What Is a Medicaid-Compliant Annuity?

Test 1: Is It Irrevocable and Non-Assignable?

The contract must say, in its own terms, that it cannot be cashed in, surrendered, commuted, sold, transferred or assigned. If the owner retains any ability to convert the remaining payments back into a lump sum, the state treats the whole thing as an available resource and the plan fails at the first step.

Look for the words irrevocable and non-assignable on the contract face, not in a marketing summary. A standard commercial immediate annuity often includes a commutation feature or a liquidity rider that would be attractive in any other context and is disqualifying here. Ask the carrier to confirm in writing that the contract as issued contains no commutation, withdrawal or assignment right.

Test 2: Is It Actuarially Sound?

The payout period cannot exceed the annuitant’s life expectancy as measured by the actuarial tables the state Medicaid agency uses – commonly a Social Security period life table. A 78-year-old buying a twenty-year certain annuity fails this test because the schedule reaches past the assumed remaining lifespan, and the excess is treated as a gift to whoever receives the tail payments.

The practical consequence is that these contracts are usually short. Terms of two to five years are common, and in a plan built around a gift the term is often set deliberately to match the penalty period. Ask which table the state uses and get the life expectancy figure in writing before the term is chosen; do not let the term be set by what produces an attractive monthly payment.

Test 3: Are the Payments Level, Immediate and Without a Balloon?

Payments must begin immediately, be made in equal amounts, and continue on a fixed schedule with no deferral period and no balloon payment at the end. A contract that pays $50 a month for four years and then a large final payment is a resource dressed up as an income stream, and it fails.

Check three items on the schedule: the date of the first payment, the amount of every payment, and the amount of the last payment. All the middle payments and the last payment should be identical. Deferred annuities do not qualify at all, whatever the sales presentation says.

Test 4: Is the State Named as Remainder Beneficiary in the Right Position?

This is the condition added by the Deficit Reduction Act of 2005 and the one most often botched. The state Medicaid agency must be named as remainder beneficiary, up to the total amount of medical assistance it pays on the annuitant’s behalf.

Position matters. The state generally must be in first position, except where there is a community spouse or a minor, blind or disabled child – in which case the state stands immediately behind that person. Naming adult children ahead of the state disqualifies the contract.

Ask for a copy of the beneficiary designation as filed with the carrier, showing the state agency by its correct legal name and in the correct order. Do not accept an assurance that it will be handled after issue.

Federal test	What the contract must say	Common failure
Irrevocable and non-assignable	No surrender, commutation or assignment right	A liquidity rider left in the contract
Actuarially sound	Term within the annuitant’s life expectancy per the state’s table	Term chosen to produce a nicer monthly payment
Level immediate payments	Equal payments starting now, no balloon	A deferred start or a large final payment
State as remainder beneficiary	Named up to the assistance paid, in the correct position	Adult children named ahead of the state
Correct purchaser and timing	Community spouse funds, or applicant funds in a gift plan	Bought before the resource assessment is done

Test 5: Whose Money Bought It, and When?

There are two entirely different uses, and confusing them wrecks the plan.

The community spouse annuity. When one spouse enters a facility, the couple’s countable resources are totaled and a portion is protected for the spouse at home as the community spouse resource allowance. Amounts above that allowance must be spent or converted. Buying a compliant annuity with the excess turns a countable resource into the community spouse’s income, and the community spouse’s income is generally not deemed available to the institutionalized spouse. For 2025 CMS published a maximum community spouse resource allowance of $157,920 and a minimum of $31,584, with a maximum monthly maintenance needs allowance of $3,948; CMS updates all three annually, so confirm the current year’s figures with your state Medicaid agency.

The single-person annuity. Used alongside a gift, the annuity provides the predictable income stream that carries the applicant through the resulting penalty months. That structure only works if the term and the penalty line up – see how that pairing is built and how the penalty length is computed.

In both cases, income from the annuity is real income. For the institutionalized applicant it generally increases patient liability, meaning most of it goes to the facility. That is expected, not a failure – the goal was to protect the principal, not to generate spendable cash.

Terms It Is Confused With

A regular commercial immediate annuity. Same underlying product, but almost always issued with features that disqualify it. Buying one and hoping is the most common expensive mistake here.

A deferred annuity. Payments start later, so it fails the immediacy test outright and is generally a countable resource.

A qualified income trust, also called a Miller trust. This addresses income, not resources. In states that cap eligibility income – commonly at 300 percent of the SSI federal benefit rate, which worked out to roughly $2,900 a month for 2025 – an applicant whose income exceeds the cap routes the excess through the trust. Confirm the current cap with the state agency. It solves a different problem from an annuity and the two are frequently confused.

