Annuities can be a surprisingly effective tool in Medicaid planning when one spouse faces a long-term care admission — in some cases, they may be the only option for preserving a family's savings. But they must be used with extreme care. Here are six critical considerations every family should understand before purchasing an annuity in this context.
Be very careful that the annuity is "irrevocable" — meaning the contingent payee cannot be changed after the policy is issued. We had a recent issue where the policy mentioned that the contingent payee could be changed if a particular form was used. The state asked about it. The form didn't exist, though it could exist under the right circumstances according to the insurance company. We spent the next two weeks trying to obtain relevant confirmation from the insurer to provide to the state. Don't let this happen to your family.
When applying for the annuity, make sure you specify how much the state is entitled to — not merely that they are a contingent payee. In the special instructions, write clearly that they are only entitled to payback for their expenditures, and specify whose expenditures you mean. The Tax Relief and Health Care Act changed the wording to indicate that payback should be for the institutionalized spouse, not the "annuitant." Make sure this distinction is explicit on the application.
Different companies define this differently. The company we work with defines a Medicaid compliant annuity as immediate, irrevocable, and payable within the life expectancy of the annuitant. Make sure you understand what happens if you don't use the Medicaid annuity option. With some companies, choosing the standard product means the annuity is deemed irrevocable and payable back to the state. Buying a regular term certain immediate annuity will not carry those protections — you would need to add them by endorsement.
Make sure any endorsements are attached to the policy itself and sent to the state if requested. This sounds simple — but missing endorsements have derailed otherwise solid plans. Verify this in writing with the insurance company before submitting anything to the state.
Confirm the post-death payout structure with both the insurance company and the state if necessary. The state does not receive payback in a lump sum. Instead, they receive the same periodic payment the annuitant received — if the annuitant was getting $250 per week, the state receives $250 per week until fully paid back. This means the family or community spouse (the spouse not in the nursing home) may wait a long time before receiving any remaining funds. Plan for this in advance.
Consider making the state an irrevocable payee while keeping the payees after that revocable. This approach preserves flexibility in planning without compromising Medicaid compliance — allowing the family to adjust beneficiary designations for subsequent payees as circumstances change.
"If used correctly, annuities are a good tool — surprisingly good and surprisingly fair when it comes to couples where one spouse is facing a long-term care admission. In some cases, it may be the only option for saving your money."
The bottom line: do not assume anything when using an annuity in planning for a nursing home admission. Every detail matters — from the application language to the endorsements to what happens the day after the annuitant passes. The stakes are too high to proceed without guidance from an experienced elder law attorney who works in this area daily.
Medicaid rules are complex and change frequently. The attorneys at Shober & Rock work in this area daily and can walk your family through the right strategy for your specific situation — including whether an annuity makes sense for you.