What is an Annuity?
An annuity is an insurance product whose primary purpose is to pay income to an individual. It is generally used as part of a retirement plan. An individual will invest a certain sum of money for the promise that payments will be made to the individual at a future date. These payments can be made monthly, annually or in a lump sum payment.
In an elder law context, an annuity may not be such a good idea (my opinion) especially where the applicant is not married. In fact, due to the strictness of the Florida Medicaid rules, annuities are really only useful in limited circumstances involving married couples and where the annuity is structured to provide income for the community spouse.
Why are annuities useful in a limited basis in Medicaid planning?
Due to the Medicaid laws, annuities must meet certain requirements in order to allow a person to qualify. They must be immediate annuities (meaning they pay you now), irrevocable (meaning you cannot cash it out once it is established), must be actuarially sound (i.e., cannot be for longer than annuitant’s life expectancy), must be non-assignable and non-commutable (i.e., it cannot be converted to cash), and must be paid in equal installments. Additionally, the state of Florida must be named as the remainder beneficiary for the total amount of Medicaid benefits paid on behalf of the Medicaid applicant. However, if there is a community spouse or disabled child, the State of Florida is listed as a secondary beneficiary behind the community spouse or minor or disabled child.
An immediate annuity is considered income (and not an asset) for Medicaid purposes. The VA (if looking at Aid and Attendance benefits) considers an immediate annuity as income only, as well. A tax-deferred annuity, on the other hand, is an investment in an insurance product that grows tax deferred until the owner withdraws money from, or annuitizes, the contract. These types of annuities are considered a countable asset for both Medicaid and VA benefit purposes.