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The Role of Immediate Annuities in Medicaid Planning

The use of income annuities to protect a Medicaid applicant's assets is a popular planning technique. Two books on the subject, The Medicaid Planning Handbook by Alexander A. Bove, Jr. and Avoiding the Medicaid Trap by Armond Buddish, discuss the use of annuities to avoid Medicaid seizure. 

There are many annuity planning options, which need to be analyzed for their relative advantages and disadvantages. The tax impact of liquidating assets to convert them to an annuity must be evaluated as well.

Generally, if an applicant's assets exceed the Medicaid test limits, they may still become eligible for Medicaid by converting those assets into an immediate annuity. Keep in mind that each state has its own rules for determining Medicaid eligibility and these rules may differ greatly from those of other states. 

When purchasing the annuity be careful to keep the combined monthly income from the annuity plus any income the applicant receives from Social Security and any pension plans, below the monthly federal limits. Otherwise, the purchase of too large an annuity income stream could inadvertently cause the applicant to exceed the federal limit even by a small amount and thus completely disqualify the applicant from Medicaid. For example: Say the Medicaid qualification test limits in this state are $1,310 a month. Income from Social Security and pension plans is $525. Therefore, the maximum annuity income to purchase should be less than $785 a month (i.e., $1,310 minus $525). If the applicant purchased an annuity which generated $800 a month he would be $15 over the limit and ineligible for Medicaid coverage. Better to purchase LESS annuity and stay well below the threshold than to risk going over the limit.

Under the Kennedy Kassebaum and OBRA '93 Acts, a "Medicaid" annuity must be based on life expectancy which is in accordance with the latest Social Security mortality tables (see Health Care Financing Agency ('HCFA') Tables). Medicaid guidelines for the use of annuities, which clarify OBRA '93, have been published by the HCFA. Under these guidelines, annuities must not be guaranteed for a period longer than the actuarial life expectancy of the annuitant (either the institutionalized individual or the community spouse). If they are, the payments that are guaranteed to be made later than the end of the actuarial life expectancy represent a transfer and will be penalized as such when the annuity is established. To avoid transfer penalties, guarantee periods of annuities must take into account the new guidelines concerning actuarial life expectancies.  

Immediate income annuities are the type of annuity most often selected in Medicaid planning. With this annuity an applicant's money is transferred to an insurance company in exchange for the promise of a stream of regular payments.

Immediate annuities are usually irrevocable contracts. That means, after the annuity policy is issued and the 20-30 day "free-look" period has passed, the policy owner gives up the right to revoke the contract and obtain a refund. Irrevocability is a necessary condition for any Medicaid annuity. However, irrevocability by itself is NOT a sufficient condition for the annuity. Most states also require that the annuity to be non-assignable and non-transferable. That means, the owner gives up the right to sell the policy to a third-party viatical or life settlements company. So while hundreds of insurance companies sell irrevocable SPIAs, very few companies will issue a policy which includes an endorsement of non-assignability and non-transferability.  Here are some examples of Non-Assignability endorsements

Click here to get licensed to sell "Medicaid-friendly" annuities which offer the required endorsements of non-assignability. Or, call at 800-872-6684 and we will email the appintment forms to you.

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('Types of Annuities Used in Medicaid Planning')