care, such as in-home personal care assistance, adult day care, or homemaker services, through a HCBS Medicaid wavier.

Please recall that with nursing home care, the majority of the annuity payments would go towards paying the nursing home. In addition, if annuity payments are greater than the cost of nursing home care, Medicaid ineligibility may result. It’s also important to mention that Medicaid has an income limit for HCBS waiver eligibility, and annuity payments count as income. Therefore, if an annuity payment is too high, one might be ineligible for Medicaid. Learn more about how Medicaid counts income and planning strategies for excess income here.

 

Cost of Purchasing an Annuity

In most cases, there is no charge to purchase a Medicaid-compliant annuity. Rather, the insurance company makes money by investing the lump sum of money that was used to purchase the annuity. However, there is one exception, and that is when the pre-determined annuity payments are for too short a period of time (i.e., less than two years) for the insurance company to make enough money from investments. In this case, the fee is approximately $1,300.

 

Using a Medicaid Planner

It is extremely important that one is aware of the rules regarding annuities in the state in which he/she lives. One needs to ensure when purchasing an annuity that it is Medicaid compliant, meaning it will not count towards Medicaid’s asset limit. Medicaid planning is vital if one is uncertain if an annuity is Medicaid compliant and/or is not aware of the rules in the state in which he/she resides. Find a professional Medicaid planner.

 

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