Many brokers are unfamiliar with the Medicaid single premium immediate annuity (SPIA) market. In fact, it seems some brokers thought Medicaid SPIA planning was eliminated when updates were made to state Medicaid laws.
For brokers knowledgeable about Medicaid SPIA planning, the changes actually make appropriate Medicaid SPIA planning acceptable. In addition, this market represents a huge opportunity for brokers because it provides a valuable resource to members of the aging population who are facing the high costs of long-term care, such as nursing home facilities.
There are three ways an individual can pay for nursing home costs: private pay, long-term care insurance and Medicaid. Private pay and long-term care insurance can be expensive options, and the individual may not qualify for long-term care insurance. Although Medicaid is not often thought of as the primary option, it should not be overlooked.
In a simplified example of a Medicaid planning case, let’s assume a husband and wife have $300,000 in countable assets. The husband must enter a care facility, for which the private pay cost is $8,000 per month. The husband receives $3,000 per month in Social Security income and his pension. This leaves a $5,000 monthly difference in the cost of the care facility, plus the couple is worried about maintaining the wife’s ability to live.
The couple’s broker suggests they purchase a $200,000 Medicaid SPIA in the wife’s name from an annuity provider. The broker figures out that a period certain payout of 65 months will provide $3,067 per month in income. This $3,067 will be paid to the wife, and when the husband enters the care facility, his $3,000 per month of income will be paid to the facility. Medicaid will then pay the difference to the facility up to the Medicaid pay amount.
By following this course of action, the couple’s assets have been reduced to $100,000, qualifying the husband for Medicaid assistance for the care facility and enabling the wife to retain income. Rules vary by state, so it is always important to consult an elder planning attorney when speaking about Medicaid planning.
Consult an elder care attorney
Each state has different rules to follow relative to Medicaid SPIA, so brokers should be knowledgeable about compliance in each state. To help brokers working in the Medicaid SPIA marketplace, elder care attorneys can provide information on individual state laws, and carriers with Medicaid SPIA products can provide additional information about the benefits of those products to brokers’ customers, depending on their individual situations. Remember, Medicaid is state run, not federal, so all states will want to be the primary beneficiary of the SPIA policy. This is part of the changes mentioned above that have allowed for the acceptance of this planning tactic. As primary beneficiary, the state will get reimbursed from the SPIA when the healthy spouse dies. Also, the state will want to know that the Free-Look period has elapsed before they sign off on their end of the paperwork. These are all done as period certain SPIAs. So, if the healthy spouse passes away in a shorter time frame, then the state will get some or all of its money back and any remaining payments will go to the contingent beneficiary.
When recommending Medicaid SPIAs, just as with all annuities, it is important to ensure that all 12 areas of suitability requirements are addressed when matching a consumer to the most appropriate product: age, annual income, financial status, financial experience, financial objectives, intended use of annuity, financial time horizon, existing assets, liquidity needs, liquid net worth, risk tolerance and tax status. It also is important to consider other family members who will be affected by the purchase of the SPIA and to ensure the SPIA will be appropriately planned to cover the long-term care costs for which it is intended.
Medicaid SPIA planning is a valuable tool brokers can offer their clients. By working with clients to recommend a Medicaid SPIA as an appropriate solution, brokers may strengthen their relationships with clients and demonstrate capabilities that can generate opportunities to handle other investments.
Special thanks to Ted Markow of Markow Financial in Seattle, Wash., for his contribution to this article.