MEDICAID ANNUITIES

Issued and entered October 14, 2002 by Frank M. Fitzgerald, Commissioner of Financial and Insurance Services 
 

It has come to the attention of the Office of Financial and Insurance Services that certain companies marketing annuities in Michigan are presenting these products, in seminars or one-on-one presentations, as financial vehicles that will allow an individual to protect accumulated assets while at the same time allowing the same individual to qualify for Medicaid benefits to cover the cost of long term care in a nursing home.

In certain circumstances, using an annuity to transfer assets between spouses or to blind or disabled dependents is not under current rules a divestment - a transfer of assets for less than fair market value - that would disqualify and subject a Medicaid applicant to penalties. Determining whether an annuity purchased for other reasons is a Medicaid divestment depends on whether the annuity was purchased as part of a legitimate retirement plan or whether the ultimate purpose of the purchase was to shelter assets from Medicaid spend-down requirements.

The State Medicaid Manual General Eligibility Requirements published by the Department of Health and Human Services to implement Title XIX of the Social Security Act provide instructions that are official interpretations of the law and regulations and binding on state Medicaid agencies. The Medicaid manual, available at http://cms.hhs.gov/manuals/pub45/pub_45.asp states that,

Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally used to shelter assets so that individuals purchasing them can become eligible for Medicaid. In order to avoid penalizing annuities validly purchased as part of a retirement plan but to capture those annuities that abusively shelter assets, a determination must be made with regard to the ultimate purpose of the annuity (i.e., whether the purchase of the annuity constitutes a transfer of assets for less than fair market value). If the expected return on the annuity is commensurate with a reasonable estimate of the life expectancy of the beneficiary, the annuity can be deemed to be actuarially sound. (State Medicaid Manual, Part 3-Eligibility, page 3-3-109.15)

The federal language clarifies that annuities are considered a divestment if they are purchased to circumvent Medicaid maximum asset limits, and the ultimate purpose of the annuity is to abusively shelter assets. An individual who purchases such an annuity would be subject to penalties under current Medicaid rules.

The Office of Financial and Insurance Services, working with the Michigan Department of Community Health, has determined that “actuarially sound” for purposes of Michigan Medicaid eligibility requirements is defined as follows:

An “actuarially sound annuity” for purposes of determining Michigan Medicaid eligibility is a product that is designed to pay off the entire asset value over the actual or expected lifetime of the annuitant. The guaranteed period must end during the annuitant’s expected lifetime. The total amount of proceeds must be designed to be dispersed in substantially equal periodic payments with no anticipated lump sum payment. The only allowable lump sum payment is the commuted value of the guaranteed payments remaining when the annuitant dies prior to the end of the guaranteed period.

An example of an annuity that may have been marketed as a way to avoid Medicaid eligibility requirements is one that makes monthly payments consisting of the interest earned plus a very nominal dollar amount, while preserving a final lump sum payable to the annuitant or, in case of death, to a beneficiary. Such lump sum contracts do not meet the federal General Eligibility Requirements or the definition of an “actuarially sound annuity” for purposes of determining Michigan Medicaid eligibility. This is only one example, and any annuity that transfers assets for less than fair market value violates current Medicaid rules.

Michigan Administrative Rule 500.1375(1) states that:

Advertisements shall be truthful and not misleading in fact or by implication.
The form and content of an advertisement of a policy shall be sufficiently complete and clear so as to avoid deception. Whether an advertisement is misleading or deceptive shall be determined from the overall impression that the advertisement may be reasonably expected to create.

Companies using advertising that states, implies, or in any way suggests that an annuity may be used as a vehicle to protect assets from Medicaid asset limitation requirements without including in at least 14-point type a reference to the limited circumstances in which this is acceptable under Medicaid rules, and the definition of “actuarially sound” as set forth in this bulletin, will be considered to be in violation of Rule 500.1375(1). Advertising shall either include the paragraph definition provided above or the following summary:

“To qualify as an actuarially sound annuity for purposes of determining Michigan Medicaid eligibility, an annuity must meet all of the following requirements:

1. Pay off all value over annuitant’s actual or expected lifetime.
2. Pay in substantially equal periodic payments.
3. Limit any “Guaranteed period” to less than expected lifetime.
4. Include no lump sum payment except for remainder of guaranteed equal periodic payments at death.

The Michigan Uniform Trade Practices Act defines several activities as unfair trade practices. These practices can subject insurers to monetary and administrative penalties, including suspension or revocation of a certificate of authority. Issuing marketing material that suggests that actuarially unsound annuities can position assets outside of the limits of Medicaid eligibility requirements appears to violate MCL 500.2005(a) by misrepresenting the benefits or advantages of an insurance policy. It also appears to violate the false advertising provisions of MCL 500.2007 and misrepresentation of policy benefit provisions of MCL 500.2064(1).

In addition, MCL 500.2236(5) grants the Commissioner the authority to disapprove, withdraw approval, or prohibit the issuance, advertising, or delivery of any form if it contains ambiguous or misleading clauses. As the Commissioner becomes aware of annuity contracts that appear to be intended to shelter assets from Medicaid eligibility requirements, the Commissioner will first apply the above definition of “actuarially sound.” If a contract does not meet the definition, the Commissioner intends to prohibit the issuance, advertising, or delivery of the contract unless the insurer can demonstrate that the marketing of the contracts is in no circumstance connected with Medicaid financial planning.

Insurers who have issued inappropriate “Medicaid friendly” annuities have put consumers at risk. Companies who wish to avoid compliance action by the Office of Financial and Insurance Services should consider making a written “no questions asked” rescission offer within 90 days of the date of this bulletin. The rescission should offer to cash out the contract at the current accumulated value with no surrender or other charges deducted.

Contracts such as lump sum payout annuities that are being legitimately sold in other markets must be able to clearly demonstrate that they are not being marketed to individuals considering positioning of assets under Medicaid eligibility requirements.

Additional information regarding Medicaid eligibility is available at the Department of Community Health. Please contact Connie Kapugia at (517) 241-8202.

Any questions regarding this bulletin should be directed to:

Office of Financial and Insurance Services
Securities and Insurance Offerings Division
611 West Ottawa Street
P.O. Box 30220
Lansing, Michigan 48909-7720

Phone: (517) 373-0242
Toll Free (877) 999-6442