Annuities

I often hear from clients the myth that annuities are "protected" from nursing homes. Usually the myth originates with an annuity salesperson. I used the words "protected" and "myth" in the previous sentence on purpose.

So first - what does "protected" mean. Well the normal meaning of "protected" is to defend or guard against attack. And, to a certain extent, an annuity will defend the money invested from attack, but the annuity will not protect the nursing home patient his or her spouse or his or her agent under a power of attorney from attack. Here is how it works:

Mrs. Jones owns an annuity. She needs long term nursing care and enters a skilled nursing facility. Mrs. Jones runs out of money and does not apply for Medicaid benefits. Instead, she is going to let the bill build up from the nursing home. Sooner or later the nursing facility is going to file a suit against Mrs. Jones, her husband, and maybe even her child who Mrs. Jones made power of attorney years before.

The nursing facility will win the law suit, and they will get what is known as a "money judgment" against Mrs. Jones. When the nursing facility attempts to collect the money from the annuity, the annuity company will not give them the money. Most annuity companies will not honor the judgment (and usually that is a provision of the annuity contract). Since the facility cannot get their money from the annuity, they will go after the spouse or child for the money.

You may be thinking - "Oh, that is great. I can get free nursing home care and my heirs will get their annuity." What do you think will happen over time of a person does not pay a nursing facility? The facility is duty bound to provide care, but that does not stop them from pressuring the patient. The facility can start the process of discharging the patient. If the facility discharges Mrs. Jones, where is she going to go? Will any facility allow her in knowing she has no funds and is intentionally avoiding payment? What about Mrs. Jones’s spouse and child? How much pressure from the facility will they be able to stand?

What I am suggesting is that using an annuity to avoid paying a nursing facility, will not result in a happy, care free existence for the patient or their loved ones.

Now it gets worse. MOST ANNUITIES ARE NOT PROTECTED FOR MEDICAID PURPOSES!!!!

If Mrs. Jones owns an annuity and applies for Medicaid, she will be denied because the annuity is treated as an asset. The outcome for Mrs. Jones is different based on the annuity. If the annuity could be redeemed, it must be. Any tax and penalties, must be paid, and then the annuity proceeds will just be lumped in with Mrs. Jones' other assets. If, on the other hand, the annuity is "annuitized," then the process is different. Annuitized means that Mrs. Jones has elected a payout of her annuity over a term of years or for her life. Mrs. Jones cannot redeem or close the whole annuity once it is annuitized.

Medicaid requires the holder of an annuitized annuity to sell the stream of payments. There are companies that buy the right to collect the payments from Mrs. Jones. Since the annuity buyer will get the money over a period of years, he, she or it, will not pay the full value of the annuity - they will pay a discounted value. The potential Medicaid recipient will have to sell the annuity and devote the funds to his or her care.