Using Annuities for Long-Term Care Planning

Insurance agents and financial institutions often advertise annuities as the perfect way to generate retirement income. While annuities can be a valuable retirement tool, if you are buying an annuity as part of a Medi-Cal planning strategy, you need to fully understand what you are getting. And whether an annuity makes sense as part of Medi-Cal planning may depend on whether you are married or single.

Historically, "immediate" annuities have been used as a Medi-Cal planning tool. In its simplest terms, an immediate annuity is a contract with an insurance company (or a private individual) under which the consumer pays the company a certain amount of money and the company sends the consumer a monthly check for the rest of his or her life.

Purchasing an immediate annuity is a way for people with assets in excess of Medi-Cal's limits to turn the assets into an income stream while avoiding a penalty for transferring the assets. The Deficit Reduction Act of 2005 (DRA) changed the requirements for annuities, making it a little harder to do this. Under the DRA, an annuity must meet the following requirements in order to avoid a transfer penalty:

•    The annuity must be irrevocable (meaning you can't cancel it)
•    The annuity must be actuarially sound (which means the annuity cannot cover a term longer than the purchaser's life expectancy and the payments expected during the annuitant's life expectancy must at least equal the cost of the annuity)
•    The payments must begin immediately (you cannot have deferred payments or a balloon payment)
•    Unless there is a spouse or a minor or disabled child, the state must be named as the remainder beneficiary (the person or entity that gets any leftover money) up to the amount of Medi-Cal provided.

Perhaps the best use of an annuity for Medi-Cal planning is for married couples, one of whom needs Medi-Cal-covered long-term care. An immediate annuity allows the couple to turn their excess assets into income for the Medi-Cal recipient's spouse. If a spouse purchases an annuity that meets the requirements under the DRA, he or she will receive the income from that annuity without having to contribute it to the Medi-Cal recipient's long-term care.

But, as a result of a 2006 amendment to the DRA, the spouse will have to name the state as the remainder beneficiary for costs incurred by the Medi-Cal recipient as well as herself if she ever receives Medi-Cal. However, such repayment would only occur if she were to die before the guaranteed payments under the annuity had expired.

Annuities generally have been less useful as Medi-Cal planning devices for single individuals. For example, if a single individual purchases an annuity, the income from the annuity counts as income and will have to be paid to the nursing home. Then, once the purchaser dies, any remaining money in the annuity will first go to the state to pay any unpaid nursing home bills. If there is any left over, it will go to beneficiaries named by the purchaser.

While immediate annuities can still be a powerful tool in the right circumstances, they must be distinguished from deferred annuities, which have no Medi-Cal planning purpose. Also keep in mind that even following the DRA, acceptance of immediate annuities for Medi-Cal planning varies from state to state. Be sure to consult with a qualified elder law attorney in your state before pursuing this strategy.