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Medicaid and Annuities (Part 1)

       The topic of annuities comes up regularly when we get a call regarding the need for Medicaid benefits to pay for long term care.  Sometimes the caller has questions about whether it is a good idea to buy an annuity in anticipation of Medicaid.  Other times someone has been sold an annuity years before and now we must figure out what to do with it so he/she can qualify for Medicaid.

       Before we get into specifics, let’s define an annuity.  Very simply, an annuity is a contract which exchanges an asset in return for a stream of income paid over a set period of time.  These contracts are typically sold by insurance companies who offer a rate of return depending on how soon one starts receiving that income stream and how the assets entrusted to the insurance company are invested.

       Annuities come in many shapes and sizes but can be classified in a few ways.  For example, there are fixed annuities and variable annuities.  Fixed annuities provide a guaranteed amount based on the terms of the contract entered into.  On the other hand, payments from a variable annuity can vary because some or all of the funds are invested, such as in stocks and bonds, which can fluctuate in value.  Variable annuities, therefore, are more volatile and riskier for the account owner.

       Annuities can be immediate or deferred.  If I purchase an immediate annuity, I pay a single premium and begin to receive the payments not later than one year from the date of purchase and usually as soon as one month after purchase.  A deferred annuity is one in which my money grows with the insurance company based on the interest rate set in the contract.  I defer the start date of the payments until a later date, often years in the future.

       Annuities can also be categorized as private or commercial.  Commercial annuities are investments sold by insurance companies.  Private annuities are typically entered into between family members.  One setting might be the sale of a family business in which a younger family member can buy the business over time, making periodic payments which can provide a retirement income stream for the seller.

       Finally, annuities can be qualified or nonqualified.  A qualified annuity, is one that uses qualified or retirement accounts to purchase the annuity.  This might be an IRA, 401k or 403b.  Qualified annuities are subject to the same tax and required minimum distribution (RMD) rules as any other retirement account.  A nonqualified annuity is simply one that is purchased with nonretirement account money.

       Even these qualifications, however, do not tell the whole story about any particular annuity.  Many have surrender charges that discourage owners from withdrawing money before a certain time by imposing charges or penalties for doing so.  Others have riders that include add on features.  (In August, 2016, for example, I wrote about annuities with long term care riders that can be used for help fund long term care needs.)

       So, how are these different types of annuities treated by Medicaid?  Are they countable as an asset or treated as income?  Must they be spent down?  Next week I’ll tackle those questions.