Disclaimer: Since Medicaid rules and insurance regulations are updated regularly, past blog posts may not present the most accurate or relevant data. Please contact our office for up-to-date information, strategies, and guidance.
In order for an annuity to be considered Medicaid compliant, it must meet certain provisions set forth by the Deficit Reduction Act of 2005 (“DRA”). The annuity must:
- Be irrevocable and non-assignable
- Be actuarially sound
- Provide equal monthly payments
- Name the state Medicaid agency as a beneficiary in the proper position
These requirements are rather straightforward – the annuity cannot be transferred or assigned, the annuity cannot be structured with any deferral or balloon payments, etc. But what does “actuarially sound” mean specifically? How does an individual know if an annuity is actuarially sound, and does the definition change from state to state? Continue reading for these answers and more.
Definition of Actuarially Sound
Almost every state considers an annuity actuarially sound if the investment amount is returned to the owner within their Medicaid life expectancy. This figure is determined by the life expectancy table published by the Chief Actuary of the Social Security Administration, or by a state’s specific life expectancy table, as outlined in each state’s Medicaid manual. You may find your state’s life expectancy table on our state-specific pages. In summary, the term of the annuity must either be equal to or shorter than the Medicaid life expectancy of the owner/annuitant.
Consider Cindy, an 83-year old woman in Indiana. Indiana uses the SSA life expectancy table, so we can determine her Indiana Medicaid life expectancy is 8.04 years / 96.48 months. As such, the term of Cindy’s Medicaid compliant annuity must be 96 months in length or less. To see if the annuity is actuarially sound, multiply the monthly payout by the annuity term. If the resulting figure is more than the initial investment amount, and the term of the annuity is within the owner’s Medicaid life expectancy, the annuity will be considered actuarially sound.
| Period Certain | Single Premium | Monthly Payout | Payout Within 96 Months |
|---|---|---|---|
| 96 Months | $35,000.00 | $390.00 | $37,440.00 |
Using this test, we can determine that Cindy’s annuity is actuarially sound.
Life Annuities
The Krause Agency often receives questions regarding “life” annuities – annuities that make payments through the lifetime of the annuitant. All benefits cease when the individual passes away. This is the case whether the annuitant dies tomorrow or twenty years from now. There are some variations to this type of policy, including a “life with period certain” option, or an “installment refund” option that ensures the owner’s initial premium is not forfeited in the event of an early death. In almost all cases, however, this type of annuity is not considered actuarially sound.
Many may think the contrary – after all, what could be more “actuarially sound” than an annuity that is literally based on the lifetime of the individual? While a life annuity may seem actuarially sound, it will not pass the actuarially sound test previously discussed. The monthly payments will be lower than an annuity structured with a term strictly within the Medicaid life expectancy; therefore, the initial investment amount will not be returned to owner/annuitant within his or her Medicaid life expectancy. Consider Susie again:
| Period Certain | Single Premium | Monthly Payout | Payout Within 96 Months |
|---|---|---|---|
| N/A | $35,000.00 | $290.00 | $27,840.00 |
Variation Among States
The actuarially sound definition described above does not require a minimum term for MCAs, only that the annuities cannot exceed a certain maximum term based on the individual’s Medicaid life expectancy. Two specific states, do require a minimum term:
- Oregon
- Washington
These states place additional restrictions on the actuarially sound requirement for MCAs:
- 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.
Because these states place restrictions on how short the annuity term may be, some of the common planning strategies utilized by The Krause Agency are not viable in these states – particularly the gift/annuity strategy (“half-a-loaf plan”), as this strategy typically involves an annuity significantly shorter in length than the owner/annuitant’s Medicaid life expectancy. All other states have adopted the traditional meaning of the actuarially sound requirement described above.
If you have any questions regarding your state’s interpretation of this requirement, please contact one of our Benefits Planners or submit your question to [email protected].
