Annuities are one of the most popular insurance products available. There are various types of annuities that are used in different situations; however, single premium immediate annuities (SPIAs) are typically purchased when people need more income. Upon purchase, these annuities begin making payments immediately.
While SPIAs are great for generating additional income, people should also consider using this annuity when faced with a permanent stay in a nursing home. When structured correctly, a SPIA can become what’s commonly known as a Medicaid Compliant Annuity (MCA). This annuity contains special contract provisions, and when used appropriately, it can protect assets and accelerate Medicaid eligibility, providing financial relief in the face of devasting care costs.
Just as a regular SPIA does, a Medicaid Compliant Annuity converts a single investment into an income stream and contains zero cash value. To be considered “Medicaid compliant,” it must also be irrevocable and non-assignable, meaning it cannot be sold on the secondary market. The term of the annuity must be within the owner’s Medicaid life expectancy, and it must name the state Medicaid agency as beneficiary.
If the annuity contains these provisions, it can be used to accelerate eligibility for Medicaid for either a single person or a married couple. With long-term care costing on average $7,148 per month (Genworth 2017 Cost of Care Survey), more seniors are falling on financial hardship trying to pay for care. Many fail to plan for these high costs and find themselves in crisis once they enter a nursing home. In these cases, they must turn to Medicaid for help.
To qualify for Medicaid, a nursing home resident must have no more than $2,000 in cash assets. If the resident is married, the spouse at home—known as the community spouse—can also keep some cash assets. The amount varies but is typically no more than $123,600 in most states. The number one reason people don’t automatically qualify for Medicaid is that they have too many assets.
Consider Bob (age 83) and Mary (age 81). Bob enters a nursing home, which costs $6,000/month. Mary is afraid they will quickly deplete their life savings trying to pay the nursing home bill. They have total cash assets of $250,000. She turns to a local elder law attorney for help.
Of the $250,000 cash assets, Bob may keep $2,000 as his resource allowance. Mary, the community spouse, may keep $123,600. This means they have excess assets of $124,400. Bob won’t qualify for benefits until this entire amount is spent. Some is spent on legal fees of $8,000, and some is spent on paying off credit card debt of $7,000. Additionally, their elder law attorney advises the couple to purchase some exempt assets—assets that Medicaid doesn’t count when determining eligibility. They purchase irrevocable funeral expense trusts for $10,000 each. Also, Mary upgrades her primary vehicle, which costs $24,400.
After the expenditures described above, the couple still has $65,000 they need to spend before Bob is eligible. The couple’s elder law attorney advises Mary to fund the remaining $65,000 into an MCA. Mary is the owner, annuitant, and payee of the contract. Once this amount is funded into the annuity, it is immediately eliminated from the couple’s cash assets. In turn, Mary will begin receiving a monthly stream of income from the annuity to help with her living expenses.
By using an MCA, the couple could accelerate Bob’s eligibility for Medicaid, saving them from having to pay the $6,000/month nursing home bill. Additionally, Mary could increase her monthly income and preserve her assets so she can maintain her lifestyle within the community.
Had the couple done nothing and continued to privately pay for care, they would have exhausted their spend-down amount of $124,400 in only 20 months. Only then would Bob have qualified for benefits. Instead, by opting to use a Medicaid Compliant Annuity, Bob became immediately eligible for Medicaid, and Mary could save her assets.
