In simple terms, an annuity is a financial product an individual purchases from an insurance company. The individual buys the annuity with a lump sum of cash that the insurance company gradually “pays back” to the individual as a fixed stream of income over a predetermined period of time. How annuities affect Medicaid Long Term Care eligibility depends on a variety of factors – what kind of annuity, payment terms, payment amounts, beneficiary, and more.
Often, annuities can help an applicant gain Medicaid Long Term Care eligibility while protecting some or all of the applicant’s resources for themselves and/or their spouse. However, the rules and restrictions surrounding annuities and whether or not they are Medicaid compliant are complicated, so trying to use annuities as a strategy to become Medicaid eligible without the help of a Certified Medicaid Planner can be challenging. Talk with one of our Certified Medicaid Planners to learn more about annuities and if using one would be beneficial for your family.
Effects of Preexisting Annuities on Medicaid Eligibility
If you already own an annuity when applying for Medicaid Long Term Care, your state’s Medicaid offices will count the annuity as an asset or as income when determining your Medicaid eligibility.
If the annuity is not Medicaid-compliant, it will be considered an asset and count against the asset limit, which is part of the financial requirement for Medicaid eligibility. For most states, the 2022 asset limit for Medicaid long term care eligibility is $2,000. This means that single applicants must have less than $2,000 (or whatever the asset limit is in their state) in assets to be financially eligible. Chances are good most annuities will be worth more than $2,000, but there are still ways you could qualify for Medicaid Long Term Care even with an annuity that pushes you over the asset limit. For example, you could cash out the annuity and use the money to purchase Medicaid-approved good or services, like on necessary medical equipment, long-term care, or a Medicaid compliant annuity. Reducing assets can be complicated and doing it wrong could violate Medicaid’s look-back rule and leave the applicant ineligible, so soliciting the expertise of a Certified Medicaid Planner is advisable before embarking on any of these strategies on your own.
The other half of Medicaid financial eligibility is the income limit. If your preexisting annuity happens to be Medicaid compliant, it will be considered income and counted against the income limit, which varies by state, marital status and type of Medicaid Long Term Care (Nursing Home or HCSB Waiver).
For Nursing Home Medicaid, the income limit is $2,523 / month for a single applicant or a married applicant with only one spouse applying and it is double that ($5,046 / month) for a married couple with both spouses applying in Washington D.C., and 31 states – Alabama, Alaska, Arizona, Arkansas, Colorado, Florida, Georgia, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maine, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Vermont, Virginia, Washington
Other states have lower income limits for Nursing Home Medicaid, like New York, where the limit is $934 / month for a single applicant or a married applicant with only one spouse applying, and $1,367 / month for a couple, or in Illinois, where the income limits are $1,073 / month for a single applicant and $1,452 / month for a couple. Some states, including California, have no income limit, and still others require that income be less than the cost of the nursing home.
However, it’s important to note that in all these cases, the Nursing Home Medicaid beneficiary must pay all but a small amount (a “personal needs allowance” of $30 – $200 / month, depending on the state) of their monthly income to the nursing home. So, having an income less than $2,523 / month (or whatever the limit is in your state) may qualify you for Nursing Home Medicaid, but you will not get to keep all of that income once you start receiving the Medicaid benefits and relocate to the nursing home.
HCSB Waiver Medicaid works differently because in these cases, the Medicaid recipient is still living in the community, often in their home, and needs a monthly income to pay for things like a mortgage, rent, utilities, food, etc. In 2022, the income limit for HCSB Waiver Medicaid is $2,523 / month for a single applicant or a married applicant with one spouse applying, and $5,046 / month for married couples with both spouses applying in 39 states and Washington, D.C. Some of the significant exceptions here are California, where the 2022 income limit for HCSB Waiver Medicaid is $1,481 / month for a single applicant or a married applicant with one spouse applying, and $2,003 / month for married applicants with both spouses applying, and New York, where the income limits are $934 / month for single applicants and $1,367 / month for married applicants with both spouses applying.
Just like with the asset limit, if your preexisting annuity puts your monthly income stream over the income limit, there are still methods you can use to get under that limit.
Using Annuities as an Approach to Become Medicaid Eligible
Purchasing a Medicaid compliant annuity can help an applicant become eligible for Medicaid Long Term Care by turning assets into income. This can often prove helpful since the asset limit is $2,000 total, and the income limit in most states is more than $2000 per month.
Annuities can be an ideal approach to Medicaid eligibility for a married couple with one spouse applying and the other spouse a non-applicant. This is because Medicaid considers all assets of a married couple to be jointly owned, and thus counted against the asset limit of the applicant spouse, but the income of the non-applicant spouse is not counted against the income limit for Nursing Home or HCBS Waiver Medicaid eligibility for the applicant. In other words, a couple can turn a well-funded joint savings account into an annuity in the non-applicant spouse’s name that will pay them a substantial monthly payment and still maintain Nursing Home or HCBS Waiver Medicaid eligibility for the applicant spouse. New York is the only state where non-applicant spouses with significant income may be required to pay some of the applicant spouse’s expenses, but even that is capped at 25%.
For example, Albert and Zoe are a married couple. Albert requires nursing home care and is applying for Nursing Home Medicaid Long Term Care while Zoe is healthy and will remain at home. The couple, both age 77, have $250,000 in joint assets, which puts them well above the asset limit. However, they can use the Community Spouse Resource Allowance, which lets the non-applicant (or community) spouse keep $137,400 in most states for 2022, to reduce that total to $112,600, which is still well over the asset limit of $2,000. But they can get to that limit by purchasing a $110,600 annuity in Zoe’s name. It will make fixed payments of $838.33 every month for 11 years, which will make the annuity actuarially sound because a woman age 77, like Zoe, will live, on average according the Social Security Administration, to 88 years and three months of age, which means the annuity needs to pay out in full in 11 years and three months, and this one pays out in 11 years.
