What If Your Annuity Client Ends Up Using Medicaid to Pay for Care?

Federal law allows for a division of assets at the time a spouse enters nursing home care. To that end, when looking at Michael and Susan’s assets, $302,900 of their original $426,500 can be put in a Medicaid-compliant annuity in Susan’s name, after accounting for Susan’s community spouse resource allowance. This annuity provides Susan with $4,320 of monthly income for six years and allows Michael to immediately qualify for Medicaid.

Michael and Susan’s Annuity

Total countable assets:                                  $426,500

Less amount Susan can keep:                     $123,600

Balance used to purchase annuity:           $302,900

This arrangement makes Susan the owner and annuitant, based on her life expectancy. However, in arranging the Medicaid-compliant annuity, the primary beneficiary listed will be the state, as any remaining money left in the annuity after Susan’s death would be recovered to help pay for the amount Medicaid has spent on Michael’s medical care to date. Any amount left after paying the state would go to Susan’s beneficiaries.

This type of transaction is regulated in part by the Deficit Reduction Act of 2005 (DRA). The DRA was passed to address transfers of assets to qualify for Medicaid. Under the DRA, Medicaid-compliant annuities were established to help ensure either spouse wouldn’t be impoverished by a serious medical condition.

To comply with DRA regulations, Medicaid-compliant annuities must meet certain requirements. These requirements include that the annuity be irrevocable and actuarially sound, and that payments from the annuity begin immediately after purchase. Also, a spouse or child can be named as the remainder beneficiary to collect on any leftover proceeds after the amount of Medicaid support is deducted.

What to Tell Clients

To help make sure you’re recommending and implementing a sound strategy for your clients, consider these four tips:

1. Partner with a highly rated company

Spend time reviewing carriers to ensure you (the client) are putting trust in the hands of an upstanding organization. This includes reviewing financial ratings and learning more about the company’s approach to customer service.

2. Consider timing and delivery

One of the key factors for this type of arrangement is timeliness. The faster the annuity contract can be shared with the Medicaid reviewers to show that assets have been repositioned into a Medicaid-compliant immediate annuity, the faster your spouse can qualify for the care he or she needs.

3. Work in conjunction with an elder-care attorney

It’s important to discuss the annuity purchase with an elder-care attorney who has specific knowledge of the needs facing seniors and is well-versed in the state’s laws. In addition, your elder-care attorney should be familiar with estate planning, preservation of assets, Medicaid and long-term care solutions.

4. Know the features

Medicaid-compliant annuities are irrevocable once issued, nonassignable and nontransferable; must be actuarially sound; and provide payments in equal amounts. These are important aspects to bring up with clients to make sure they understand the specifics of the annuity ahead of the purchase.

Since the need for long-term care assistance will be increasing in the years to come, start having conversations with clients about options to pay for these impending future expenses. The Medicaid market presents you and your clients with the opportunity for a better way to deal with an already stressful time.

An annuity can be the spend-down option that preserves the integrity of your client’s way of life and also allows an ill spouse to receive important care, which helps to ensure that both clients are supported.

Rich Lane is the second vice president of individual annuity sales and marketing for The Standard. He has served on the board of the National Association for Fixed Annuities.