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What is an Immediate Annuity (Medicaid Annuity), Deferred Annuity?

Immediate Annuity vs. Deferred Annuity

What is a Medicaid Annuity (or Immediate Annuity) and Deferred Annuity?

In 1993, Medicaid laws were passed that favored annuities. A commercial annuity is one in which an investment product is sold by a licensed insurance company. There are two different types of annuities, immediate and deferred. A deferred annuity is when the policyholder has not yet chosen any payout period and the account continues to earn interest and fluctuates with the stock market. When referring to Medicaid annuities, this usually means an immediate annuity. These annuities meet the Federal requirements that were set forth under OBRA ’93. These particular annuities are important for immediate-need planning.

Medicaid Planning with a Deferred Annuity – Converting Deferred Annuity to a Medicaid Friendly Annuity

A deferred annuity cannot be used to change a countable asset to one that is not countable. Despite this, many clients who are planning for Medicaid will purchase this type of annuity. This can later be converted to a Medicaid Friendly Annuity which will allow the policy to be converted by the company that issued it. This is only done on request from the policy holder. In some cases, there may be a time frame involved. Certain contracts will allow the conversion only after a set amount of time has elapsed.

Possible Cons to Converting to a Medicaid Annuity

Individuals must be aware of the penalties that could be involves in the conversion of the annuity policy. Most annuities will have an early withdrawal penalty and most of them will have to be surrendered in order for the conversion to take place. However, just because a surrender penalty is high, this does not make it a risk to purchase. In fact, most annuity contracts involve the policy holder trading liquidity for the higher earning potential. The penalty for annuity conversion may not be so bad if an individual is able to earn more money from the annuity over a period of time. It should be known that there is a nursing home stay in the immediate future; the deferred annuities should not have any penalty when they are converted. If there is a nursing home stay expected in the immediate future; the deferred annuities should not have any penalty when they are converted. It is very important to understand possible penalties before deciding to purchase one of these annuities.

Immediate Annuity vs. Deferred Annuity

An immediate annuity is not commonly used to meet the needs of costs for long-term care. Many seniors will use a deferred annuity instead because they allow them to protect their Medicaid assets from any risks in the market. They can also take advantage of interest rates that are usually very competitive. Individuals should also know that not every annuity can be converted to a Medicaid Annuity. Sometimes, it will be required to cash out the annuity first. When looking for a way to protect assets because of long-term care needs, individuals need to evaluate the effectiveness of these two types of annuities and determine what the advantages and disadvantages are before making any financial decisions. Please contact Medicaid Consultants toll-free at 1 (877) 21-Medicaid or 1 (877) 216-3342.
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