What is an Annuity?
Let’s back up for a minute. Before we jump in to annuities, their effects on long-term care, and what annuities may be best for your situation, let’s begin with the basic definition of an annuity. An annuity is a financial product purchased via lump sum or periodic payments, and offering a fixed monthly or yearly sum payment, typically for the rest of the recipient’s life. In other words, pay $X amount now, and you’ll receive $Y amount per month, for the duration of your lifetime.
How Can Annuities Cover Long-Term Care?
When considering long-term care costs, you’re often looking at a lifetime of recurring monthly costs. How much does in-home care cost? What about assisted living and, eventually, nursing home care? A pretty penny, every month, indefinitely. Enter annuities, which allow you to transform a lump sum (or, less commonly, periodic payments over time) into a recurring monthly or yearly income, guaranteed for the recipient’s lifetime. In other words, an annuity is a guaranteed, lifetime income that can help pay for long-term care. That said, these same annuities may be considered an asset, thus disqualifying you from Medicaid – and Medicaid, for many, is the only way to fully afford the average $6,844-$7,698 per month for nursing home costs. But there are other annuities available, specifically ones that won’t be considered assets and therefore may help you qualify for Medicaid benefits when otherwise, your assets would disqualify you.
What is a Deferred Annuity?
Deferred annuities are a long-term planning strategy: Typically, you’ll set up a deferred annuity – either with a lump sum now, or with fixed or variable payments over time – and will wait for your nest egg to grow, until you’re ready to receive income (usually, in retirement). With enough advanced planning, deferred annuities are well suited to long-term healthcare for the elderly. That said, deferred annuities do require years of planning, you do have to qualify medically, they usually only pay out through age 85, and women will receive a smaller monthly payment (over a longer period of time). Additionally, deferred annuities must often be undone, in order to qualify for Medicaid. This process can incur steep surrender fees. Alternatively, you may convert your deferred annuity to an immediate annuity. Which brings us to,
What is an Immediate Annuity?
Immediate annuities are a lot like what they sound like: Make an initial lump payment, and immediately begin to receive a specific, monthly income. Immediate annuities are most often contracted through an insurance company or, less frequently, private individuals, and are available regardless of health status or pre-existing conditions. Immediate annuities are most often used as a Medicaid planning tool: if your assets exceed Medicaid limits, immediate annuities can turn those assets into an income stream, thus qualifying a loved one for Medicaid benefits.
How Do Annuities Affect Medicaid Benefits?
We’ve already touched on this briefly, but annuities will absolutely affect whether you qualify for Medicaid. First things first: Immediate annuities are most often used as Medicaid planning tools. Why? Because, as mentioned above, immediate annuities transform assets into income – and, as such, relieve you of those assets that would otherwise disqualify you from Medicaid benefits. Additionally, you will not incur a penalty for transferring your assets into an immediate annuity. That said, establishing an immediate annuity for Medicaid benefits isn’t as easy as it used to be. Under the Deficit Reduction Act of 2005 (DRA), a qualifying annuity must meet the following requirements:
- It’s irrevocable. In other words, you cannot ever cancel your annuity.
- It’s actuarially sound. This means that your annuity cannot cover a period longer than the recipient’s reasonable life expectancy AND that annuity payments during the recipient’s lifetime must be, at a minimum, equal to the cost of the annuity.
- It’s immediate. Deferred annuities or balloon payments do not qualify.
- The state is the remainder beneficiary. Unless there is a surviving spouse, minor child, or disabled child to inherit the annuity, the state will receive the remaining annuity money, up to the amount of Medicaid costs provided.
If you decide to restructure your assets into an immediate annuity, do not base your decisions solely on the advice of an annuity company; speak with an elder law attorney.
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