Annuities

Long term health care costs remain high and growing. Because of this retirees with significant assets should plan for their potential Medicaid eligibility. A Medicaid qualified annuity can play a part in this planning when one spouse has to enter a nursing home leaving the other one at home.

Medicaid picks up the long term care cost of elderly who are impoverished.  Long term care is very expensive and can eat up savings fast. The elder may not be able to leave a legacy to their children.

Medicaid is a federal program but handled at the local level by your State. State restrictions and regulations on Medicaid vary so you always need to be aware of your own states’ Medicaid policies.

Nevertheless, simply giving your assets away and then immediately applying for Medicaid is unacceptable under federal rules . To be safe you need to irrevocably transfer assets 60 months prior to applying. Anything shorter will prompt your state Medicaid office to attribute those assets to you and require you to pay your Medicaid monthly rate (state dependent) until all those assets have been exhausted. Only then will Medicaid foot the bill.

If you still have substantial assets, you can protect some assets for your spouse but you must strictly abide by rules for Medicaid eligibility. Here, a Medicaid annuity may be used.

A typical scenario would be if one spouse needs long term care costs to be covered by Medicaid. The couple must then divide all their assets in half and the spouse needing care must spend his or her half of the assets down to less than $2,000 in order to qualify for Medicaid benefits. But this loss of assets may reduce the standard of living for the healthy spouse at home.

So, Medicaid will allow the spouse needing care to convert his or her share of the assets into an income annuity that belongs to the healthy spouse. This legal strategy provides the healthy spouse with more income and avoids the impoverishment imposed by the Medicaid spend down requirement. These annuities must meet strict rules  imposed by Medicaid and you should seek a legal expert in this area to help you.

You can also prepare for Medicaid qualification by investing in a deferred annuity anticipating its eventual conversion into guaranteed income before applying for Medicaid. These deferred annuities should be designed so that the policy can be turned into a guaranteed income stream for either spouse of a couple. That income stream should go to the healthy spouse — the one not requiring Medicaid assistance.  In some cases, the annuity strategy can even benefit a single person.

Note that annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments.  Use of annuities as a Medicaid planning tool is regulated by each State with their own rules and a qualified advisor should be consulted. Annuities are insurance products and are subject to insurance related fees and expenses.

http://www.medicare.org/content/view/20/67/ ‘Medicaid pays for health services for the very poor of any age. Qualifications for Medicaid vary by state, but generally the law says you must first spend down to the poverty level, using up all but about $2,000 of your assets.’
(Section 1917(c) of the Social Security Act; U.S. Code Reference 42 U.S.C. 1396p(c)), http://www.cms.hhs.gov/MedicaidEligibility/10_TransferofAssets.asp#TopOfPage
Medicaid guidelines for the use of annuities, which clarify OBRA ‘93, have been published by the Health Care Financing Agency. See your state rules for current restrictions.  http://www.hcfa.gov/medicare/medicare.htm

For agents seeking to close annuity sales

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CD versus Deferred Annuity Comparison Safety, Return, and Investment Time

Retirees with cash often seek an investment with a lot of safety. Holding a certificate of deposit (CD) gives you that safety but sacrifices investment return. Let’s compare a CD to a deferred fixed annuity for safety, return and investment time. Then you can choose what’s best for you.

The Safety Issue
Banks offer CDs. The Federal Deposit Insurance Company (FDIC) guarantees any investment in a bank up to $250,000 (through 2009) against the bank’s failure. If you plan to invest more than that, spread it between different banks – not different accounts in the same bank – so all your holdings are FDIC guaranteed.  Bank failures are not all that uncommon.

A deferred fixed annuity hasn’t any FDIC protection. But it’s still considered a conservative investment. First it’s backed by the financial strength of the company that issues the annuity. So, before buying a deferred fixed annuity, check the insurance company’s financial rating. Independent rating companies such as Moody’s, A.M. Best, Standard & Poor’s and Fitch provide this information to you.

As a safety backup in case of failure, many insurance companies are affiliated with a guaranty association in their state. One example is the Georgia Life and Health Insurance Guaranty Association in Georgia. It provides total annuity cash surrender protection per owner per insurance company of $100,000 (read these guaranty association terms carefully—some state that the guarantee is conditional on the association having funds).

The Return Issue
Your return for CDs and deferred fixed annuities depend on their interest rate earnings and taxation. CDs offer guaranteed interest rate for a fixed term – generally, the shorter the term, the lower the rate. All CD earnings are taxed annually – whether you withdraw money or not. This yearly taxation loss reduces the annual compounding of a CD’s return.

A deferred fixed annuity can guarantee an interest rate for an initial period or for multiple years.  But earnings of annuities are tax-deferred. So at equal interest rates, your savings will compound annually faster than for a CD. Annuity earnings are taxed only when you withdraw them.

The Investment Time Issue
Withdrawing money before term for a CD will bring a penalty. And an early surrender from a deferred annuity will do so too. So if you’re planning on using most of that money within a year or two, then a CD is probably the better choice. But if you plan on holding for the long term a deferred fixed annuity may be more advantageous.

