Actuarially Sound Requirement

Calendar on desk

One of the requirements an annuity must meet in order to be considered Medicaid compliant is that it is actuarially sound. The term “actuarially sound” means that the owner of the annuity will receive their investment back within their Medicaid life expectancy. The life expectancy is determined by using either the state’s specific life tables or the life tables published by the Chief Actuary of the Social Security Administration.

In many states, there is not a minimum amount of time the annuity must be structured, although, we recommend structuring the annuity for a reasonable amount of time. Many carriers require a minimum term length but may be able to go as low as two months.

There are three states that do specify how short an annuity must be in order to be compliant. They are as follows:

  • North Dakota – The annuity must be within 85% of the individual’s Medicaid life expectancy.
  • Oregon – The annuity must be within 12 months of the individual’s Medicaid life expectancy.
  • Washington – The annuity must have a term that is not less than five years if the life expectancy of the annuitant is at least five years, or have a term equal to the life expectancy of the annuitant, if the actuarial life expectancy of the annuitant is less than five years.
  • To read more about these specific states and what this means for the actuarially sound requirement, read our blog, “What is the Meaning of ‘Actuarially Sound’?

To figure out if the annuity is actuarially sound in all other states, take your client’s monthly payout and multiply that by the annuity term. If this amount exceeds the initial investment, and the term of the annuity is within the owner’s life expectancy, the annuity is actuarially sound. For example:

Rose is 85 and lives in Texas. Texas uses the Social Security Actuarial Life Table to determine life expectancy. According to this table, Rose’s life expectancy is 6.91 years or 82.92 months. Rose’s attorney recommends structuring her annuity to a 24-month term. She put $100,000 into the annuity with a monthly payment of $4,195.

24 (annuity term) x $4,195 (monthly payment) = $100,680

Rose will receive more than her initial investment of $100,000 back, and the 24-month term is within her 82.92-month life expectancy. This annuity meets the actuarially sound requirement.

Let’s take Barbara. She lives in South Carolina and is 85. However, her life expectancy will differ from Rose’s because South Carolina has its own life expectancy table. Barbara’s life expectancy is 6.59 years or 79.08 months. After discussing with her attorney, she decides to spread the annuity across her entire life expectancy, so the term will be 79 months. She invests $100,000 into the annuity. Her monthly payment will be $1,300.

79 (annuity term) x $1,300 (monthly payment) = $102,700.

The annuity term is within her life expectancy, and she receives more than her investment back; the annuity is actuarially sound.

The actuarial sound requirement is extremely important when using Medicaid Compliant Annuities and when planning for Medicaid. Make sure you understand this term to plan correctly.