Many annuities are intended as retirement or investment plans, purchased without intent to gain eligibility for Medicaid.  Some annuity plans, however, may be considered as transfers of property with intent to gain eligibility.  In either situation, annuities may or may not be considered as available resources.  Because annuities can be written in many different ways, this memorandum will not address all types.  Any type of annuity not discussed in this memorandum should be submitted to State Office for a determination, using the IM-14 process.

Determining whether there is a transfer of property is based on the actuarial soundness of the policy.  The policy should be constructed so that it is reasonable to expect that the policy's value will be returned to the annuitant during the annuitant's lifetime.  Thus, transfer penalties are likely to be involved if the policy is to be paid out over a time greater than the life expectancy of the annuitant or if regular payments from the annuity are small with the intent of leaving a substantial  value for the beneficiary at the end of the policy's term.  We do not expect staff to determine the soundness of every annuity.  However, certain types of annuities may be readily handled in the county office.  The rest of this memorandum gives county offices definitions and guidelines they need to decide whether to send an annuity to state office and to determine transfers and resources for those annuities kept in the county office.

Definitions for Annuities

Annuities involve persons in any of three capacities: as owners, as annuitants, or as beneficiaries.

• The owner is the person who buys the annuity or to whom the ownership has been transferred.

• The annuitant is the person who will receive periodic payments from the policy.

• The beneficiary is the person who will receive benefits (a lump sum or periodic payments, in most cases) after the annuity stops, either because the annuitant has died or because the annuity's term has expired.

Other terms used in discussing annuities:

Single Premium Annuity:  An annuity purchased by giving the insurance company one single payment (premium) to fund the annuity.

Immediate Annuity:  An annuity which begins periodic payments in the immediate next period.  (For example, if an annuity will pay monthly, an immediate annuity begins paying the month following purchase.)  Opposed to deferred annuity, in which payments do not begin immediately.  This is usually to allow for completing purchase of the annuity be accumulation of installments or for deciding later how an annuity will be paid out.  Some policies will give an "annuity start date", especially if the annuity is deferred.

Period Certain:  The period over which payments are guaranteed to be made to the annuitant, provided the annuitant lives for the entire period certain.  If the annuitant dies before the period certain has expired, the beneficiary may receive the payments for the remaining term of the period certain, or may receive instead a lump sum or some other benefit.  Opposed to life annuity, which pays during the life of the annuitant, without regard to how long the annuitant lives.

You will always need to know these three things:

• Is the annuity revocable?  (Does it have cash surrender value?)
• Who is the owner?
• Who is the annuitant?

If the policy is irrevocable and the Medicaid claimant or spouse is the owner, you will need to know these points:

• Who is the beneficiary?
• Does the policy guarantee payment over a certain period?  (Is this a period certain annuity?)
• Do the annuity payments begin as soon as the policy is purchased?  (Is this an immediate annuity?)
• What is the life expectancy of the annuitant at the time the annuity payments begin?
• Will the regular annuity payments exhaust the annuity policy over the period certain or the life expectancy of the annuitant, whichever applies?  (Is the intent to leave a remainder for the beneficiary when the annuity stops?)  If there is expected to be a remainder, what is the expected value of the remainder?

Consult the life expectancy tables in Chapter XI, Appendix C (issued with this memorandum) to find the life expectancy of the annuitant.  Note that there are two tables, one for females and one for males.  If the policy names both members of a married couple as annuitants, then use the table which yields the longer life expectancy.  The tables were published by the Health Care Financing Administration (HCFA) specifically for use in dealing with annuities.  Do not use these tables for determining life estate values; continue using the Carlisle Table for life estates, as described in Chapter XI, Appendix A.

To estimate whether the annuity payments will exhaust the policy, multiply the periodic payment by the expected number of payments; this gives you the total payout.  If the annuity is period certain, the expected number of payments is simply the number of payments per year times the years of period certain; some policies will express the period certain in expected number of payments.  If the annuity is life, the expected number of payments is the number of payments per year times the annuitant's life expectancy at the time the payments start.  If the total payout is greater than the original premium, the policy will probably be exhausted.  If it appears the annuity will not be exhausted and it is period certain, obtain the expected value of the remainder from the insurance company and send the annuity and expected value to state office.

Example:  Mr. Caslon purchased an annuity for $20,000 to be paid over a 10 year period certain with monthly payments of $200.00.  The total payout is $24,000 (10 years X 12 payments per year X $200 per payment), which is greater than the premium, so we can assume the policy will be exhausted.

Example:  Mr. Garamond purchased an annuity for $80,000, with payments to be made over a 20 year period of $100 per month.  His daughter, Joanna, is the beneficiary.  The total payout is $24,000, which indicates that he intends for his daughter to receive a substantial amount when the annuity expires.  Ask the insurance company to estimate the value of her benefit at the end of the annuity period.

