Increasing numbers of middle-income clients in need of nursing home care face a serious bind.

Couples with little money can rely on Medicaid to pay nursing home bills. And, the wealthy can easily pay the $10,000 to $20,000 a month or more for private care. But couples with, say, $300,000 in retirement money, which may have taken them 30 to 40 years to save, can burn through it all in as little as 15 to 30 months. If the mid-range husband and wife spend down their assets to qualify for a Medicaid-paid facility, the at-home (or “common”) spouse could end her years on a subsistence budget. But there is another option that financial advisors need to discuss with clients.

The couple can set aside an amount to help with living costs that won't count against their eligibility, via a Medicaid compliant single-premium immediate annuity -- SPIA. Unlike annuities that workers buy for their retirements, the SPIA is purchased in moments of crisis when a doctor recommends nursing home care or when a potentially short “rehab” stay is extended. Preparing clients now can help them understand the rules and their options under much calmer conditions.

In the first three quarters of 2014, sales of SPIAs reached about $7.8 billion, according to the D.C.-based Insured Retirement Institute. If the last quarter is consistent with the others, SPIA sales for the year could reach a record $10 billion.

SPIAs are “a godsend” for middle-income couples, says Jake Lowrey, a financial advisor and president of Lowery Financial Group, based in Beverly, Mass., and Verona, Wis. “The institutionalized spouse gets the same level of care and the common spouse still gets to go on with her life.”

Because Medicaid is a joint federal and state run program, the rules vary from state to state. Most states set monthly cash-flow limits somewhere between $2,000 and $3,000 for a person to qualify. The common spouse can keep about $100,000 in assets, which does not include the family home.

Lowrey offers this example of how an SPIA works in Massachusetts: Mr. and Mrs. Smith have a total of $300,000 in liquid assets, when they discover that Mr. Smith needs a skilled nursing facility, which is going to cost the family $13,000 a month. In Massachusetts, Mrs. Smith can protect $109,000, and the remaining $181,000 is subject to Mr. Smith's nursing home expense. But Mrs. Smith can opt to take the remaining $181,000 and transfer it to a Medicaid Compliant SPIA, thus converting the asset to an income over her life expectancy, usually a five- or six-year period (using current guidelines of 87 for males and 90 for females). At the time the SPIA is paid out in full to Mrs. Smith via equal monthly payments, she will have sheltered all $300,000 for her living needs. Mr. Smith's income – from Social Security and any retirement income such as pensions – will go to Medicaid, as the contingent beneficiary, for his care. If Mrs. Smith dies before her husband, the proceeds from the SPIA would then go toward the cost of Mr. Smith's care.
 
About 20 to 25 percent of Lowrey's clients have opted for an SPIA, estimates Lowrey, who says the advisors that he works with often admit they need help getting up to speed on the annuity. “It would definitely benefit them to do the training to preserve assets for their clients."

Mark Gilfix, an attorney in the father-and-son law firm of Gilfix & La Poll Associates LLP, in Palo Alto, Calif., has noticed knowledge gaps among legal advisors, too. “Clients typically bring their advisors” to his office, he says. “Because very few lawyers even know this stuff.” Gilfix's father, Michael, created the state's first legal aid program for elders in 1973.

The cost of long-term care, says Gilfix, is on the rise in California, as elsewhere. “We have clients who have spent up to $250,000 in one year.” The cost of nursing home care is low by comparison, but Medicaid does not subsidize long-term or assisted living care. So the SPIA won't help there. “The only option is paying for the care yourself or buying long-term care insurance,” says Gilfix.  

One drawback with the SPIA, says Gilfix, is that if the at-home spouse also has to go into a nursing home, the annuity payments would go to Medicaid or in California, Medi-Cal.
 
“This program is not to shelter assets for beneficiaries,” reminds Lowrey, “but to keep the healthy, common spouse from going impoverished and also dependent on Medicaid.”