Question: I purchased an annuity in 2007 in the hope that it would be protected from nursing home costs. I have heard some things in the news that make me wonder whether that money will have to go to the cost of nursing home care. What is the truth?
Answer: By itself, an annuity is either an asset, in which case it will be subject to the asset test for Medicaid qualification or an income stream, in which case it will be subject to the owner’s monthly patient pay amount. There is nothing about an annuity that protects it from the cost of nursing home care. But annuities can be valuable tools in asset protection planning.
Exactly how the annuity is treated will depend on whether the annuity has been annuitized (turned into a monthly income stream). As noted in Wikipedia:
There are two possible phases for an annuity, one phase in which the customer deposits and accumulates money into an account (the deferral phase), and the annuity phase in which the insurance company makes income payments until the death of the customers (the “annuitants”) named in the contract. It is possible to structure an annuity contract so that it has only the annuity phase; such a contract is called an immediate annuity. Annuity contracts with a deferral phase are similar to bank CDs and have a growth phase prior to distribution of income, and are called deferred annuities. The newest incarnation is the fixed, equity indexed product which can be either a fixed annuity or pure life insurance.
Annuities in the deferral phase would be treated as an asset and accordingly subject to either the $2,000.00 asset limit for individuals or the more complex rules for spouses.
This situation is complicated further by the new rules under the Deficit Reduction Act that requires you to name the state of Michigan as a beneficiary in order to avoid having the annuity treated as a gift and subject to a penalty period.
Does this mean that annuities cannot be used to shelter assets from the cost of long-term care? No. There are still viable methods of planning with annuities, but a successful outcome will require a thorough understanding of the rules for Medicaid qualification. It makes sense to have annuities reviewed by an elder law attorney prior to purchase. If you have already purchased an annuity and have questions about your exposure to the cost of long-term care, it makes sense to have your annuity contract reviewed by an elder law attorney.