In 2015, I wrote this blog post: Immediate Annuities in MassHealth Planning for Married Couples. This post talks about how immediate annuities might be used by spouses of nursing home residents to preserve their assets and qualify the nursing home spouse for MassHealth coverage. Immediate annuities are also used by unmarried or widowed nursing home residents, but with less favorable results. In effect, they permit the nursing home resident to pay the MassHealth rate rather than the private-pay rate. Use of immediate annuities is based on the following rules and facts:
First, as a refresher, an immediate annuity is a contract with an insurance company through which the annuitant pays a lump sum in exchange for a stream of income which may last for a specific length of time or for the annuitant’s lifetime. For instance, a nursing home resident might pay $200,000 in exchange for monthly payments of $3,500 for five years.
Second, MassHealth will begin covering a nursing home resident’s cost of care when his countable assets are spent down to $2,000. Virtually everything is counted against this limit except for one’s home and personal belongings.
Third, transfers of assets can cause up to five years of ineligibility for MassHealth coverage of nursing home care.
Fourth, the purchase of an immediate annuity will not be treated as a transfer of assets if it meets the following requirements:
- The guaranteed period of time of payment under the annuity is shorter than the annuitant’s (the owner’s) actuarial life expectancy.
- The payments from the annuity are equal to or greater than the cost of the annuity.
- The Commonwealth is made the remainder beneficiary of the annuity up to the amount of the MassHealth benefits paid on his behalf. This means, for instance, if a nursing home resident with an annuity paying out over five years dies after year three, MassHealth will be reimbursed from the final two years of payments.
Fifth, MassHealth pays nursing homes significantly less than they charge on the private market.
Based on these facts, an unmarried nursing home resident can use an immediate annuity to qualify for MassHealth and lower his cost of care. An example can better demonstrate how this works:
Joe Jones has entered a nursing home that charges him $12,000 a month. He has income from Social Security, a pension of $2,000 a month, and savings totaling $200,000. If he takes no planning steps, he will run out of funds in 20 months since his monthly costs exceed his income by $10,000 a month. (For this example, we are assuming that he has no other expenses or other ways to spend down his savings.) At the end of that period, he will qualify for MassHealth to pick up his cost of care.
If, instead, Joe paid the $200,000 to an insurance company in exchange for a stream of income paying $3,500 a month for five years, he would be able to stretch his money longer. He would be immediately eligible for MassHealth coverage. Whether this actually saves money for him, or really his heirs, depends on how long he lives. For purposes of the following calculations, we will assume that MassHealth is paying the nursing home $8,000 a month. In that case, it’s actual expenditure would be $2,500 a month since Joe would contribute his income towards his cost of care, which would now total $5,500 a month including the annuity payments.
If Joe were to pass away after one year and took no planning steps, his estate would have $80,000 remaining: $200,000 – ($10,000 x 12) = $80,000.
If he were to buy an annuity and apply for MassHealth, his heirs would receive $138,000, the difference between the remaining four years of annuity payments of $3,500 a month minus the amount MassHealth had paid for a year of coverage: ($3,500 x 48) – ($2,500 x 12) = $168,000 – $30,000 = $138,000.
After two years with no planning, Joe would be out of funds. With the annuity, there would still be $66,000 remaining to pass to his heirs: ($3,500 x 36) – ($2,500 x 24) = $126,000 – $60,000 = $66,000.
This amount of savings would drop every month and after three years, the savings inherent in the annuity approach would disappear as the MassHealth costs begin to exceed the remaining annuity payments: ($3,500 x 24) – ($2,500 x 36) = $84,000 – $90,000 = ($6,000).
As this example demonstrates, for unmarried nursing home residents, immediate annuities simply stretch the dollars so that they last longer. In this example, the approach saves a bit more money each month for the first two years until the savings over paying privately reaches $66,000, and then drops quickly until, at the end of year three, it offers no savings at all.
The amount and timing of potential savings depends on each individual’s income, savings, and cost of care. Anyone considering this approach needs to do so in the context of other available planning options, the likely lifespan of the nursing home resident (if it can be determined) any cost of liquidating assets to purchase the annuity, and the fact that applying for MassHealth is a time-consuming process.
The immediate annuity strategy does not ultimately affect MassHealth, since it gets reimbursed from the annuity, but it does mean lower income for nursing homes since they are paid the MassHealth rate rather than their private pay rate.