Should Mom cash in the second annunity ($25,000.) 2 years before maturity date and accept penalties? -

Should Mom cash in the second annunity ($25,000.) 2 years before maturity date and accept penalties?


Not on Medicaid yet. Annunities, one is matured. Going to cash in as she needs $. Other matures in 2 yrs. Is there anything else she could do if she cashed in early that Medicaid would not penalize her on the 5 yr look back. So far her health is good so hopefully she can spend down the money (if she cashes it in early)
She is not on medicaid at this time and hopefully not for several more years, but you never know. We're not trying to cheat medicaid, just trying to financially plan for the future.

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Hi…the diligent Aging Care staff saw your question and asked that I respond which I am happy to do.

First, for the benefit of my reply and for the benefit of others reading this, let’s be sure of the type of annuity you are speaking of and what you mean by the annuity “maturing”.

I am going to assume that you are speaking of a “deferred annuity” that operates very much like a bank Certificate of Deposit (CD) in that a lump sum is deposited with the insurance company and interest is credited to the account every year. (Annuities are issued by insurance companies, not by banks, and are not FDIC insured).

Also like some bank CDs, some deferred annuities guarantee the credited interest rate for a fixed number years, e.g., 3% for 5 years.

Because of their familiarity with bank CDs, many annuity holders call the expiration of this interest rate guarantee the “maturity date”. However when speaking of annuities this is an inaccurate term as the “maturity date” of an annuity is actually the “annuity date”; the date when the policy must be annuitized (a fixed stream of income begins). The annuity date is usually at age 80 or above.

Be all this as it may be, it appears your main concern is about the cash value of this annuity and its relationship to mom qualifying for Medicaid.

Understand that the “5 year look-back” only applies to asset transfers where a Medicaid applicant has gifted or given money in the prior 5 years and received nothing of fair market value in return.

So, if mom owns the annuity, does not give or gift any of it, and spends it down on her own health, maintenance and welfare, no penalty will be applied at application. (Making an investment is not considered an uncompensated transfer or gift).

Alternatively, if she were to gift the annuity or other assets now, and 5 years were to elapse before application, there would again be no potential penalty.

If at the time of application mom has more than $2,000 in assets (including the cash value of annuities and potentially other life insurance policies) you should consider methods of preserving assets above $2,000 so she will have those funds for her use while she is receiving Medicaid.

So, to quickly recap, mom can keep the annuity in her name and use the money for her benefit without concern for the “5 year look-back”. At the time of application she cannot have more than $2,000 in her name and the pro’s and con’s of doing something about that now should be carefully weighed.
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Sometimes you are better off to have the annuity pay off in increments as opposed to lump sum. You would need to kick this around with a financial advisor who can look at the whole picture of assets and expenses.
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I am assuming that by "maturity date", you mean the date after which there will be no penalty for cashing in the annuity. My mom also had several annuities when I began dealing with her finances, and the early withdrawal penalties were quite substantial, some as high as 16%. The penalties usually decline each year until they become zero. My mom's annuities all had a clause allowing her to withdraw up to 10% of the value each year penalty free. If your mom needs money now, you might be able to withdraw part of the money before the maturity date without paying a penalty.

Also, if it is a tax deferred annuity, taking annual withdrawals will lessen any income tax consequences. For example, if there is enough accumulated interest to cause mom's social security to become taxable, it might be advantageous to spread out the payments. Regardless of when you withdraw the money, it shouldn't affect Medicaid eligibility as long as the funds are used for mom's expenses before she applies for Medicaid.
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Thank you Mr. Robbins and all for helping me find answers to my questions. It has given me light where there was darkness. You've taken much stress off my shoulders. God Bless you.
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