For single applicants or married couples with both spouses applying, annuities are a less effective approach when it comes to eligibility for Nursing Home Medicaid. That’s because Medicaid will require most of the Medicaid recipient’s income stream (everything except the $30-$200 / month personal needs allowance), including the monthly payments from the annuity, to be paid to the nursing home. Purchasing a Medicaid-compliant annuity could help a single applicant or married couple with two applicants get below the asset limit, but there may be better ways to do that like purchasing an irrevocable funereal trust or making medically-needed improvements to the home.
It’s a different story for single applicants or married couples with two applicants when it comes to annuities and HCBS Waiver Medicaid income limits, because Waiver recipients are allowed to keep their income up to their state limit. So, using an annuity to turn assets into income could be a worthwhile approach for single applicants or married couples with two applicants when it comes to HCBS Waiver Medicaid eligibility.
Requirements for a Medicaid Compliant Annuity
These are the general rules that annuities must follow to be Medicaid compliant. They can vary by state.
• Immediate vs. deferred – Immediate annuities begin paying back the owner of the annuity (called the annuitant) immediately after the annuity is purchased. Annuities must be immediate to meet Medicaid compliance standards. Deferred annuities (also called longevity annuities or tax-deferred annuities) don’t start paying out until a later date, usually years after the transaction. Deferred annuities ARE NOT Medicaid compliant and will be counted as assets.
• Irrevocable vs revocable – An irrevocable annuity cannot be changed, canceled or cashed out in any way. Annuities must be irrevocable to meet Medicaid compliance standards. Revocable annuities can be altered, terminated or cashed out by the annuitant. Revocable annuities ARE NOT Medicaid compliant and will be counted as assets.
• Fixed vs variable – A fixed annuity guarantees that payments will be made monthly in the same amount dollar amount for the life of the annuity. Annuities must be fixed to meet Medicaid compliance standards. With a variable annuity, the payment amounts change with the fluctuation of the annuity’s investments. Variable annuities ARE NOT Medicaid compliant and will be counted as assets.
• Actuarially sound – For an annuity to be Medicaid compliant, it must be actuarially sound, which means the length of payments must not exceed the life expectancy of the owner of the annuity. Life expectancy estimates are based on the Social Security Administration’s life expectancy table.
• Full return of investment – In order to meet Medicaid compliancy standards, an annuity must pay back the owner of the annuity, during the owner’s lifetime, the entire amount they originally paid for the annuity.
• Beneficiary – The state must be named as the annuity’s remainder beneficiary upon the death of the annuity owner in order for the annuity to be Medicaid compliant. This means the state where the annuity resides will receive any funds left in the annuity to help cover the cost of care the state has already paid through Medicaid on behalf of the recipient.
Purchase Timing of Medicaid Compliant Annuity (and Medicaid’s Look-Back)
When and how much you spend on annuities matters. If you put in too much money too early, you’ll tie up cash that you might need for another emergency, medical or otherwise. If you wait too long, you may not be able to purchase an annuity that will span enough months to create payments small enough to be under the income limit.
The minimum purchase amount for immediate, Medicaid-compliant annuities in most states is $25,000-$30,000. Buying an annuity in this price range can help the applicant get under the asset limit, but it won’t create too much of a monthly income stream – the monthly payments for an immediate, Medicaid-compliant $25,000 annuity for a 65-year-old man would be $121.34 (paid out over 17 years, two months) and for a 75-year-old man they would be $198.41 (paid out over 10 years, six months); and the monthly payments for an immediate, Medicaid-compliant $25,000 annuity for a 65-year-old woman would be $105.49 (paid out over 19 years, nine months) and for a 75-year-old woman they would be $166.67 (paid out over 12 years, six months).
In theory, a couple with one spouse applying and a non-applicant spouse can protect unlimited assets with a Medicaid-compliant annuity. However, as mentioned above, tying up all of one’s money in an annuity and having no liquid assets for emergencies or large purchases may put the non-applicant spouse in a difficult financial situation. In these situations, a couple with enough money can decide to pay out of pocket until they spend their assets down to a predetermined amount that would leave the healthy spouse with enough money to buy an annuity that would support their monthly needs. Remember, in these cases the healthy spouse would still be allowed to keep the Community Spouse Resource Allowance ($137,400 for 2022 in most states), so they would still have some liquid assets, in addition to the income stream provided by the annuity.
For example, Jane has a Social Security income of $1,000 / month and expenses of $3,000 / month, and her husband Frank needs nursing home care. The couple has saved $500,000 in assets, but Jane doesn’t want to buy an annuity for $360,600 to help Frank become Medicaid eligible ($500,000 – $137,400 CSRA + $2,000 asset limit = $360,600). So, Jane, with the help of her CMP, decides to pay for the nursing home, and the $2,000 / month difference in her own living expenses, out of pocket until there is $242,000 remaining. By their calculations, Jane will be 79-years-old at that time, so she can purchase a $240,000 annuity that will pay her $2,000 / month to cover her extra living expenses and will reduce the couple’s total assets to $2,000 total, making Frank asset eligible for Medicaid Long Term Care.
One thing you don’t have to worry about with timing is Medicaid’s look-back rules, which allows the state to “look back” at the previous five years (2.5 in California) of your financial records to make sure you didn’t simply give away any assets to get under the limit. As long as an annuity is Medicaid-compliant, you can purchase it any time and it will not violate the look-back rule.
Still, there are so many variables – age, amount of assets, marital status, type of Medicaid, the financial and practical needs of the community spouse – that each case is unique. So, consulting with a Certified Medicaid Planner is the best way to ensure that you’re purchasing the right annuity at the right time for your situation.