Annuities

This section provides policy on:

l  Counting annuities as income.

l  Counting annuities as assets.

l  Evaluating annuities in asset assessments.

l  Verifying annuities.

For information on annuity transfers for clients requesting long-term care (LTC) services LTC services include skilled nursing facility (SNF) care, nursing facility care in an inpatient medical hospital or intermediate care facility (ICF, ICF/DD), or services covered by home and community-based waiver programs (CAC, CADI, DD, EW, and TBI). see Annuity Disclosures, Naming DHS a Preferred Remainder Beneficiary, and Evaluation of Annuities under Transfer Policy.

For information on annuity-funded burials, see Types of Burial Assets and Life Insurance.

 

Overview of Annuities.

Classification of Annuities.

Free Look Period.

Cash Surrender Value.

Commuted Cash Value.

Counting Annuities as Income.

Counting Annuities as Assets.

Annuities in Asset Assessments.

Annuity Verification.

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Overview of Annuities

An annuity is a purchased contract in which one party (annuity issuer A person or entity (an insurance company) that manages an annuity. The annuity issuer accepts funds from the owner(s) during the accumulation phase and issues payments after the funds have been annuitized. Banks and financial planners often sell annuity arrangements; however, insurance companies issue annuity-based financial arrangements.) agrees to pay the purchaser, or the person the purchaser designates (the payee A person who receives periodic payments from an annuity. An annuity contract may provide for two or more payees. An annuity payee is sometimes called the annuitant; however, a payee may not also be an annuitant. or payees), a return on money deposited with the annuity issuer (either in the form of a single lump sum or several payments deposited over several months or years) according to the terms of the annuity contract.

An annuity owner can name a person, trust or entity to receive death benefits from an annuity. This recipient is called the death beneficiary The person named to receive benefits or payments (for example, social security payments or payments from a life insurance policy or trust). For annuities, a beneficiary is the individual, trust, or entity named by the annuity owner to receive death benefits from an annuity.. The annuity provides a series of payments made at set times for a specific period or for a time based on the life expectancy of the annuity owner Person(s) who may exercise rights provided in the annuity contract. For example, the owner(s) names the payee(s) who can be an owner or other parties, chooses the settlement option, and names the beneficiaries. or the annuitant The person(s) upon whose life expectancy annuity payments are based. Multiple annuitants in an annuity contract are commonly referred to as joint annuitants or co-annuitants. Not all annuity payments are based upon a person’s life expectancy. See ”r;term certain annuity.” Annuitant sometimes refers to a person who receives periodic payments from an annuity..

Classification of Annuities

Annuities can be classified in a number of ways, including:  

1. The time at which annuity payments begin.

m Immediate Annuity An annuity contract under which the periodic payments will begin within one payment interval following the payment of the annuity premium. A payment interval is the period that will elapse between payments (a month, a calendar quarter, a year)..  

m Deferred Annuity An annuity contract under which periodic payments will begin sometime in the future. A deferred annuity contract provides the purchaser with the opportunity to accumulate savings over an extended period before the contract enters its payout phase. A deferred annuity has two phases: 1) the accumulation phase; and 2) the annuitization phase (also called the payout phase)..

2. The nature of the periodic payments.

m Fixed Annuity A type of annuity in which benefits have guaranteed or fixed dollar amounts..

m Variable Annuity A type of annuity in which periodic payments vary according to income generated by assets in an underlying investment portfolio. Payment amounts may fluctuate because the annuity payments vary based upon the performance of the market..   

Note:  Variable annuities do not provide equal payments as required under evaluation of annuities under transfer policy because payments are based on the performance of the market.  

3. The period over which annuity payments will be made.

m Term Certain Annuity An annuity under which payments are scheduled to continue for a specified period of time, such as for 10 years, irrespective of the annuitant's lifetime..  

m Life Annuity An annuity under which the payments continue for the life of the annuitant..

4. The type of annuity issuer:

m Commercial Annuity An annuity that is purchased and set up via an insurance company or financial institution licensed or regulated by the Minnesota Department of Commerce or a similar agency of another state..

m Private Annuity An annuity that is purchased and set up by a private individual that is not part of selling the annuity as an employee of an insurance company or financial institution, licensed or regulated by the Minnesota Department of Commerce or a similar agency of another state..

Note:  These types of annuities may be an uncompensated transfer. See Evaluation of Annuities under Transfer Policy.

Free Look Period

Under Minnesota law, the purchaser of an annuity has the right to cancel an annuity contract within ten days following the date of receiving a copy of the annuity contract.

This cancellation period is often referred to as the ”free look period.” Some annuity contracts allow a free look period longer than ten days. The purchaser cannot waive the right to cancel an annuity contract. The purchaser of the annuity always has this right, even if he or she agrees to give up this right or the right is not stated on the annuity documents.