Example:  Mrs.  Kaufmann purchased a $45,000 life annuity.  She was 63 years old at the time.  She will receive monthly payments of $125, to begin when she is 65.  She has named her daughter, Nan, as her beneficiary.

Mrs. Kaufmann's life expectancy at the time the payments begin (age 65) is 18.96 years.  The total anticipated payout would be 18.96 X 12 payments per year X 125 = 28,440.  This is less than the premium.  Therefore, obtain the expected value of the remainder when she reaches age 84 (65 + 18.96) from the life insurance company and send to state office.

If the Medicaid claimant is the annuitant, count any payments from the annuity to the claimant as unearned income.  It does not matter whether the claimant is also the owner; it does not matter whether the annuity is revocable or irrevocable.

Revocable Annuities

If the policy has a cash surrender value (if it is revocable), then there is no transfer penalty.  Evaluate the policy for its availability as a resource.

If the Medicaid claimant or the spouse is the owner, then the cash/surrender value, minus any surrender fees or other charges, must be counted as an available resource.

Example:  Mrs. Bodoni applied for Medicaid in June 1995.  Mr. Bodoni bought an annuity for $50,000, also in June 1995, which can be surrendered with a 7% surrender charge in the first year.  Consider $46,500 ($50,000 - $3,500) as the available resource from the annuity.

Example:  Herman Melior bought a $40,000 annuity for his daughter, Katherine.  Katherine has applied for Medicaid.  Because Katherine is not the owner of the policy, do not consider any of the policy's value as an available resource to her.

If the policy is irrevocable (if it has no cash surrender value), then its value is not an available resource to the Medicaid claimant or the spouse, regardless of the claimant's or spouse's capacity in the annuity.  Therefore, the only remaining question is whether there is a transfer of property.

If the Medicaid claimant or the spouse is the owner, but neither of them is the annuitant and neither of them is the beneficiary, then the entire amount of the premium should be considered a transfer of property.  Use the appropriate transfer policy based on the date the annuity was purchased.

Example:  In the above example, Herman Melior bought an annuity for his daughter, Katherine.  If his wife, Agnes, applies for Medicaid, examine the annuity to see whether Herman can recover any of the premium.  If not, then the policy is considered irrevocable and the $40,000 counts as a transfer of property, effective the date he bought the policy.  The full amount of the transfer would count against Mrs. Melior.

Irrevocable, period certain annuities (claimant or spouse is owner and one of them is annuitant)

There is no transfer penalty if:

• the annuity is paid over a period certain,

• the life expectancy of the annuitant when the payments begin is greater than or equal to the length of the period certain AND, 

• the regular payments from the annuity will exhaust the annuity at the end of the period certain.

Example:  Mr. Morris just bought an annuity for $30,000 over a 10 year period certain.  It will pay him $290 per month.  Payments will begin immediately.  His age is 62.

The total payout will be 120 X $290 = $34,800, so the policy can be assumed to be exhausted.  His life expectancy at the time of purchase is 16.99 years.  which is greater than 10 years.  Therefore, there is no transfer penalty, since he is expected to get full value back from the policy.

    (Period certain - life expectancy) X premium
                                period certain

Example:  Mr. Currier purchased an immediate annuity of $30,000 for a 10 year period certain.. His age at the time of purchase was 95.  His life expectancy is 2.90 years, which is less than 10 years.  Therefore, a portion of the premium will be considered a transfer property.  The transferred amount is

(10 - 2.90) X 30,000 / 10 = 7.10 X 30,000 / 10 = 21,300

Example:  Mr. Baskerville purchased an annuity of $40,000 for a 10 year period certain.  Monthly payments will be $100.00.  The total payout is $12,000 less than the premium, so submit the policy to state office.

There is no transfer penalty if:

• the annuity is paid over the life of the annuitant AND

• the regular payments from the annuity will exhaust the annuity over the life expectancy of the annuitant.

Example:  Mr. Palatino, 75 years old, bought an immediate life annuity for $35,000, with monthly payments of $350.00.  His life expectancy at the time of purchase was 9.24 years.  The expected total payout is 9.24 years X 12 payments per year X $350 per payment = 38,808.00.  He is expected to receive full value for the premium, so there is no transfer penalty.

Transfer = premium - total payout

Example:  Mr. Chancery, 82 years old, bought an immediate life annuity for $70,000 which will pay $400.00 monthly.  His life expectancy at the time of purchase was 6.21 years.  The expected total payout is $29,808.00 [6.21 years X 12 payments per year X $400 per month], which is less than the premium.  The transfer is $70,000 - $29,808 = $40,192.

Submit any annuities which do not fall into any of the above categories to state office for determination.

• Review this memorandum with all appropriate staff.
• File the Life Expectancy Tables in Chapter XI, Appendix C at the end of the chapter.