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Private Funds: Annuities
Understanding how Annuities Can Pay for Senior Care

An annuity can ensure that a retiree is able to afford assisted living. Immediate annuities promise a steady stream of payments, no matter how long you live. The catch is that you must hand a large chuck of money over to an insurance company that you can't get back for emergencies or give to heirs, and the costs of this investment can sometimes be high. By providing a guaranteed monthly income, these investment funds will best supplement retirement benefits.

When choosing an annuity, the holder of the annuity can select to send a single payment or a series of payments to the insurance company. The insurance company then, in return for the premium payment(s), sends an annuity, which is a series of regular payments over a specified and defined period of time. Below we are going to briefly cover the two most common types of annuities:

Immediate Annuity

With an immediate annuity, you receive payments immediately after making your initial payment. Immediate annuities are best for people who require immediate income from their annuity. With an immediate long-term care annuity, the insurance company sends a specified monthly income in return for a single premium payment. It is available regardless of current health status. It also has no bearings on whether a person has long-term care insurance or not.

Immediate annuities sold with joint and survivor payout benefits or period-certain options could become problematic. Joint-and-survivor payouts on annuities are a "double-edged sword." For example, if the spouse winds up in the nursing home s/he may have too much in assets for Medicaid to cover those costs.

What to Know Before Purchasing an Immediate Annuity

Understand your future needs. The amount received may not satisfy long-term care expenses and inflation can reduce the value of the monthly income.

Deferred Annuity

With a deferred annuity, you receive payments at a later date, usually at retirement. Most deferred annuities allow for regular withdrawal payments beginning thirty days after buying an annuity, up to 10% per year, in most cases. With a deferred annuity you can invest either a lump sum all at once or make periodic payments, either fixed or variable. That money grows tax-deferred until you wish to start receiving payments. Studies show that deferred annuities comprise the vast majority of all annuity sales in the U.S., and are best suited for the long-term costs of health care for the elderly.

Annuities for senior care costs
Understanding Annuities

The stream of guaranteed income goes for a period of time or for the rest of one's life. The amount depends on the initial premium, the person's age, and gender. Women receive a smaller monthly payment over a longer period of time than do men of the same age, due to longevity.

Oftentimes, an elder law attorney has to undo deferred annuities so that a client can qualify for Medicaid. If this happens, the client may pay steep surrender fees. Or, annuities can convert to actuarially sound immediate annuities for Medicaid.

The deferred long-term care annuity is available to people up to age 85. A person can receive a stream of monthly income for a specified period of time in exchange for a single premium payment. The annuity creates two funds: one for long-term care expenses and another separate fund that you can use however you desire.

To qualify for a deferred long-term care annuity, you must satisfy some health criteria.

What to Know Before Purchasing a Deferred Annuity:

Consider these things when considering a deferred long-term care annuity:

  • If the fund is not used, it passes on to heirs. A deferred annuity that passes on to heirs can affect your Medicaid eligibility.
  • Long-term care expenses may run higher than the monthly installments.
  • The long-term care portion may satisfy the tax-qualified long-term care policy requirements but has a complicated effect on taxes. Consult your tax professional before purchasing one.
  • It can affect Medicaid eligibility at the time a person needs nursing home care and runs out of money. It's having the wrong kind of annuity that could prevent the person from qualifying for Medicaid.

Annuities Impact on Medicaid Benefits

In most states, an annuity is exempt as an asset for Medicaid when:

  • The annuity is binding and non-transferable and cannot be redeemed or sold. So, deferred annuities are countable as assets for Medicaid. If the annuity can withdraw cash, counts as an asset.
  • The annuity has to pay you back, the entire cost within the life expectancy set forth in tables disseminated by Medicaid.

Caution: Be wary of annuities sold as a "Medicaid annuity."

The Benefit of Annuities

You receive money regularly, even if the premium costs runs out. So, if you have a long life, you get more back than you put in. The company underwriter takes the risk that if you die early, they benefit.

Annuities are not counted as assets by Medicaid when you apply for government assistance. The income from the annuity counts as a "resource," but the larger sum originally used for to buy, is not. Someone applying for Medicaid medical coverage allows $2,000 ($3,000 for a couple) in cash, savings, or other assets, plus a number of other assets that are "exempt" (not counted) from Medicaid eligibility rules.

When investing in annuities, beware of deceitful marketing schemes selling annuities that target susceptible seniors, like Medicaid annuities. You'll find them sold at adult education seminars, telemarketing schemes, and through biased advertising. It's more common than most seniors realize.

Always use your common sense; if it sounds too good, it possibly is a scam.

Other Tips

Choose a reputable company when you buy an annuity, and work with a representative who comes highly recommended. Ask the sales representative to help you think through some of the details, like inflation.

Carol Marak
Carol Marak

After seven years of helping her aging parents, Carol Marak has become a dedicated senior care writer. Since 2007, she has been doing the research to find answers to common concerns: housing, aging and health, staying safe and independent, and planning long-term.