Immediate Annuities and Medicaid Plans

Types of Immediate Annuities Used in Medicaid Planning

There are several kinds of immediate annuities, not all of which make payments for life. But all immediate annuities provide for periodic payments that are predetermined and specified when the contract is negotiated. Payments are made at various set intervals and distributed at least once each year.

Most states require that the immediate annuity used in Medicaid planning be issued as non-assignable and non-transferable. So while hundreds of insurance companies sell irrevocable SPIAs, very few companies issue policies which are also non-assignable and non-transferable. You can get licensed with the companies which do offer this specialized product by clicking here.

Below are the five types of immediate annuities used in Medicaid Planning. Any of these types can be issued non-assignable by the companies we represent:

(1) Single Lifetime No Refund ("Life Only") annuity - This annuity option produces the largest monthly income among annuities which cover the lifetime of the applicant. No provision is made for heirs and the contract terminates on the death of the annuitant. Accordingly, a substantial loss may incur if the annuitant dies early. For Medicaid planning, "Life Only" annuities are advisable when a single person or married couple have no heirs or when heirs have been given other assets.

(2) Single Lifetime with Refund annuity - This annuity option covers the lifetime of the applicant and also provides for heirs if the annuitant dies within a pre-set number of years. There are different ways to structure this annuity. Providing for heirs can be made possible if the annuity contract is set to pay for Life with "X" Years Certain (continuing for the greater of the life of the annuitant or a stipulated time period), or if it provides for a Life with Installment Refund (guaranteeing total annuity payments at least equal to the premium paid to the insurance company). To qualify under the Medicaid guidelines, the number of years ("Period Certain") guaranteed cannot be longer than the actuarial life expectancy of the annuitant. Additionally, under the Estate Recovery rules passed by OBRA 93, any income that continues to heirs after the Medicaid recipient's death may be subject to recovery by the state.

(3) Period Certain or Term Certain Only annuity.These annuities have no life contingency component. The period of the annuity payments is predetermined and does not depend on the survival of the annuitant. The payment is guaranteed and will be made either to the original beneficiary or, in the event of the original beneficiary's death, to contingent beneficiaries named in the policy. Therefore, the owner is assured of no loss in the value of his estate due solely to an early death. Under OBRA '93, the guarantee period must be no greater than the stated actuarial life expectancy.

(4) "Balloon" annuity. Payments under this kind of annuity are structured to pay out a nominal (usually $10 a month plus interest) return during the period of coverage and then at the end of the period they pay out a lump sum equal to the initial premium less the $10 monthly distributions.

Example. An 85-year-old woman owns $100,000 of excess assets (i.e., in excess of the limits permissible to qualify for Medicaid). Her HCFA-based life expectancy is between six and seven years. If she purchases a $100,000 balloon annuity with a five (5) year period certain her monthly payments might be around $32 and her final lump-sum balloon payment would be $99,400. She will likely qualify for Medicaid because the annuity is an unavailable asset and upon her death or after the 5 year period, she and/or her heirs will receive the final lump sum payment of $99,400.

(5) Staged annuity.Payments under this kind of annuity - instead of being level - are structured to increase at some agreed upon rate, for example, with a 3% a year Cost of Living Adjustment. The COLA results in lower payments in the earlier years and higher payments later. If the annuitant dies in the earlier period, the beneficiaries will receive the bulk of the income. The structure is determined after taking into consideration share of cost aspects, anticipated changes in other income, special needs, and life expectancy.

(6) A Final Thought. Keep in mind: "Non-qualified" (after-tax) immediate annuities are also afforded tax advantages in Medicaid Planning in that the IRS treats a large portion of each payment as return of premium, i.e., initial deposit, therefore it is not taxed, while the smaller portion is considered a payment of interest. Thus, these income streams tend to be virtually tax-free!

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