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

Last updated: December 30, 2022



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 their countable assets, and therefore, meet Medicaid’s asset limit. 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 explains the various types of annuities, how Medicaid’s asset limit (and income limit) factors in, and the general rules of how states treat annuities. Promissory notes, which are similar to annuities, are also briefly discussed.

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Medicaid’s Asset & Income Limits

For long-term care Medicaid eligibility, there are specific 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.

In 2023, most states have an asset limit of $2,000 for an individual senior applicant. The assets of a married couple, even when just one spouse applies for long-term care Medicaid, are considered jointly owned. This means that all assets owned between the couple are added up and considered when determining the applicant spouse’s eligibility for Medicaid. To be clear, assets solely in the non-applicant’s name are used to calculate the eligibility of the applicant spouse.

Some assets are considered exempt. This means they are not counted towards Medicaid’s asset limit. Exemptions generally include one’s primary home, household items, personal belongings, and a vehicle. Non-applicant spouses’ retirement savings accounts, such as IRAs, 401(k)s, and pensions, are not always counted towards an applicant spouse’s Medicaid eligibility. Furthermore, some states do not count the applicant spouse’s IRA. See which states exempt IRAs (an applicant spouse’s and / or non-applicant spouse’s) from countable assets.

There are Spousal Impoverishment Rules in place for when just one spouse of a married couple applies for Nursing Home Medicaid or home and community based services via a Medicaid Waiver. One such provision is a Community Spouse Resource Allowance (CSRA), which allows the non-applicant spouse to retain a higher amount of the couples’ assets. In 2023, most states allow a community spouse to retain as much as $148,620 in assets. This spousal allowance is in addition to the $2,000 the applicant spouse is able to retain.

In 2023, most states allow a senior applicant up to $2,742 / 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 them 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, they must “spend down” excess assets to meet the limit. One must not give away assets or sell them for less than fair market value to meet Medicaid’s asset limit. Doing so violates Medicaid’s Look Back rule, which will result in a period of Medicaid ineligibility.

Purchasing a Medicaid Compliant Annuity is one way to spend down assets without violating the Look-Back Rule. 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. For Medicaid applicants, income from an annuity is counted towards Medicaid’s income limit.

 Annuities are a way for Medicaid applicants to turn countable assets into non-countable assets. Persons can use the Spend Down Calculator to determine if they might countable assets over Medicaid’s asset limit, and if so, learn the approximate amount.


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.

 When considering an annuity to become asset eligible for Medicaid, it is critical to choose one that is Medicaid compliant. 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. 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 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. It should NOT be used for Medicaid planning purposes. 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 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 Annuity

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, 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. Medicaid compliant annuities are based on estimated life expectancy. This means payments are not guaranteed for the entirety of an annuitant’s life, but rather on an estimate of how long they 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. These rules, while fairly consistent across states, do not necessarily apply to all states.

  • 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.
  • Cannot be Transferrable – The annuity cannot be transferred or sold to someone else. Said another way, it is nontransferable or non-assignable.
  • 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 one’s 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. 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. 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. 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 their life expectancy. As an example, if one’s life expectancy is 5 years and they purchases an annuity for $60,000, they must receive a payment of a minimum of $1,000 per month. (60 months divided by $60,000 = $1,000 month)

An annuity that is not Medicaid compliant may violate Medicaid’s Look Back rule, resulting in a Penalty Period of Medicaid ineligibility. 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.


Annuities versus Promissory Notes

Promissory notes are closely related to annuities. Both are Medicaid planning tools that utilize the same basic principle of turning a lump sum of cash (countable assets) into a stream of income. While annuities are a financial contract between an individual and an insurance company, a promissory note is a written contract, essentially a loan, to another person. Often, the “borrower” is a family member of the “lender”. Unfortunately, promissory notes are not a viable option in all states. Some states consider them a countable asset or a violation of Medicaid’s Look Back Period.

In the states where promissory notes are permissible, they must comply with specific rules. Some of the rules for annuities and promissory notes are the same. For instance, payments must be made in equal amounts, and they must be actuarially sound, meaning the terms of payment cannot exceed the life expectancy of the person who is receiving the payments.

There are also differences between the two types of planning strategies. While annuities require that the state be listed as a beneficiary to recoup costs paid for long-term care, promissory notes do not. However, for promissory notes, it is prohibited that the loan be cancelled if the lender passes away. This allows the state to still attempt recovery of care costs from promissory notes via Medicaid’s Estate Recovery Program.


How Marital Status Factors In

Single Applicant

A single applicant that requires Medicaid-funded nursing home care is only allowed to keep a very small portion of their income as a Personal Needs Allowance. This is generally between $30 and $200 / month. With only a few other exceptions, the rest of one’s income is paid to the nursing home for their care. If the annuity causes one to have monthly income greater than their cost of care, they are ineligible for Medicaid. Remember, an annuity payment is counted as income in the month that it is received.

For long-term care through a Home and Community Based Services (HCBS) Medicaid waiver, applicants (in 2023) are generally able to retain up to $2,742 / month in income. One should exercise caution when purchasing an annuity. If annuity payments put an applicant over the income limit, they might be ineligible for Medicaid. More on how Medicaid counts income and planning strategies if one has income over the limit 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. 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 is an applicant, the non-applicant spouse’s income is disregarded; 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 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 (non-applicant spouse), giving them a set income while allowing the applicant spouse to meet Medicaid’s asset limit.


Married with Both Spouses as Applicants

When 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. In this situation, 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 Waiver.

With Medicaid-funded nursing home care, the majority of the annuity payments would go towards paying the nursing home. If annuity payments are greater than the cost of nursing home care, Medicaid ineligibility may result. Remember, Medicaid also has an income limit for HCBS waiver eligibility, and annuity payments count as income. 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. The insurance company makes money by investing the lump sum of money that was used to purchase the annuity. There is one exception. This 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 they live. When purchasing an annuity, it is imperative 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 unaware of the rules in the state of residence. This also holds true for persons considering a promissory note. Find a Professional Medicaid Planner.

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