Medicaid Annuity Last Updated January 28, 2018

Table of Contents:
  1. Introduction
  2. Creating the right Medicaid Annuity
  3. Medicaid Annuity details
  4. Medicaid Annuity rules

A Medicaid Annuity is a tool for turning a portion of your assets into income, thereby making you eligible for Medicaid as soon as possible. It is typically part of the Modern Half-a-Loaf strategy to retain as many assets as legally allowable within your family, before spending them all on medical care prior to your Medicaid eligibility.

An annuity is an insurance product that you purchase for a specified amount, under the agreement that the insurance company will pay that amount (less services fees) back to you in regular intervals over time. It turns what would have been a large asset (a lump sum of cash) into small amounts of monthly income. A Medicaid Annuity is designed specifically with the Medicaid applicant in mind. It reduces your "countable assets" (the assets counted when considering your Medicaid eligibility), so you become eligible for Medicaid sooner.

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Creating the right Medicaid Annuity

Your Medicaid Annuity purchase must be considered in tandem with any gifts you give, and within your overall Modern Half-a-Loaf strategy. Placing too much money in the gift may extend your penalty period too far, and delay your Medicaid eligibility. Placing too much money in the annuity may extend the annuity term too far, also delaying your Medicaid eligibility. It is essential that the right kind of annuity be purchased, in the right amount, and over the right term.

Finding the right gift amount and annuity terms can be very complex and, because the stakes are so high, professional advice from an expert with Medicaid knowledge is essential. Getting the terms wrong could render you ineligible for Medicaid coverage and cost you thousands of dollars.

The optimal Medicaid Annuity terms depend on many factors, including any other income received (social security, dividends, interest payments, etc.), Medicaid rules specific to your state (the "penalty divisor," the "free look" period, "too much income" provisions, etc.), your age and life expectancy, and more. But typically, the annuity payments will be monthly and the duration will equal the total penalty period incurred for gifts you've given over the past 5 years.

Medicaid Annuity details

A Medicaid Annuity is a type of insurance product called a "Single Premium Immediate Annuity (SPIA)"—an agreement between the annuitant and insurance company where a lump sum of money is paid up front, and that sum is paid back in smaller amounts over time. The payments are guaranteed by the insurance company. Medicaid Annuity payments could be at any regular interval (monthly, quarterly, annually), as the frequency is not mandated by relevant law (see Deficit Reduction Act of 2005). However, monthly payments are usually chosen, as that is the typical nursing home billing period.

A Medicaid Annuity is effectively a "safe harbor" for the amount of the annuity, excluding it from countable assets while avoiding penalties. The Medicaid Annuity "safe harbor" concept recently faced an important court challenge, but the strategy was vindicated by the U.S. Third Circuit Court of Appeals in the "Zahner Opinion."

Medicaid Annuity rules

In order to adhere to guidelines and work properly, the Medicaid Annuity must follow certain rules. Specifically, it must be "fixed" (equal payment amounts at regular intervals), "immediate" (payments begin as soon as the agreement is signed), "irrevocable" (cannot be cancelled or modified), "actuarially sound" (the period is not longer than the annuitant's life expectancy), and "non-transferable" (cannot be sold or transferred to another person or entity). Whether the Medicaid Annuity is considered "actuarially sound" is based on the annuitant's life expectancy, as estimated using the Social Security Administration's life tables or a state-specific equivalent.

Additionally, the state paying the annuitant's Medicaid costs must be named a "successor beneficiary" of the Medicaid Annuity. That is, if the annuitant dies prior to the annuity's end, the state will receive the remaining payments. However, certain other successor beneficiaries can also be named, and will receive the payments before the state. This includes spouses, minors, and disabled children.

Note that even the factors governing the above Medicaid Annuity rules can vary by state. For example, in many states, annuity purchasers are allowed to cancel an annuity within the first 10 to 30 days after purchase. During this "free look" period, because the annuity is in fact "revocable," it continues to count as an asset, which impacts your countable assets and therefore your Medicaid application. Also, some states have a "too much income" provision, which means that if total monthly income (including the Medicaid Annuity) is too high, the penalty period from gifts given will begin not at the time of application, but after the income has been reduced to within the "too much income" threshold, resulting in a significant delay in Medicaid eligibility.

Insurance companies that sell Medicaid Annuities are aware of these rules.