A structured settlement. A payment stream from a legal case, not a planning purchase.

A charitable gift annuity. Includes a donative element and is generally treated as a transfer.

Estate recovery. Separate program operating after death. A compliant annuity’s remainder provision is not the same as recovery against an estate – see how recovery works.

The Three Questions to Ask Before Anyone Sells You One

First: has an elder law attorney licensed in this state reviewed this specific contract against this state’s current rules? Several states impose requirements beyond the federal list, and some scrutinize community spouse annuities more aggressively than others. An agent’s assurance that a product is “Medicaid compliant” is a marketing claim, not a legal opinion.

Second: what is the commission, and who pays it? Annuity sales to older adults are a recognized area of regulatory attention, and state insurance departments enforce suitability standards. Asking the question in writing is entirely normal.

Third: what happens if the annuitant dies early in the term? The remaining payments go to the beneficiaries in the order named, with the state ahead of the family up to what it paid. Families should understand that outcome before signing, not after.

Where an In-Force Life Insurance Policy Sits Next to This Decision

An annuity and a life insurance policy are opposite instruments. One converts a lump sum into income you cannot outlive spending; the other converts premiums into a lump sum paid when you die. That is why the two get planned against each other, and why the sequencing matters.

The common scenario: a household has excess countable resources, part of which is the cash value inside an old permanent policy. Surrendering the policy to raise cash for a compliant annuity is one route, and sometimes the right one. But surrender is irreversible and pays the carrier’s figure, which for an older insured in declining health is frequently the lowest number available. Establish what the policy is actually worth before converting it into anything. Compare the paths honestly in a settlement against a compliant annuity and an annuity against keeping the policy.

Be equally clear about when the policy should be left alone. A small policy already designated as an irrevocable burial arrangement under state rules, a policy a community spouse genuinely still needs, and a term policy with no cash value are all cases where the answer is to do nothing with it. If you want a plain number for a specific policy to hand your elder law attorney, a free policy review costs nothing and produces one – including, when true, the answer that the policy has no market value.

---

Frequently Asked Questions

Can I buy a Medicaid-compliant annuity from any insurance agent?

You can buy an immediate annuity from many agents, but only a contract meeting every federal condition works, and most standard products contain a feature that disqualifies them. Have an elder law attorney licensed in your state review the specific contract before purchase. An agent’s statement that a product is compliant is a marketing claim, not a legal opinion.

What happens to the money when the annuitant dies?

Remaining payments go to the named beneficiaries in order. Because federal law requires the state Medicaid agency to be named as remainder beneficiary up to the amount of assistance it paid, the state is generally repaid before family receives anything, except where a community spouse or a minor, blind or disabled child holds the position ahead of it.

How much can the spouse at home keep?

A portion of the couple’s countable resources, called the community spouse resource allowance, calculated under the state’s method within a federal band. For 2025 CMS published a maximum of $157,920 and a minimum of $31,584. Those figures are updated every year, so confirm the current ones with your state Medicaid agency before planning around them.

Is a Miller trust the same thing?

No. A qualified income trust, often called a Miller trust, addresses excess monthly income in states that cap eligibility income, commonly at 300 percent of the SSI federal benefit rate. An annuity addresses excess resources. The two solve different problems and a household may need one, both or neither depending on the state and the numbers.

Will the annuity income just go to the nursing home?

For an institutionalized applicant, generally yes, because the income increases patient liability. That is the expected outcome rather than a failure of the plan. The purpose was to protect the principal from being spent down entirely, not to create spendable cash. For a community spouse annuity, the income belongs to the spouse at home.

Should I cash in a life insurance policy to fund one?

Only after finding out what the policy is worth. Surrender is irreversible and pays the carrier’s number, which for an older insured in declining health is often the lowest available outcome. A small burial-designated policy, a policy the community spouse still needs, and a term policy with no cash value should generally be left alone entirely.

Related Reading

• Life Settlement Vs Medicaid Compliant Annuity
• Life Settlement Medicaid Compliant Funding
• Annuity Vs Keeping Policy
• Life Settlement Vs Annuity
• What Is A Half A Loaf Strategy
• What Is The Medicaid Penalty Divisor
• What Is Medicaid Estate Recovery
• What Is Medicaid Patient Liability

---

Pine Lake Legacy does not purchase life insurance policies and does not provide legal, tax, or investment advice. Information provided is for educational purposes only. Eligibility for any option, including life settlements, is not guaranteed and depends on individual circumstances, policy terms, underwriting, and market conditions. Consult independent legal, tax, or financial professionals before making decisions regarding a life insurance policy.