Refer to the table for a quick summary of comparison issues. You just need the current interest rates and early withdrawal penalty features of CDs and deferred annuities to make an informed decision.

Note on Annuities: With tax deferred investments, income taxes may be due upon withdrawal of funds, withdrawals prior to age 59½ are subject to a 10% penalty. Annuities have surrender charges or expenses associated with them while CDs have early withdrawal penalties. The purchase of annuities may incur commission and annuities may not be as liquid as CDs. CDs are FDIC insured to $250,000 per owner while annuities are not and are guaranteed by the claims paying ability of the insurance company.

for insurance agents: annuity leads

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For retirees, the most attractive feature of fixed annuities is the assurance that it’ll provide a fixed income for life. But all investments have their good and bad points; and fixed annuities are no different. Let’s overview some of their advantages and disadvantages summarized in the table.

Advantages
The three important features of an annuity are tax-deferred accumulation, guarantee of principal, and guaranteed life income.  The tax-deferred accumulation – in comparison to a similar taxable investment - allows for greater accumulation since earnings are not taxed away annually.

Annuities have been conservative vehicles for investment. Of course you should always check out the strength of any insurance company you’re considering buying from.   A good source is to get the Comdex rating of 80 or better from Vital Signs (see a financial professional) or a Weiss rating of B or better.

With the guaranteed life income payout option, you don’t have to worry about market downturns that could rob you of income. Also if you can put off your payout until later, you’re monthly payout will increase not only from increased earnings but from your reduced life expectancy.

Disadvantages
Because an annuity is a long-term investment with tax-deferred status, the IRS will levy a 10% excise tax penalty on any withdrawal before age 59 ½.

Annuity fees can significantly cut into any withdrawals taken early in the accumulation years. So plan on holding off for 10 years or so to let your earnings offset this effect.

Since your money is placed with an insurance company in an annuity contract, you have little control over the rate of return on your investment. When you buy, find a company that has a history of providing competitive returns If you ask for the interest rate history, you will get it).

Although with a fixed annuity you’ve eliminated the possibility of market risk on your investment you have created the risk of losing purchasing power. After beginning payments to you you’re not able to make any adjustments in case of higher inflation rates. However, if the rate history looked good, the company may be more reactive to raising rates when possible.

Choosing a lifetime income leaves generally leaves no residual investment for your heirs. You can choose options that remedy this, but at the cost of a lower monthly payout.

Annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments. Annuities are insurance products and subject to insurance related fees and expenses.

More: annuity pros and cons

–Bob Richards

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Do you own an IRA, hold a Keogh, or still have assets in a qualified retirement plan that was offered by a previous employer? Then perhaps now you have to think about the best way to withdraw the funds, as the IRS requires at age 70½, while making sure that you don’t outlive your income.

One choice is to remove the money all at once and pay the tax. That step, however, may put you in a higher tax bracket is is usually not wise. Another option is to go along with the government’s guidelines and calculate the Required Minimum Distribution that you must withdraw each year after you turn 70½. But what if there was a way to not have to do those calculations and also not worry about tax law changes and market fluctuations that could affect retirement accounts every year?
 
A tax-qualified, fixed immediate annuity will spread the tax liability over your projected lifetime and automatically satisfies the IRS requirements, so you will never have to calculate the required minimum distribution. A check will arrive every month, or whichever schedule you select, for the rest of your life—no matter how many years that might be (guarantee is based on the claims-paying ability of the annuity company). All you will have to do is pay the income tax and spend the balance of the money as you wish, or save it.

Note that even if you have several IRAs, you may want to add up the balances and then use a fixed immediate annuity in just one IRA to provide the required minimum distribution for all three.  Note that you must take a required minimum distribution form each type of retirement account you have.  You cannot for example just take a distribution form your IRA if you also have a 401k account.  You must make a required minimum distribution from both accounts.

Make sure you tell the immediate annuity company that you are using the payments to meet your required minimum distributions so that the payments are properly structured and will increase as you age.

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Fixed annuities can be popular among seniors. They are easy to buy, you know exactly how long you must tie up your money, and the IRS will let you defer the income tax on the earnings. 

But one point that may have stopped you from investing in an annuity is that some traditional fixed annuities do not lock in the interest rate for the duration of the contract. This means that after the initial period, which is typically one year, the return that the annuity company pays could possibly go higher or lower each year thereafter. However, there is a type of annuity that fixes the return for the entire contract’s term. This way you will know exactly how much you’ll earn while you own the contract–see the fixed annuity calculator for a projection.  

CD-annuities (also known as multi-year guarantee annuities) provide level interest rates for the entire term so you won’t get any surprise notices during this time. You select the term, which generally ranges from three to ten years when you make the investment. At the end of the term, you will usually have a 30-day window to withdraw all or part of your money, or renew the contract for another multi-year period. The withdraw charges expire when the term ends.