The purchaser is entitled to a refund of the annuity's entire purchase value when the annuity is cancelled within a free look period.

Exception:  The refund the annuity purchaser is entitled to receive when a variable annuity A type of annuity in which periodic payments vary according to income generated by assets in an underlying investment portfolio. Payment amounts may fluctuate because the annuity payments vary based upon the performance of the market. is cancelled within a free look period is based upon several factors. As a result, the refund could be more or less than the annuity's purchase value.

Cash Value

The cash value, also known as the cash surrender value (CSV) The amount the life insurance policy owner, including an annuity owner, would receive if the policy were cashed in., of an annuity, or the amount that can be surrendered, is the amount the client can withdraw from the annuity.

It is most common for an annuity to have cash value during the accumulation phase. Typically, at annuitization The point in time when an annuity's settlement option is chosen. there is no longer a cash value to count because the funds are no longer available as a lump sum.

Consider it to be a conversion of assets and follow policy for the assets to which the cash value was converted if the client does withdraw the cash value.

To calculate cash value:

1. Total all deposits made to the annuity + any earnings on those deposits not previously paid out.

2. Subtract any earlier withdrawals and any surrender costs charged for withdrawal.

Note:  There may be tax penalties for early withdrawal. However, do not allow income tax withheld or tax penalties for early withdraw as deductions from cash value.

Commuted Cash Value

A commuted cash value allows the owner to cash in the contract even after annuitization.

n  This allows the owner to cash in the policy for the present value of all future payments.

n  Commuted cash value would be a provision in the contract.

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Counting Annuities as Income

For all health care programs, treat annuity payments to a client as unearned income. Generally, payments from an annuity occur in the annuitization phase. However, there are times when the owner of the annuity is required to make mandatory minimum withdrawals during the accumulation phase. The mandatory withdrawals are age dependent. At a certain age, usually 59 and a half or 70 and a half, the owner of the annuity has to make a withdrawal of cash.

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Counting Annuities as Assets

For all health care programs, evaluate annuities where the client is the annuity owner as follows:

l  Accumulation Phase The first phase of a deferred annuity during which the contract accumulates funds from the payments made into the annuity and accrues interest and earnings on investments.. Count the following toward the asset limit:

n  The cash value of the annuity toward the client’s asset total, if the client is able to withdraw it from the annuity.

n  The value of an annuity in a free look period.

l  Annuitization Phase. Count the following toward the asset limit:

n  Any available cash value of the annuity toward the client’s asset total.

n  The value of an annuity in a free look period.

n  The commuted cash value.

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Annuities in Asset Assessments

Count the cash value of an annuity owned by either spouse toward the asset total if the annuity meets any of the following:

l  Is in the accumulation phase (not annuitized).

l  Is in a free look period.

l  Has a commuted cash value.

Count annuities converted to income between the time of asset assessment and application as available when determining the spousal asset allowance at the time of MA application.

Exception:  Do not count the annuity if it is funded by a pension or retirement fund held by an employer or union and the client cannot gain access to the funds.

Count the dollar amount available to the client, if the retirement fund contains a special provision that allows the individual to access a portion of the fund or the entire fund under certain circumstances such as a medical emergency.

See the Asset Assessment section of the manual for more information regarding asset assessments.

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Annuity Verification

Clients requesting LTC services must provide verification of the full current cash value as of the date of the request for MA payment of LTC services if the annuity is revocable.

Clients must provide verification of the annuity’s market value if the annuity is assignable.

A copy of the annuity contract and account statements can verify most items needed. In some situations, it may be necessary to get a signed release from the client and contact the annuity issuer or insurance company to obtain verification. Request verification of all of the following:

l  Whether the annuity is a commercial or private annuity.

l  Under what circumstances, if any, the annuity can be sold, cashed in, or assigned to someone else.

l  Cash value of the annuity on the day of annuitization.

l  If anyone other than the client and his or her spouse is an owner of the annuity.

l  If anyone other than the client is named as an annuitant.

l  If anyone is named as beneficiaries.

l  The settlement option chosen, including;

n  How often payments are made.

n  The value of each payment.

n  Date the payments began or will begin.

n  How long payments will be made.

Request verification if it is unclear if the annuity:

l  Is in a free look period.

l  Has a cash value.

l  Has a commuted cash value.

l  Payment received is due to annuitization or a mandatory withdrawal due to age.

Note:  MinnesotaCare does not require verification of assets. However, accept copies of an annuity contract and account statements to verify income from an annuity or to assist a client in determining the asset value of an annuity.

For more information see Verification of Assets.

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