As an elder care attorney, a phrase I hear from time-to-time is that an annuity is “Medicaid friendly.” Annuities are a written contract with an insurance company to receive a specific amount of payments for a term of years or for the life of an individual. The person obtaining the annuity gives the insurance company a lump sum of money in return for receiving the payments back as an income stream. There are many good reasons to consider an annuity, such as for income tax deferral or to obtain a higher interest rate then can be got at a bank.
Michigan’s Medicaid regulations for the nursing home program and MI Choice Waiver home program do not contain a description of a “Medicaid friendly” annuity. The regulations do, however, define how an annuity has to be structured in order for a senior to qualify for Medicaid. I would refer to that as a Medicaid-compliant annuity.
Under Michigan’s Medicaid regulations, an annuity is considered either an asset or an income stream. If, under the terms of the annuity contract, the senior can liquidate the annuity and receive a lump-sum payment back from the insurance company, the annuity is considered an asset that counts toward Medicaid’s $2,000.00 countable asset limit.
If, however, a senior only has a right to receive an income payment from the annuity, Michigan’s Department of Human Services will consider the annuity to be income, if the following requirements are met:
1. The annuity must be irrevocable. That means the senior has given up the right to cancel the contract and get their lump sum payment back. If the annuity was revocable, it would be considered a countable asset as note above.
2. The annuity contract must be issued by an insurance company that is licensed in the United States and by a financial agent who is licensed by the State of Michigan. This requirement is to prohibit the use of “private annuities,” which are used in some estate planning situations.
3. The annuity payment must be solely for the benefit of the person applying for Medicaid or that person’s spouse. This means a senior cannot purchase an annuity and have the income stream paid to another person while qualifying for Medicaid.
4. The annuity must be “actuarially sound” so that the money paid to the insurance company is paid back to the senior within their life expectancy as defined by the Department of Human Services. This means that a Medicaid-compliant annuity must be an immediate annuity, not a deferred annuity, where payments may not start for a number of years.
5. The annuity payments must be in equal amounts.
If the above 5 requirements are met, the annuity will be considered Medicaid-compliant. If it is the Medicaid applicant’s annuity, the income received from the annuity each month will have to be paid to the nursing home as part of the patient-pay amount (see other blogs on this topic), so the nursing home will be receiving the monthly annuity payments. If the annuity is owned by the community spouse of the nursing home resident, the community spouse will be able to keep the annuity income.
There is one final and extremely important requirement for an annuity to be considered Medicaid-compliant. If the annuity was obtained or the contract was amended on or after February 8, 2006, then the State of Michigan must be designated as the primary beneficiary of the annuity when the contract owner dies, unless there is a community spouse, in which case the State must be named as the beneficiary after the spouse. This means that in many situations, the state will receive any money remaining in the contact when the Medicaid applicant dies.
If an annuity does not comply with the above requirements, obtaining it will be considered a divestment, and the senior applying for Medicaid will not qualify for a period of time.
As you can see, annuities are not really Medicaid friendly, in that they either count toward the $2,000 asset limit or are considered income, income that may have to be paid to the nursing home. What some financial advisors mean when they say Medicaid friendly is that you can cancel the contact and get your money back if you are in a nursing home.
However, there are a few situations where Medicaid-compliant annuities are very helpful in long-term care planning and Medicaid and VA Aid and Attendance qualification. That will be the subject of another post.
Andrew Byers is an elder care attorney with a law practice in the Rochester Hills, Michigan area.