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Home Articles Elder Law Life Insurance and Annuities for Long Term Care Planning

Life insurance and annuities are useful products that help solve problems with the estates of elderly long term care recipients. We discuss below a number of situations where these insurance products are used to rescue assets from long term care costs, reduce or eliminate taxes, protect the lifestyle of the healthy spouse and increase inheritances for the family.

Deferred Annuities Provide Tax Advantages and Potentially Better Earnings
The appeal of deferred annuities is the deferral of taxes on earnings until money is withdrawn or the annuity is converted into a guaranteed income stream. Deferred annuities can also avoid probate if the owner chooses not to create a living trust for this purpose. As a general rule, annuities have the potential of producing an average yearly rate of return somewhat better than a bank CD or savings account. Annuity returns also tend to be more stable than short-term savings.

Life Insurance for Long Term Care Planning
Life insurance companies have become more competitive in recent years for policies issued on people over age 70. Good health is still a major consideration for low premiums, but policies have been redesigned to provide more death benefit and less cash value. Some term policies and certain universal life permanent policies are designed to provide a guaranteed death benefit up to age 95 with a guaranteed premium and no cash value at all. This design generally results in more death benefit for each premium dollar. Also, policies designed for couples -- second-to-die policies -- can provide a significant amount of insurance for a one-time single premium even if one of the partners is in very poor health.

An important concept to consider is that single premium life policies with no cash value and purchased for estate planning purposes, many years in advance of applying for Medicaid, can be a valuable planning tool if the need for Medicaid arises. Medicaid does not apply the death benefit of a life insurance policy to the asset spend down rule. But the cash value of any policy that has more than $1,500 in cash will count towards the asset test and could disqualify a Medicaid applicant. As an example, a person could have $1 million of life insurance with cash value less than $1,500 and it would not prevent that person from receiving Medicaid. However, cash value of more than $1,500 in this example will apply toward the asset test. It is important to know, for planning purposes, that people who apply for Medicaid and then transfer assets to a life insurance policy, while they are going through spend down, could be in violation of their state's Medicaid transfer rules and such an act may disqualify the applicant.

Life insurance can be used as an alternative for funding the cost of long term care. If someone planning for the eventuality of long term care is concerned about losing assets that would normally be passed on to the children or be needed by a surviving spouse, that person can invest a portion of those assets in life insurance and leverage a death benefit payout -- sometimes for up to $3.00 in death benefit for every $1.00 in single premium. The death benefit is also income tax-free. A person creating such an estate can then use remaining assets for long term care needs in the future but still be assured that the children or a surviving spouse will receive an inheritance at death through the life insurance. And, as discussed above, if the money runs out and Medicaid has to start picking up the costs, a single premium life insurance policy with less than $1,500 cash value will not disqualify the applicant owning the policy

Another use for life insurance for the elderly is in paying the cost of final expenses such as funeral and burial. A number of companies will issue policies without any health questions for people who may not have very long to live. Most of these policies will provide little or no death benefit in the first two years after issue and so there is some risk, but most companies will also return the premiums paid if death occurs in the first two years.

IRA or 401(k) Income Life Annuity to Buy Life Insurance
Tax qualified investments such as IRAs, 401(k)s, Tax Sheltered Annuities and other plans are great for saving taxes while one is working but many seniors find they don't need that money during retirement and they may want to pass on some of this tax sheltered money to their children. New "stretch IRA" rules have made it easier to reduce the immediate tax burden on these transfers at death but income tax that was deferred must still be paid. The income tax on these transferred assets can eat up a significant portion of the investment.

One way to create a tax-free transfer at death is to convert the IRA or 401(k) into a life annuity income while the owner is alive and use part of the income to purchase a life insurance policy that would equal the amount of money in the IRA -- intended as an inheritance. A life insurance death benefit is income tax-free and thus the loss of a significant part of the account to taxes has been avoided.

Medicaid Spend down for Funeral Trust
Medicaid will allow a Medicaid applicant to transfer a certain amount of assets into a trust that will pay for funeral and/or burial costs at death. In many states the maximum allowable amount is $15,000. These trusts are often funded with special life insurance policies. The trust must be irrevocable and meet Medicaid rules for such trusts.

Medicaid Annuities
If one spouse in a couple needs long term care costs to be covered by Medicaid, the couple must divide combined assets in half and the spouse needing care must spend his or her half of the assets down to less than $2,000 remaining. This loss of assets may reduce the standard of living for the healthy spouse at home.

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 spend down. These annuities must meet strict rules imposed by Medicaid and an expert in this area should be sought out.

In the past, advisers also recommended these income annuities for single Medicaid beneficiaries in order to transfer some of the spend down assets to members of the family at the death of the annuitant. The Deficit Reduction Act of 2006 changed the rules for these single Medicaid beneficiary annuities and did away with their use as a planning tool for asset transfers. Under certain circumstances partial transfers can still be done using a Medicaid beneficiary income annuity called a "half-a-loaf" transfer. As with a spouse annuity, an expert should be sought in order to make sure this is done properly.

Medicaid Anticipation Deferred Annuity
Money can be invested in deferred annuities anticipating the eventual annuitization (conversion into guaranteed income) for Medicaid purposes. Many practitioners set up these investments inside of living trusts which also avoid probate. These deferred annuities should be designed so that the money can be turned into a guaranteed income stream for either spouse of a couple. The income stream must go to the healthy spouse -- the one not requiring Medicaid assistance.

Charitable Annuity Remainder Trusts
Many people have investment property that has accrued a significant capital gains tax liability in the event of a sale. Some people prefer to give their assets to charity and a charitable remainder trust is a way to transfer property with capital gains liability to a charity and avoid the taxes. These arrangements also include a lifetime income option for the individual or couple making the donation. The charity provides the income and in many cases will use a single premium income annuity to create the monthly cash flow. In the case where a person receiving this income anticipates needing Medicaid or the VA benefit in the future, the income must be set up as an irrevocable annuity and the charity must be the owner and not allow the annuitant any control over the income.



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