How to Evaluate Annuities for Medicaid Eligibility

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Katie Camann
Katie Camann February 26, 2024

As Content Marketing Specialist, Katie drafts and edits content across multiple platforms, including blogs, Industry News, emails, videos, website pages, and more. She conducts research and gathers up-to-date information to keep our clients well-informed.

Many seniors purchase annuities in order to have a stream of income during their later years. Unfortunately, if they eventually pursue Medicaid eligibility, they may encounter roadblocks associated with their annuity. That’s why it’s vital for you, as a senior market agent, to understand how to evaluate annuities for Medicaid eligibility.

As you know, there are generally two types of annuities: immediate and deferred. While immediate annuities begin making payments immediately, deferred annuities accumulate growth before annuitization. Once an annuity is annuitized and begins making payments, it can no longer be modified.

If you have a client seeking Medicaid eligibility, but you’re not sure which type of annuity they own or how to handle it, start by reviewing the contract’s payout terms, deferral period, surrender charges, and whether it is fixed or variable. These factors should help you determine the type of annuity as well as your client’s options for preserving the funds within the contract while also achieving Medicaid eligibility.

Read More: How to Spend Down Assets for Medicaid

Medicaid Compliant Annuities

A Medicaid Compliant Annuity (MCA) is a single premium immediate annuity that is designed to convert an individual’s excess countable assets into an income stream with zero cash value, thus accelerating their eligibility for Medicaid. An MCA must adhere to specific guidelines in order to be considered Medicaid-compliant. It must be irrevocable, non-assignable, and actuarially sound. It must provide equal monthly payments and name the state as the primary beneficiary (in most cases). Annuities that do not meet these requirements are considered non-compliant and may jeopardize your client’s Medicaid eligibility.

Non-Compliant Annuities

Since non-compliant annuities do not meet Medicaid’s requirements, they are treated as either a divestment or a countable asset. Depending on the type of annuity your client owns, they may be able to liquidate, transfer, or sell the policy.

How to Handle Tax-Deferred Annuities

In most cases, a tax-deferred annuity is considered a countable asset for Medicaid purposes because the policy often contains an accessible cash value. To accelerate eligibility, your client can typically either liquidate the contract or transfer the policy to a Medicaid Compliant Annuity using a Section 1035 Tax-Free Exchange. While this allows them to avoid the immediate tax consequences of liquidating the contract, they may still be liable for any surrender charge or penalties.

Dealing with Immediate Annuities

An immediate annuity consists of either a contract that was purchased as an immediate annuity or a deferred annuity that has been annuitized and is currently making payments. Contracts like these are often treated as divestments or improper transfers for Medicaid purposes. However, if the immediate annuity is revocable and assignable, it will likely be treated as an available asset for Medicaid eligibility purposes since the client is able to transfer the policy. If you have a client who has been assessed a period of ineligibility due to purchasing the annuity, they can accelerate their Medicaid eligibility by selling the policy on the secondary market and spending down the proceeds.

Read More: How to Handle IRA Funds in Medicaid Planning

Working with Experienced Annuity Providers

Fortunately, when you work with us, you have a team of experienced annuity providers on your side. In addition to providing Medicaid Compliant Annuities to your crisis planning clients, we offer complimentary annuity valuation as well as assistance with the entire transaction, from valuation to sale. Plus, you have the opportunity to earn a 5% commission on qualifying non-compliant annuity sales through our office! If you have a client who owns any type of annuity, please contact our office for a complimentary review of the contract. Either reach out to us directly or start a proposal online.

Watch Now: Mastering Non-Compliant Annuities in Medicaid Planning