A major fear for most married clients — regardless of age — is that they will outlive their income. For older clients, this concern can magnify quickly when one of the spouses requires long-term care.
When a spouse becomes ill, a couple’s attention most often is focused on finding the best care facility. However, they may not be thinking of one important factor: What happens to the financial stability of the healthy spouse? The average cost of a semiprivate room in a nursing home has increased to $6,844 a month, according to the most recent Genworth “Cost of Care” study. Many clients haven’t thought about how this cost could impact their overall financial situation.
The High Cost of Long-term Care
Consider this example: You have worked with a husband and wife — Greg and Jennifer — for more than 15 years. During this time, you’ve helped them build and maintain a net worth totaling $426,500 in countable assets. Now well into retirement, Greg suddenly experiences a stroke and requires full-time nursing home care. In the middle of determining the best approach for Greg’s care, the couple has an important decision to make. How can they fund Greg’s care and still maintain Jennifer’s standard of living?
There are a few ways the couple could proceed.
First, they could pay for Greg’s care privately, which would cost the couple about $7,000 a month as they wouldn’t be eligible for Medicaid assistance at their current income level. With $84,000 per year going toward nursing home costs, the couple’s hard-earned savings could be gone in about five years if they pursue this option.
Alternatively, the couple could convert their assets into a Medicaid-compliant annuity, which acts as a spend-down vehicle. Purchasing an immediate annuity will put the bulk of the couple’s income in a safe place that preserves it for Jennifer’s needs, while resulting in Greg’s immediate eligibility for Medicaid to pay for his long-term care.
Using an Annuity to Restructure a Client’s Assets
While Medicaid can provide much-needed financial assistance when someone incurs a serious medical condition later in life, certain rules and requirements may keep some of your older clients from receiving the financial support they need after experiencing a serious health condition. As illustrated previously, the cost of care in a nursing home can be financially devastating, and many clients may not be able to sustain this type of expense.
Immediate annuities are a good tool to use when assisting your clients with Medicaid planning. The ability to rearrange assets to qualify for Medicaid became legal under the Omnibus Budget Reconciliation Act of 1993. Although regulations vary from state to state, this law means assets placed within a Medicaid-compliant immediate annuity are considered income and no longer count as available assets when qualifying for Medicaid assistance.
Immediate annuities can help achieve your clients’ goal of helping an ill spouse qualify for immediate Medicaid eligibility in order to pay for long-term care, while providing the healthy spouse with sufficient income and resources to maintain their lifestyle.
Setting up a Medicaid-compliant Annuity
Federal law allows for a division of assets at the time a spouse enters nursing home care. To that end, when looking at Greg and Jennifer’s assets, $310,580 of their original $426,500 can be put in a Medicaid-compliant annuity in Jennifer’s name. This provides Jennifer with $4,320 of monthly income for six years, and allows Greg to qualify for Medicaid immediately.
This arrangement makes Jennifer the owner and annuitant, based on her life expectancy. However, in arranging the Medicaid-compliant annuity, the primary beneficiary listed will be the state, as any remaining money left in the annuity after Jennifer’s death would be recovered to help pay for the amount Medicaid has spent on Greg’s medical care to date.
Medicaid-compliant annuities still may be used as vehicles to help pass remaining wealth on to loved ones, as well. Secondary beneficiaries (including children and grandchildren) can be listed, allowing for the money remaining after the Medicaid settlement to go directly to those listed.
Regulations Around Use
This type of transaction is allowed by the Deficit Reduction Act of 2005 (DRA). The DRA was established to provide states with the ability to reform Medicaid programs and expand access to affordable coverage. Through this, Medicaid-compliant annuities were established to help ensure either spouse wouldn’t be impoverished by a serious medical condition.
Under the DRA, Medicaid-compliant annuities must meet certain requirements. These include the annuity being irrevocable and actuarially sound, and that payments from the annuity begin immediately after purchase. Also, as mentioned previously, a spouse or child can be named as the remainder beneficiary to collect on any leftover proceeds after the amount of Medicaid support is deducted.
By providing an income stream to the healthy spouse who is exempt from Medicaid spend-down, the healthy spouse is protected from losing their money and needed government assistance. In addition, Medicaid-compliant policies are reviewed by a state’s Medicaid office and reported, so clients can feel secure knowing this is a valid, helpful transaction.
Tips to Keep in Mind
As mentioned previously, pursuing this option is a viable way to ensure a client can receive the appropriate long-term care needed, without bankrupting the healthy spouse. To help make sure you’re recommending and implementing a sound strategy for your clients, consider these tips.
1. Partner with a highly rated company. There are a handful of companies that offer Medicaid-compliant immediate annuities, but it’s important to spend time reviewing carriers to ensure you’re putting your trust in the hands of an upstanding organization. This includes reviewing financial ratings and learning more about the company’s approach to customer service.
2. Consider timing and delivery. One of the key factors for this type of arrangement is the carrier’s ability to issue and deliver the annuity quickly. The faster the annuity contract can be shared with the Medicaid reviewers to show that assets have been repositioned into a Medicaid-compliant immediate annuity, the faster the spouse can qualify for the care needed. This will limit the amount of time the couple will spend self-funding care.
3. Work in conjunction with an elder-care attorney. After a Medicaid-compliant annuity is issued, it can’t be revoked. It’s important to discuss the annuity purchase with an elder-care attorney. These attorneys have specific knowledge of the needs facing seniors and are well-versed in your state’s laws. In addition, they are familiar with estate planning and preservation of assets, as well as Medicaid and long-term care solutions.
4. Know the features. Once issued, Medicaid-compliant annuities are irrevocable, nonassignable and nontransferable. They must be actuarially sound and provide payments in equal amounts. These are important aspects to bring up with clients to make sure they understand these features before they make the purchase.
The Medicaid market is a huge opportunity for sales due to the aging population and the high cost of long-term care. Although this strategy may be unfamiliar territory or seen as complex, the rules have changed over the years. The result is strengthened Medicaid programs that are led by the states themselves.
Seeking a spend-down option that preserves the integrity of your client’s way of life and allows an ill spouse to receive important care helps ensure that both clients are supported during what can be an already stressful time.
Rich Lane is the second vice president of individual annuity sales and marketing for Standard Insurance Co. (The Standard). Rich may be contacted at [email protected]