Many people have annuities because they are one of the first vehicles proposed by a bank when a person is unhappy with the bank CD rates. The annuity is a financial contract with an insurance company where you agree to give them money to hold for a certain amount of time and they agree to give you payments or a set interest rate.  Annuities have many different characteristics and terms.

An annuity is usually not a great idea for seniors unless recommended by a Certified Elder Law Attorney for complex Medicaid planning.

There are many different types of annuities.

Qualified or Non-Qualified

A Qualified Annuity is funded with pre-tax assets.  Any withdrawal from a Qualified Annuity must be taxed at your current income tax level.  The entire amount is taxable rather than just the income.  Any amount that the annuity made is deferred from taxation until you make the withdrawal and because the entire amount of the withdrawal is taxable, there is no additional tax. A non-qualified annuity is funded with after tax funds and therefore the only tax you must pay is on the income created by the annuity.  Many times this is the difference between what you put into the annuity in the beginning and what it is worth when you cash it in.

Fixed or Variable

When a person places money into a fixed annuity, the annuity company takes control of the money and agrees to make fixed payments under the contract for a time period.  The time period is either based on the life of the person or a set time period such as 5 or 10 years.  If you place money into a fixed annuity for your life, and you die before your life expectancy, the life insurance company keeps your money.  If it is for a set number of years, you (or your heirs) get payments for that amount of time.  It is usually less than the life annuity but provides more protection for the principal.

A variable annuity makes regular payments to you for life, or a certain time, but the amount of the payment is tied to the performance of the underlying investments.  Many times, the company agrees to a certain amount but lets you share in the increase in value of the investments.

Deferred or Immediate

An Immediate annuity begins payments right away; where a deferred annuity holds your funds and they increase in value.  You can defer your receipt of these funds.

Medicaid compliant annuities

For an annuity to be exempt for Medicaid purposes it must be an immediate fixed annuity that agrees to pay out for no longer than the Medicaid applicant or the spouse’s life expectancy.    It must be non-assignable, non-transferrable and have no cash value.  There must be no change in the payment as an option.  Further for a single person, the annuity must name the State of Ohio as the remainder beneficiary for the remaining payments.  The State may be named second to a healthy spouse.

Annuities for Medicaid planning are useful in two circumstances:

  • The single person in a nursing home, who is not going home who wants to transfer assets to a child.  The elder law attorney will determine what amount to transfer and what period of time to utilize to weather a period of ineligibility imposed by the State Medicaid office
  • The community spouse might purchase an annuity to convert an IRA or other assets into an income stream and an exempt asset rather than a countable asset that is counted against their protected asset amount.

Annuities are very complicated and not all annuities are Medicaid compliant.  Consulting a certified elder law attorney is critical before planning.