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What Makes an Annuity Medicaid Compliant?

We have recently received a number of calls inquiring about Medicaid compliant annuities.  Similar to QITs which I wrote about here a couple of months ago, there is much misunderstanding of what is and is not a Medicaid compliant annuity (MCA) and when it can be used.  First, let’s clearly define an MCA.

An annuity must be a single premium immediate annuity to be considered Medicaid compliant.  This means that the annuity is purchased with a single lump sum, known as the premium.  Annuities are insurance contracts in which the premium is given to the insurance company in return for an agreement in which the company pays the insured back his or her money over time with interest.  An immediate annuity begins the payments immediately within 30 days as opposed to a deferred annuity which does not start the payments until some future date.

So, is that it?  Not quite.  The annuity must also be noncancellable and non assignable.  Once purchased you are locked into a monthly payment schedule.  You can’t cancel the contract and get your remaining premium back in a lump sum and you can’t sell it to a third party for a lump sum.  In other words, you can’t change your mind after making the purchase.  

The payments under the annuity must also be made in equal monthly installments and the annuity must be actuarily sound.  This means the term of the annuity (the period of time over which the equal monthly payments are made) cannot exceed the life expectancy of the annuitant (the person purchasing the annuity).  The IRS has a life expectancy chart which is consulted for this purpose.

Finally, with certain limited exceptions, the annuity must name the State of New Jersey as primary beneficiary to receive remaining payments in the event the annuitant dies before the payment term is completed, up to the amount the State paid out in Medicaid benefits.

Many people assume that if they have an annuity that is already making regular monthly payments, they have a Medicaid compliant annuity.  That is rarely if ever true.   The only reason to purchase an MCA is to qualify for Medicaid.

So, how and when is this type of annuity helpful in a Medicaid setting.  We’ll cover that next week.