Monday, April 2

Medicaid Compliant Annuity Payouts: Life Only, Period Certain, or Life and Period Certain

When investing in an annuity providing immediate payments an applicant can usually select  one of three different payout options:

    Life-Only Payout:  Payments continue as long as the owner/annuitant lives.  Upon death, the payments cease, regardless of how long the policy has been in force.
    Period Certain Payout:  Payments are guaranteed for a specified number of months or years.  Once the specified period is reached, no further payments are made.  If death occurs prior to the specified period, the remaining monthly payments are made to beneficiaries.
    Life and Period Certain Payout:  Payments are made in a combination of the above.  A specified term is made, and payments are guaranteed to be provided until that time.  Should the owner/annuitant predecease the term, the remaining payments are made to beneficiaries.  Should the owner/annuitant outlive the term, payments will continue until death.

99% of Medicaid Compliant Annuities have terms consisting of a period certain payout.  Although on rare occasions a life payout can be acceptable.  However, many elder law attorneys ask, how do you determine if a life payout is "actually sound?"
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For purposes of an example, consider an 80-year-old female Wisconsin resident who invests $100,000 into an immediate annuity containing a life payout and seven-year period certain.  The annuity provides her with monthly income of $806.04 for at least seven years.  If she does not predecease the seven-year period, she will continue to receive payments until her death.  If she does predecease the seven-year period, the remaining payments up to year seven will be provided to the policy beneficiaries.  In Wisconsin, an 80-year-old female has a Medicaid life expectancy of 9.43 years/113.16 months.  When the monthly payout of $806.04 is multiplied by the 113-month Medicaid life expectancy, the anticipated payout is $91,082.52.  In that this figure does not exceed what was invested, the annuity is not deemed actually sound.  This is the usual result; very few life payouts are determined to be actually sound.

Notwithstanding, several states' annuity rules explicitly outlaw the use of life payouts.  The Arizona Health Care Cost Containment System's Eligibility Policy Manual subsections 706.01-706.17 states that in order for an annuity to be considered a compensated transfer it must be "a period-certain annuity that will return the full principal and interest within the annuitant's life expectancy..."  Furthermore, the fairly new Illinois Register Volume 35, Issue 46, $ 120.388 states that "period certain annuities that payout over a term less than the person's expected life shall be treated as actually sound.

Lastly, consider the beneficiary designation requirement.  An annuity containing a life-only payout has no beneficiary designation in that upon the death of the owner/annuitant payments cease.  As such, a life only payout would not be acceptable for Medicaid eligibility purposes.  However, a life and period certain payout, as outlined above, holds a beneficiary designation in the event the owner/annuitant predeceases the period certain.  This affords the ability for the owner/annuitant to designate the state Medicaid agency as a beneficiary.  A life payout option may not be terribly advantageous for an institutionalized individual, but instead may be advantageous when used by a community spouse.  That is, if one can be obtained that is actually sound.

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