Annuities can be a controversial topic among retirement planners, with some suggesting everyone should have an annuity while others insisting that no one should. As is typically the case, the truth lies somewhere in the middle: in some situations, an annuity can be an ideal solution for guaranteed income in retirement.
That’s why we were intrigued by this CNBC article, written early last year by reporter Sarah O’Brien, which we’re bringing back for another discussion. The report describes a use for annuities that may not have occurred to you. For some couples, purchasing the right kind of annuity can be a way to protect assets that might exceed Medicaid limits. The CNBC article nicknames these “Medicaid Annuities.”
Medicaid Qualification Puts Couples in a Bind
“It’s not uncommon for older couples to reach a point when nursing home care is needed for one spouse — and the cost isn’t something they were prepared for,” O’Brien writes. This is a topic we talk about constantly here at AgingOptions. Couples (and singles) who fail to make plans to cover the cost of long-term care are heading into a potentially devastating situation.
It still surprises some seniors to learn that Medicare doesn’t cover long-term care. That means, unless a senior in need of nursing care qualifies for benefits through the Veterans Administration, Medicaid is the only government-paid benefit that most can look to. The problem is that Medicaid limits how much in assets a couple can retain before benefits kick in.
“While Medicaid steps in when a person’s financial resources are minimal, some couples face the possibility of depleting their own assets to pay for nursing home care,” says O’Brien — a cost which, says Genworth, exceeds $8,800 per month, or nearly $106,000 a year. That cost often leaves the healthy spouse in a precarious financial situation.
Medicaid Limits Vary by State
When planning for Medicaid qualification, it’s important to note that limits on allowable income and assets – including home equity – can vary significantly depending on what state you live in. Because AgingOptions is based in Washington State, we consulted a website called Medicaid Planning Assistance for current limits. (This website is provided by the American Council on Aging.) For married couples where only one spouse needs care, the maximum allowable assets in 2023 (not counting home equity) total $148,620.
In Washington State, income isn’t really an issue for couples. “When only one spouse of a married couple applies for nursing home Medicaid or a Medicaid Waiver, only the income of the applicant is counted,” says the website. “The income of the non-applicant spouse is disregarded and has no impact on the applicant’s income eligibility.” The same is true for home equity: as long as the “healthy” spouse is living in the couple’s home, the equity is exempt from Medicaid calculations.
Medicaid Annuity Helps Avoid Painful Spend-Down
What if you have more than the limit and still need help? Couples whose assets exceed Medicaid limits are in a bind. “They realize they’re in a tough position because they have extra cash that will prevent them from qualifying for Medicaid initially,” certified financial planner Jeffrey Levine told CNBC. “So, the question is what can they do to preserve the value of those assets?”
The process of “spending down” assets generally involves paying off debt or making purchases that won’t hurt Medicaid eligibility. Sometimes couples end up self-paying the care bill for a period until their assets are sufficiently depleted. But, says O’Brien, “another option may be purchasing what’s called a Medicaid annuity. This strategy basically allows you to convert countable assets (for Medicaid eligibility purposes) into an income stream for the healthy spouse — and not have it factor into the calculation.”
But this suggestion comes with a warning label. “There are lots of details to know before running out to purchase an annuity for this purpose,” says CNBC. “And its usefulness may be limited to a situation with no better alternatives.” Financial planner Levine, sounds a negative note. “It’s not a great option,” he told CNBC, “but may be the best of a series of bad options.”
What to Know About a Medicaid Annuity
As CNBC explains, here’s how a Medicaid annuity can work. “Say a couple has $100,000 above their state’s asset cap,” O’Brien writes. “They would purchase an annuity with it that’s payable to the healthy spouse, based on their own life expectancy.” But there are restrictions. We consulted the Medicaid Planning Assistance website and here are some of the key ones in Washington:
- The annuity must be immediate, with payments starting immediately;
- It must be irrevocable, which means the money can’t be withdrawn;
- It must be a fixed annuity, not variable;
- It must be non-transferable;
- The State of Washington must be named as remainder beneficiary
There’s more to know, so as we said, do your homework. “If there’s a chance a Medicaid annuity could be useful in your situation, it’s wise to get guidance from a local attorney who specializes in elder law and knows your state’s laws regarding this strategy,” CNBC warns. And be sure to look into other options. Other state-sanctioned Medicaid qualification programs may be a better fit for your situation.
As always, please contact our partners at Life Point Law for answers to all your questions about Medicaid and other aspects of retirement planning.
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We have big news! The long-awaited book by Rajiv Nagaich, called Your Retirement: Dream or Disaster, has been released and is now available to the public. As a friend of AgingOptions, we know you’ll want to get your copy and spread the word.
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(originally reported at www.cnbc.com)