Understanding How a Medicaid Compliant Annuity Can Help You

Posted by Bill Bruce on Mar 2, 2023 11:00:00 AM

nurse talks to older woman in long  term care405730276As Americans age, they face the reality of needing long-term care in their retirement years. Unfortunately, many people determine that the cost is high, and it may seem like it’s too late to financially plan for nursing home care and other forms of long-term care. 

Experts estimate that 70 percent of those who turn 65 years old will have nearly a 70 percent chance of needing long-term care services. And that comes with a hefty price tag — the average estimated lifetime cost for formal long-term care is $172,000.

Medicaid is the go-to government program for earning financial benefits to help pay for these soaring costs of long-term care. However, it’s difficult to meet the eligibility requirements, which is where Medicaid compliant annuities can be helpful. 

How Medicaid Eligibility Works

As a joint federal and state government program, Medicaid helps provide health coverage to millions of Americans, including people living with disabilities, children, pregnant women, and seniors. Federal law requires that states cover certain groups, like low income families or those receiving supplemental security income (SSI).

When the Affordable Care Act passed in 2010, a new methodology for determining financial eligibility was introduced. It’s based on modified adjusted gross income (MAGI), which considers tax filing relationships and taxable income. This methodology is also tied to the federal poverty level. 

This is where medicaid compliant annuities can help people lower their taxable income and assets to potentially qualify for Medicaid, which will help pay for long-term care services. 

What Is a Medicaid Compliant Annuity?

As you may know, the concept of how an annuity works can seem rather complicated. But when you break down the basics, it’s easier to understand the benefits of using annuities. 

An annuity is a financial product that pays out money over time in exchange for an upfront payment. This account earns tax-deferred interest, so as an annuitant, you can get a reliable source of income throughout your retirement years. 

Every year, annuities are paid to the policy holder, and those earnings can be used to help people who need to save for retirement, to provide long-term care benefits for those who don’t want to deplete their assets, or to supplement retirement income streams. 

The four primary types of annuity products include: 

  • Immediate Annuities
  • Deferred Annuities
  • Fixed Annuities
  • Variable Annuities

woman discusses medicaid compliant annuity with father442450160How Medicaid Compliant Annuities Work

Medicaid compliant annuities are designed to help you protect assets from being counted when you’re applying for Medicaid. This way, you’re able to meet eligibility requirements.

Essentially, they enable you (the annuitant) to convert liquid assets into an income stream to prevent your assets from being counted when you need to meet eligibility requirements. 

Some of these requirements include the following:

  • The annuity must be irrevocable — you cannot withdraw funds out of the annuity except through regular payments.
  • It must be non-assignable, showing no cash value.
  • It must be non-transferable, so it can only be in your name, not any other party.
  • It needs to have a term limit that's shorter than your life expectancy.
  • It should specify the period of time for which payments will be made to you.

As an immediate annuity, Medicaid compliant annuities are purchased with a lump sum payment. Depending on the terms of your contract with your insurance company, you can earn the income from that account on a monthly, quarterly, and annual basis. 

Who Needs a Medicaid Compliant Annuity?

There are several factors you should consider when determining if you should start shopping for Medicaid compliant annuities. If any of the following situations apply to you, it’s time to contact a trusted insurance provider

Those Who Need Long-Term Care

As noted above, long-term care costs are high and they can add up quickly. For example, the American Council on Aging reports that in 2021, the nationwide average annual cost of nursing home care was $94,900 for a shared room and $108,405 for a private room. 

Often, these costs quickly drain Americans’ assets, leaving their families with costs they can’t afford. Medicaid can be a vital lifeline in this situation, but individuals must meet strict income and asset limits to qualify, which is how an annuity can help. 

Those Who Have Excessive Assets

If your financial resources and assets exceed your state’s Medicaid eligibility requirements, then you're not going to earn those benefits. This is why it’s important to plan and be proactive with managing your assets before you need to apply for Medicaid. 

Consider how to effectively move your assets without compromising your Medicaid eligibility or your financial future for your family. Using an annuity may be your best option to reduce assets to meet the strict requirements defined by your state. 

Those Who Reached Their Limit for Insurance Benefits

If your insurance reaches its limit, you’re going to be responsible for paying for the remaining years of your long-term care services. And as noted above, this can be a significant drain on your financial health, especially given the rising costs. 

With a Medicaid compliant annuity, you can earn government benefits to help pay for your care after your insurance coverage runs out. 

Benefits of a Medicaid Compliant Annuity

Effective strategies like getting a Medicaid compliant annuity are successful because they provide the following benefits:

Meet Medicaid Asset Requirements

While Medicaid eligibility guidelines vary by state, an individual’s assets are commonly limited to $2,000. For this calculation, married couples are considered to own assets jointly. 

Items such as a primary home, vehicle, and personal and household items are generally excluded from this total, and in some cases, a spouse’s retirement savings account will also be excluded. You can learn whether your state counts spousal retirement accounts when determining Medicaid eligibility by checking this chart.

Additionally, most states provide for a Community Spouse Resource Allowance, which allows spouses who are not applying for Medicaid assistance to retain a much larger share of assets (commonly an additional $130,380). This is intended to prevent spouses of Medicaid recipients from having too little income and assets to meet basic living expenses.

Meet Medicaid Income Requirements

Your income is another significant factor in determining your Medicaid eligibility. As of 2021, most states require an individual’s income to be less than their cost at the facility in order to qualify for benefits. 

Some states also impose an additional cap of $2,382, which requires the use of a special, income-only trust. Unlike assets, a non-applicants spouse’s income is not counted when determining Medicaid eligibility.

Find the Right Medicaid Compliant Annuities

The purchase of an annuity, either by the applicant or the spouse, can help many Americans meet Medicaid eligibility guidelines. 

If you’re trying to gain Medicaid eligibility to pay for long-term care services, it’s critical that you work with a financial professional who is experienced in Medicaid planning before deciding to purchase an annuity. Medicaid guidelines are strict and complex. You must ensure that you’re meeting both income and asset requirements for your state and that any annuity you purchase to meet them is Medicaid compliant.

ELCO Mutual has been helping seniors meet their financial planning needs since 1946 and is experienced in providing Medicaid compliant single-premium immediate annuities (SPIAs). Learn more about ELCO’s Medicaid compliant annuities by reaching out to our team of experts today. 
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Topics: Annuities