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Effective: December 1, 2006 |
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19.25.30ar1 - Annuities (Archive) |
Archived: May 1, 2009 |
This section provides policy provisions for annuities.
Determining Counted Annuity Value.
An annuity is a contract purchased by a person with whom another party (the insurer) agrees to pay the purchaser, or the person the purchaser appoints (the annuitant) a stipulated amount over a period of time.
There are two different ways to purchase an annuity, which are:
l Commercial - 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.
l Private - Purchased and set up by a private individual that is not part of an insurance company or financial institution licensed or regulated by the Minnesota Department of Commerce or a similar agency of another state.
The annuity provides a series of payments made at set times for a specific period or for a time period based on the life expectancy of the owner or the annuitant. This is known as the settlement option.
There are many types of settlement options that may be selected however the most common are:
l An immediate annuity.
n This type of annuity starts payments within one year of purchase.
n A client can purchase an immediate annuity with a lump sum and immediately annuitize it by choosing a settlement option.
l A deferred annuity: starts payments at some future age of the annuitant.
Annuities may contain a rescission (or right to cancel) period, often called the free look period, that immediately follows the purchase of an annuity, during which the owner can cancel the purchase. There may also be a free look period after the settlement option is chosen.
The annuity owner is the person who may exercise the rights provided in the annuity contract during the life of the annuitant. The owner:
l Can name himself/herself or another person as the annuitant.
l Chooses the settlement option.
l Names the beneficiary.
The annuitant is the person who is entitled to payments under a settlement option.
The beneficiary is the person who will receive benefits if the annuitant dies before the annuity payment starting date, or will receive any remaining payments under a settlement option after the annuitant's death.
The beneficiary can be selected when the annuity contract is purchased or at a later date.
The cash value, also known as the cash surrender value (CSV), 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 there is usually no longer a cash value to count because the funds are no longer available as a lump sum.
If the client does withdraw the cash value, consider it to be a conversion of assets and follow policy for the assets to which the cash value was converted.
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.
A commuted cash value allows the owner to cash in the contract even after annuitization.
l This allows the owner to cash in the policy for the present value of all future payments.
l Commuted cash value would be a provision in the contract.
The accumulation phase is the first phase of an annuity. During the accumulation phase:
l The contract accumulates funds through funds paid into the annuity and through growth.
l The owner can usually cash in, or surrender the annuity for its cash value or surrender value.
l The client does not have to withdraw the cash value for it to be counted.
The annuitization phase is the second phase of the annuity. During this phase, the owner chooses a periodic payment option, also called a settlement option.
Once annuitization occurs, the person cannot change the settlement option chosen as it locks in the way the funds will be paid out of the annuity.
The owner chooses:
l The amount of each payment.
l How often payments will be made.
l The length of time over which the payments will be made.
An owner of an annuity may request cancellation of the contract and a refund of payments without penalty at certain times indicated by the contract. This rescission period is often called the free look period.
Minnesota law requires at least a 10 day free look period after the initial purchase of an annuity, however, most commercial annuities provide for more than the minimum. Generally when the settlement option has been selected, at annuitization, there will not be a free look period.
During the free look period the entire amount of the deposits made and any earnings on those deposits is available to the client.
Treat annuity payments to a client as unearned income. See Categories of Income.
A transfer of assets may take place for:
l An annuity that is or has been annuitized, by either the client or the client’s spouse.
l Annuities that have been sold, assigned or have had part of the income stream sold.
l Annuities purchased on or after 3/1/02 must be evaluated as a transfer if it meets one of the following:
n It does not have equal monthly payments at annuitization.
Example:
A lump sum/balloon payment indicates that the monthly payments are not equal.
n Payments or principal and interest do not begin at the earliest possible date after the settlement option has been selected and the annuity is annuitized.
n It was set up by a private party.
See Annuity Transfers for more information on how to evaluate these annuities.
Determining Counted Annuity Value
Evaluate annuities where the client is the owner as follows:
l Accumulation Phase. 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.
Request proof 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 is named as 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 How long payments will be made.
n Date the payments will begin.
Request proof 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.
For more information on what annuities need verification under general provisions, please see Verification of Assets.
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.
Also see the Asset Assessment section of the manual for more information regarding asset assessments.