Annuities and Medicaid Benefits

An immediate annuity provides a mechanism to qualify a person immediately for Medicaid benefits if a person or couple's assests are over a specific amount. The immediate annuity legally converts countable assets to a non-countable asset which generates an income stream to either the applicant or the applicant's spouse.

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The annuity must follow certain requirements and must not be for more than the life expectancy of the applicant. The immediate annuity must follow specific Medicaid guidelines in order for it to be considered an exempt asset. The annuity must be immediate,irrevocable,non-transferrable and must be for a term less than the annuitant's life expectancy (as determined under Medicaid Tables).

For a single person, the income generated by the annuity will be required to be paid to the nursing home.

For a married couple should be established with the well-spouse as the annuitant. The income generated will not count towards the applicant's Medicaid eligibility, but may impact the well-spouse's Minimum Monthly Maintenance Income Allowance.

If your assets exceed the Medicaid test limits, you may still be eligible for Medicaid by converting the assets to an immediate annuity income stream.

You must be careful that the combined monthly income from the annuity together with your other social security and pension payments stays under the allowable federal limits. Otherwise, the purchase of too large an annuity income stream could inadvertently take you even slightly over the limit and completely disqualify you from Medicaid.

The annuity income stream must begin prior to applying for Medicaid. Immediate annuities are irrevocable contracts. Once the annuity has been purchased, the owner does not have the right to revoke the contract. Immediate annuities are afforded tax advantages in that a large portion of each payment is treated as a return of capital (and not taxable) while the smaller portion is considered a payment of interest.

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There are several kinds of immediate annuities:

  1. Life only immediate annuity. This annuity produces the largest periodic payment among annuities which cover the lifetime of the annuitant. No provision is made for heirs as the contract terminates on the death of the annuitant, and all remaining principal is retained by the insurance company. For Medicaid planning purposes, "life only" annuities are generally advisable only in the case of a married couple who have no heirs or whose heirs have been given other assets.
  2. Life annuity with refund provisions. Provides for heirs as it provides for a refund (which guarantees total annuity payments at least equal to the premium received by the company). To qualify under the Medicaid guidelines, the period of the guarantee cannot be longer than the actuarial life expectancy of the annuitant.
  3. Period certain annuity - which has no life component. The period of the annuity payments is guaranteed for a specific time period and does not depend on the survival of the annuitant. The payment 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.
  4. Balloon annuities. Payments under this kind of annuity are structured to increase at some set rate, resulting in lower payments in the earlier years and higher payments later. From the above information, an immediate annuity can be a great financial vehicle to qualify an individual for Medicaid; however, there are many factors to be considered which should be discussed with your financial advisor and an attorney.

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