Tag Archives: Enough Money

Don’t Depend on Medicaid Coverage for Your Long-Term Care Needs

Don’t Depend on Medicaid Coverage for Your Long-Term Care Needs

Are you financially prepared to shell out $67,000 plus annually to cover future long-term nursing home care expenses?  If not, perhaps you are expecting Medicaid to cover the cost of your long-term care needs?  If you or your parents have this same expectation then read on.

Medicaid is a public program that provides custodial care to those in need, but cannot afford to pay for care. The annual costs for this program are growing exponentially. In fact, Medicaid expenditures now account for the fifth largest budget item behind Social Security, defense, debt service and Medicare. And based on its current growth rate, Medicaid expenditures will soon exceed those spent on Medicare.

There just isn’t enough money in Federal or State budgets to cover this expected growth. In an effort to control costs, Congress passed a bill in February 2006 that makes it harder to qualify for Medicaid.

The purpose of this legislation is to keep people from cheating the system. Medicaid is designed for the poor, not those wanting the government to subsidize their long-term care costs while they pass on substantial assets to their heirs.

Here are a few of the bill’s provisions:

Home Equity Disqualification

Medicaid coverage of nursing home care is prohibited for those with home equity in excess of $500,000, or $750,000 at the option of each state.  If you live in a part of the country that has experienced exponential real estate growth, watch out. People in such places, even if they have few other assets, may be forced to sell their homes and spend that money before qualifying for Medicaid.

Extended Lookback Period

In the past, you could reduce your assets by gifting them to your loved ones. As long as you didn’t apply for Medicaid within three years of that gift, it would not be counted as an asset. Now, you’ll have to wait five years.

As an example, suppose Janice transfers the title of her home, which is valued at $300,000, to her daughter. Janice then applies for Medicaid 36 months after the title transfer.  Because she is inside the look back period, the house is still considered Janice’s resource. Janice has less than $2,000 in resources and would otherwise qualify for Medicaid right away. However, Medicaid will not pay a dime for her care until the equivalent spend down of her gift has been paid. In other words, the state considers the previous asset transfer to be a resource that should have been exhausted before Janice qualified for Medicaid assistance. This spend down requirement now becomes a penalty after the fact.

The penalty is determined in months of care and is calculated by dividing the amount of the gift by the state Medicaid rate, which in this example is $5,000 a month. Dividing the gift by the monthly rate yields 60 (5 years) penalty months. From the date that Janice would have been approved for Medicaid someone must pay for 69 months of her care before Medicaid takes over.

With a large gift, penalty periods could last five to ten years or more. If Janice applied for Medicaid 60 months and one day after making the gift there would have been no penalty.

Annuity Rule Changes

You’ll no longer be able to buy an annuity, hoping that only the income will be counted, thus shielding that asset.  Instead, the government is eliminating this loophole by requiring that Medicaid be named as the annuity’s remainder beneficiary.

The bottom line here is that you should not rely on Medicaid to cover your long-term care needs. Nor should you rely on your ability to transfer assets to your loved ones and still qualify.  Even before these rule changes, qualifying for Medicaid was hard enough.

* MetLife Mature Market Institute. “The MetLife Market Survey of Nursing Home & Home Care Costs,” September 2006.

Time to Split: Squelch Retirement Worries with a Split-Annuity

Time to Split: Squelch Retirement Worries with a Split-Annuity

Recent research shows that U.S. workers are growing increasingly apprehensive about their ability to fund a comfortable retirement. Only 18% of surveyed workers said they are very confident about having enough money for a comfy retirement, according to the Employee Benefit Research Institute’s 2008 Retirement Confidence Survey.

That means that more than 80% of workers are not certain that they have enough retirement savings. Of course, in the face of skyrocketing health-care costs and burgeoning inflation, it’s really no wonder why workers are so concerned. If you’re worried that you may not have enough income to last a lifetime, you may want to consider a split-annuity strategy. This tactic may allow you to start receiving a steady stream of income now that could continue well into your retirement years.

How to make the split

It’s fairly simple to pull off a split-annuity strategy. All you have to do is divide a lump-sum contribution between an immediate fixed annuity and a deferred fixed annuity. An annuity is a contract between you and an insurance company. You pay the insurance company either a lump sum or a series of payments in exchange for the promise that the company will offer you a stream of income in the future. This allows your money to grow over a specified period of time in a relatively low-risk environment.

The split-annuity strategy is an effective approach for those who need income now and well into the future. That’s because the immediate annuity starts paying you income right away for a specific period of time while the deferred annuity continues to accumulate interest-which will provide you more income in the future.

A case study

Let’s say a man named Bob splits a $500,000 lump sum between an immediate annuity and a deferred annuity-that’s $250,000 in each account. Bob chooses an immediate annuity contract that guarantees a 4% annual rate of return, allowing him to receive an annual payout of $35,000 for the next eight years.

In the meantime, Bob’s $250,000 in the deferred annuity is also earning a 4% annual return on a tax-deferred basis. After eight years, Bob’s immediate annuity has been drained, so he turns to the deferred annuity-which has grown to more than $342,000. Bob can now start collecting income from the deferred annuity.

Important annuity facts

Before you tap into this split-annuity strategy, it’s important to understand all the ins and outs of annuities. Here are a few things you’ll want to keep in mind:

  • Beneficiaries: If you have a deferred annuity and die during the accumulation phase (the time before the payouts begin), your designated beneficiary will collect the principal in addition to any interest that has accumulated. This is why it’s extremely important to designate a beneficiary in your annuity contract.
  • Surrender charges: Although there are some surrender charges associated with withdrawing money from deferred annuities, these charges typically decrease over time. After a certain amount of time, surrender charges will no longer apply.
  • Taxes: Annuity earnings are taxed as ordinary income. Also, if you make any withdrawals before the age of 59ВЅ, you may be subject to a 10% federal income tax penalty.

If you are concerned about having enough income to fund a comfortable retirement, ask your financial advisor about a split-annuity strategy. This effective line of attack may allow you to start collecting income right now and ensure you’ll have enough income well into the future.

* Annuity withdrawals are generally taxed as ordinary income and may be subject to surrender charges, in addition to a 10% federal income tax penalty if made prior to age 59 1/2. The guarantees and payments of income are contingent on the claims paying ability of the issuing insurance carrier.