Promissory Notes Vs Medicaid Compliant Annuities

Checkbook and calculator

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

Click here to view our updated post on MCAs vs. Promissory Notes.

Insurance Agents assisting clients facing crisis Medicaid planning situations have a variety of tools at their disposal. Two of the most popular strategies are Medicaid Compliant Annuities and Promissory Notes. Both have very strict guidelines and not all states recognize Promissory Notes. When viable and under state and federal law, both can be effective tools in crisis Medicaid Planning situations.

What Is A Medicaid Compliant Annuity?

Medicaid Compliant Annuity (MCA) is a Single Premium Immediate Annuity (SPIA) that has added restrictions that allow it to meet the rules of the Deficit Reduction Act of 2005. In order for an MCA to be a viable option under the Deficit Reduction Act, it must:

  • be irrevocable
  • be non-assignable
  • provide equal monthly payments
  • contain zero cash value

Additionally, the MCA must be structured to be “actuarially sound” in accordance with each state’s Medicaid manual and must name the State Medicaid agency as primary beneficiary. This does vary from state to state. If you would like to view your state’s rules, we have compiled all that information in your Agent Access account.

MCAs are frequently used in crisis Medicaid planning to help preserve cash assets by transitioning them into an income stream that is payable to the individual receiving Medicaid benefits. This changes in the case of a married couple as the payments go to the spouse living in the community, also known as a community spouse (CS).

What are Promissory Notes?

Promissory Note involves a legal promise from one party that they will pay another party a specific amount of money, either on

  • A predetermined date
  • Or on demand

Promissory notes are used in crisis Medicaid planning situations to convert excess countable resources into an income stream and are typically made between family members.

In order for a Promissory Note to work in a crisis Medicaid case, the repayment term must be actuarially sound and prohibit the cancellation of the balance upon the death of the lender. The promissory note must also be non-assignable.

Which Medicaid Planning Strategy Works Best?

Every client will have different case facts requiring different approaches, but a Medicaid Compliant Annuity might be the best option in many cases because:

  • Promissory notes are considered either a countable resource or a divestment in many states.
  • Promissory notes are typically controlled by a family member, and, if something were to happen in the family, could become inconsistent. On the other hand, MCA payments are controlled by an insurance company, that guarantees monthly payments are scheduled. This takes away the stress and possible inconsistency of a promissory note and creates a reliable source of income.

A promissory note does make more sense if a client has an asset like a cottage that is intended to remain in the family as there is no liquidity with which to fund an MCA.