The states, which are fighting dwindling budgets and spiraling debt, are setting their own rules when it comes to Medicaid-compliant annuities. They are also cracking down on misleading sales of annuities to seniors. Whether a state will accept a Medicaid annuity now largely depends on whether there are strong litigators, hired by seniors or their families, willing to pose challenges to state laws, says Krause. In "strong bar" states such as Pennsylvania, New Jersey and Ohio, it doesn't take long to get Medicaid annuities accepted. Nor have there been problems in Massachusetts or New York.
The toughest place to get an immediate annuity qualified for Medicaid is Tennessee, Krause says. Another state, North Dakota, "will challenge just about any product that comes before them," he adds, while South Dakota has contended that the Medicaid annuity is a countable resource because it is an "uncompensated transfer." You don't get the full value in return.
Another argument by some of the states is that the annuities have value in a secondary market, say if a client were to sell it through companies like J.G. Wentworth and Peachtree. If the annuity has this value, it can be construed as an asset rather than an income stream, and it thus disqualifies an aspiring Medicaid applicant from meeting the low $2,000-$3,000 threshold.
To counter that, Krause says he has unsuccessfully tried to obtain a letter from J.G. Wentworth to refute this argument and say the annuity could in fact not be sold. But Steve Harris, sales manager of the Bryn Mawr, Pa., company's annuity purchase program, says such letters are against company policy because of the wide variety of annuity contracts, riders and situations.
To help keep it from being construed as an asset in the eyes of companies like J.G. Wentworth and Peachtree, it's important for the client to make sure the contract has non-assignment language in it.
More financial services professionals are turning to the Medicaid and veteran annuity business because traditional variable annuities are a tough sell, Krause says. The stock market is shaky and seniors, who already have variable annuities, are reluctant to exchange them while values are down and lose their death benefit guarantees. (When a policyholder dies, beneficiaries of variable annuities often are guaranteed its market value or original principal-whichever is greater.)
Annuities aimed at qualifying clients for veterans' pension benefits are less restrictive than Medicaid annuities and likely can be obtained from virtually any insurance company.
However, it's increasingly tough, Krause says, to find an insurance company that will issue a Medicaid-compliant annuity. Reason: The state rules vary so dramatically and the life spans of these policyholders are so short there's not much opportunity for profit.
But a couple of companies work with Krause. Those include Old Mutual Financial Life Insurance Company, Baltimore (recently purchased by New York private equity fund Harbinger Capital Partners) and Employees Life Co. (Mutual) of Lake Bluff, Ill.
Richard P. Leach, a senior vice president at the latter insurer, says the Deficit Reduction Act largely killed the balloon-style Medicaid annuities his company pioneered around 1986. Virtually all states-except California, which had not yet adopted the Deficit Reduction Act as of this writing-prohibit balloon-style annuities. Most Medicaid annuities today are short term, typically designed to allow persons seeking Medicaid benefits to give larger sums to heirs during the five-year Medicaid look-back period. Some Medicaid annuities, he says, have terms as short as two years or even six months!