As with traditional annuities, there are no income taxes on the earning while they remain in the account. Therefore, you won’t get a 1099 form to file with the IRS each year. Nor will you have to worry about income taxes if you renew the contract at the end of the term, and you get to name a beneficiary. This means that if you die while you own the CD-annuity, your heirs will quickly receive the account’s value without going through probate. Then they’ll  have the option to take a lump sum payment, or a systematic payout.

Note that if you also get an annuity with a market value adjustment (MVA), and interest rates do decline, you can cash out your annuity prior to term and be rewarded for the MVA adjustment.  Of course, always buy annuities with the intention of holding to term.

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Many seniors purchase fixed annuities for potential safety, tax savings, and asset protection. In some cases, insurance companies will offer a higher interest rate for a limited time period to encourage those investments. But what happens after that time period ends? Other than the minimum rate guarantee, do you have any assurance that you will still get a good return? 

Pass-through annuities could possibly reduce that concern by limiting the amount of money the company makes on your investment.

To achieve a basic understanding about how this works, let’s look at a hypothetical example (please note that this example is for illustration purposes only and is not based upon the performance of any particular annuity product).  Say you bought a fixed annuity that had the traditional method of crediting interest. If the first year’s rate included a 5% bonus, plus the 3% minimum, you could be looking at 8%. And you might think that’s pretty good. 

Then year two rolls around and it’s time for rate renewal. The annuity company might only be contractually required to the minimum interest rate, even if they earned more than that on your premium payments. 

With a pass-through annuity you can potentially achieve a better result, since there is a contractual guarantee in place that limits how much of the earnings an insurance company can keep. Once an insurance company takes its share, the rest of the investment return is “passed through” to you. 

Of course, any additional fees that are charged for this guarantee could reduce your overall return. The interest rate and pass-through features of these annuities can also vary from company-to-company. Annuities are designed for long-term investing. Ordinary federal income taxes and a 10% tax penalty could apply to withdrawals taken prior to age 59½. Annuity benefits and guarantees are based upon the claims-paying ability and financial strength of the underlying insurance company, and are not government-insured. Surrender charges can also apply to withdrawals, based upon the time the insured has been invested in the annuity. 

Because there are so many annuities on the market, get retirement help by locating an experienced annuity agent.

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Stability and safety are important to many seniors, and these are only two of the reasons why immediate annuities are popular investments. A check arrives every month and part of the income is considered a tax-free return of your principal. As long as the annuity company is financially sound, the payments will continue for the life of the contract (annuities are guaranteed by the claims-paying ability of the issuing company).

However, consumers sometimes believe that immediate annuities are illiquid, irreversible investments, and cannot provide for future lifestyle changes. Nonetheless, there are some immediate annuities with options that may add flexibility to your financial plan.

Immediate annuities can possibly include an option that would allow you to receive extra cash at specific anniversary dates. For example, this might be at the 5th, 10th, or 15th anniversary of your investment. Exercising this option will reduce your future payments (the distribution may be fully taxable, so consult with your tax professional).

Suppose you needed money to cover an emergency, like paying for caregivers or a home repair. Some annuity companies will let you take up to six payments at once. You would not, however, receive checks for the following six months (payments may be fully taxable so consult with your tax professional).

You may also have the ability to provide a cash benefit from your immediate annuity to your heirs. This would be a pre-determined percentage, such as 25% or 50% of the amount of your initial investment. Selecting this option will reduce your monthly annuity checks, and may have tax consequences.

Annuities are so varied and there are so many different options provided, it’s essential to speak with a retirement advisorto see a range of products and solutions available.

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Retirees want to secure their future financial status. Fixed annuities can play a big part. Let’s consider how fixed annuities can help individuals and families create a future supplemental retirement income.

While fixed annuities provide several benefits in the form of increased rate of growth in savings through tax-deferred growth, competitive returns, and security (through various guarantees) they also offer another important benefit– insurance against financial instability. You can invest as much as you want in a fixed annuity, leave it there to grow as per the rate of interest promised to you, and withdraw money when you need it. Lastly, you have several choices about how and when to withdraw your money.

Here are several benefits that contribute to stability:

1.      A fixed annuity is often an appropriate choice for seniors because it offers the promise of a steady income when annuitized. Buy ‘term certain’ fixed annuities if you want to collect income over a particular time period only. Or buy a life annuity if you want to receive income for your entire life.

2.      Several fixed annuities offer special features that can be useful for seniors. You can receive systematic or flexible withdrawals. This gives you the freedom and pleasure of creating your own “pension.”

3.      Every fixed annuity provides a principal guarantee, so you can be assured of receiving at least the initial premium you paid (less potential surrender charges or other costs).

4.      You may choose a nursing home waiver feature. This would relieve you of paying surrender charges if you fall sick at any time during the annuity period where you are required to cash in your annuity to pay for your nursing home bills.

Note that the amount of “payback” you receive when you annuitize depends the amount you have invested, as well as on your life expectancy. But be vigilant about all the details of the annuity contract before you sign. Note that fixed annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims-paying ability of the insurance company. Fixed annuities should be considered long-term investments. Riders such as nursing home waivers may have additional costs.

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