What Is a Medicaid Annuity?

The cost of a long stay in a nursing home can quickly deplete your savings. Medicaid can cover many of these costs, but only people of limited financial means can qualify. You might have to expend nearly all your assets to pay for our care before Medicaid can help. By purchasing a Medicaid annuity, however, you may be able to reduce your assets and become Medicaid-eligible while also receiving income from the annuity.

A financial advisor can help you explore the role of Medicaid Annuities in your financial plan.

Understanding Medicaid Annuities

An annuity is a financial product that converts a lump sum of money into a stream of income. You can purchase an annuity from an insurance company, which then contracts to send you a set amount on a recurring basis. For example, you may pay an insurance company $500,000 for an annuity that will pay $2,000 a month for 25 years. After 25 years, you will have collected $600,000 in payments.

Annuities are attractive, in part, because the payments are reliable, staying the same despite market and economic fluctuations. There are many types of annuities. They can be structured to, for instance, start making payments now or at some point in the future. The amount of the payment can also vary.

One variety is the Medicaid annuity. This annuity also called a Medicaid-compliant annuity or a Medicaid planning annuity, is designed to help you meet the financial requirements to receive Medicaid long-term care benefits while preserving your assets.

Medicaid is a government program that provides healthcare coverage for people of limited financial means. Unlike Medicare, another government healthcare program, Medicaid can pay for long-term care. However, Medicaid has strict limits on the amount of assets that recipients can have. One way someone with more assets can qualify is to pay long-term costs out of their own pockets until their assets meet the Medicaid criteria. Buying a Medicaid annuity represents another approach.

How a Medicaid Annuity Works

How much a Medicaid annuity could be worth.

A Medicaid annuity is a specialized financial tool designed to help individuals qualify for Medicaid long-term care benefits without having to spend down all their assets. It allows a person, often a healthy spouse, to convert a portion of their savings into a steady stream of income. This transformation effectively reduces countable assets in the eyes of Medicaid, helping one spouse qualify for benefits while ensuring the other maintains financial stability.

If your assets exceed Medicaid’s limits and you need long-term care, here are steps to using a Medicaid annuity.

Purchase the annuity: This can be done by transferring assets such as cash or property into a Medicaid-compliant annuity. Such an annuity is designed to meet specific requirements under Medicaid regulations.
Receive annuity income: The annuity will generate a stream of payments that can be used to pay for long-term care as well as other costs.
Qualify for Medicaid: Converting assets into a Medicaid-compliant annuity can reduce the assets Medicaid counts when determining eligibility to a level low enough to meet the limits. You can then tap Medicaid benefits to pay for long-term care costs.

For example, a 60-year-old man needs to move into a nursing home. He has $200,000 in savings, which disqualifies him from Medicaid. By purchasing a $200,000 Medicaid annuity, he can reduce his countable assets and potentially qualify for Medicaid. The annuity payments can then be used to pay for costs not covered by Medicaid.

Medicaid Annuity Limitations

Medicaid annuities aren’t appropriate for all situations. For example, Medicaid looks at income as well as assets in determining eligibility. Medicaid annuity income and other retirement income such as Social Security benefits total can push someone in long-term care over these income limits and disqualify them from receiving benefits.

Also, while Medicaid is a federal program, it is administered by individual states. Each state has its own set of rules and regulations concerning Medicaid annuities. For example, California only allows you to exclude assets from Medicaid consideration by purchasing certain types of annuities, including those start payments immediately, provide equal payments and don’t have a term longer than the purchaser’s life expectancy.

Medicaid annuities can have complex implications and their effectiveness in achieving Medicaid eligibility can depend on various factors, including the individual’s specific financial situation and the state’s Medicaid rules. Also, purchasing a Medicaid annuity will require you to pay a number of costs and fees. These vary depending on the annuity provider and the specific terms of the annuity contract.

To accommodate these rules, Medicaid planners have developed a few other strategies for protecting assets from Medicaid in addition to Medicaid annuities. Some will be more appropriate for certain people than using annuities. For these and other reasons, before investing in a Medicaid annuity, it’s essential to consult with an experienced financial advisor, attorney or other Medicaid planning expert.

Alternatives to a Medicaid Annuity

While a Medicaid annuity can be an effective way to preserve assets and qualify for long-term care benefits, it isn’t the only strategy available. Depending on your financial situation, health needs, and state laws, there are other planning options that can help protect your wealth while maintaining eligibility for Medicaid. Here are several common alternatives to consider.

Long-Term Care Insurance: Long-term care insurance provides coverage for nursing home care, assisted living, and in-home support before you ever need Medicaid. By planning early, you can use this insurance to cover future care expenses without depleting your savings. However, premiums can be expensive, and coverage may be limited based on age or pre-existing conditions.
Medicaid-Compliant Trusts: A Medicaid Asset Protection Trust (MAPT) allows you to transfer assets out of your name while maintaining some control and protection for your beneficiaries. After a “look-back” period (typically five years), those assets are no longer counted toward Medicaid eligibility. This strategy can be effective for long-term planners but requires early action and careful legal structuring.
Spousal Refusal or Spousal Transfer Strategies: In states that allow it, a healthy spouse may use a spousal refusal or transfer strategy to shift assets into their name, protecting the couple’s savings while the other spouse applies for Medicaid. This approach requires navigating complex state-specific rules and may trigger legal or financial scrutiny, so professional guidance is essential.
Spend-Down Strategy: A spend-down involves strategically using excess assets to pay for legitimate expenses — such as home improvements, medical costs, or debt repayment — until you meet Medicaid’s asset limit. This method can help you qualify without losing value unnecessarily. However, improper spend-downs or gifts within the look-back period can result in penalties or delays in eligibility.
Irrevocable Funeral or Burial Trusts: Setting up an irrevocable funeral trust allows you to prepay for burial and funeral expenses in a way that’s exempt from Medicaid asset calculations. It’s a simple, practical option that reduces countable assets while relieving your loved ones of future financial burdens.

Choosing the right alternative to a Medicaid annuity depends on your timing, health status, and overall financial picture. Some strategies work best for early planners, while others are more effective for individuals already facing long-term care needs. Consulting with a financial advisor and an elder law attorney can help you identify the best approach to protect your assets, comply with Medicaid rules, and ensure peace of mind for you and your family.

Bottom Line

A Medicaid annuity can be a valuable tool for protecting assets while qualifying for long-term care benefits, but it’s not the right solution for everyone. By converting savings into guaranteed income, it helps meet Medicaid’s strict asset limits and ensures financial stability for a healthy spouse. However, the rules are complex, and alternatives like trusts, long-term care insurance or strategic spend-downs may offer greater flexibility depending on your situation.

Tips for Retirement

To protect your assets and secure your future, consider speaking with a financial advisor about the potential benefits and drawbacks of Medicaid annuities. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s Retirement Calculator can tell you whether you are saving enough for the retirement you have in mind.