As a Boston Elder Law Attorney, I often meet with clients that have invested their assets in annuities or may be thinking about it. In some cases, when used as a long term investment or Medicaid Planning tool, it may make sense to purchase an annuity. However, I often see annuities that are misused. Financial Advisors are motivated to sell annuities, because they receive a commission on the sale. Before purchasing any annuity, you need to make sure that the investment is really in your best interest.
What is an Annuity?
It is a contract with an insurance company. You pay a lump sum in exchange for periodic payments. There are two kinds of annuities: variable and immediate.
Variable annuities make payments to you for the rest of your life. The payment that you receive, depends upon the performance of the investment. Most companies offer a guaranteed minimum return on your investment. Variable annuities are considered a tax deferred investment. This means that you are not taxed on the investment earnings, but only on the income when the annuity is withdrawn.
A variable annuity may work for you, if you are planning your retirement and won't need to withdraw your original investment. If you need to withdraw the initial investment, you may get hit with high penalties for withdrawing the money. You may not think that you will need this money, but if you get sick, you may need it to pay for long term care. Therefore, if you are older, disabled or sick, in most cases, you should not purchase a variable annuity.
I know several clients that had to withdraw variable annuities and were faced with large penalties. In most of these cases, the financial advisor never should have sold this product to the client to begin with, because it was likely that the client would need nursing home care in the near future.
Variable annuities should never be used as a Medicaid Planning tool. If you are older or sick, you probably should not be buying a variable annuity. Before purchasing a variable annuity, it is helpful to get a second opinion, to make sure that it is a wise investment for you.
With an immediate annuity, you pay the insurance company a lump sum, and the insurance company pays you a fixed amount, usually on a monthly basis, for a certain period of time. Immediate annuities can be based upon a certain number of years or payments, called a "term", or they can be paid out for life.
In Massachusetts, immediate annuities are often used in Medicaid/ MassHealth planning. As an elder law attorney, there are specific situations where I recommend that clients purchase a variable annuity. However, this is always used only as a last minute planning option, usually when a spouse is faced with imminent placement in a nursing home.
The immediate annuity must be carefully established to ensure that it complies with the Medicaid/ MassHealth regulations. Before purchasing an annuity, you must make sure that your financial advisor is aware of the specific eligibility requirements for Medicaid. You should always consult with an elder law attorney before purchasing an immediate annuity for Medicaid purposes. If the annuity is missing specific language, it will result in a denial of the Medicaid application, which could cost you many thousands of dollars.
You can also purchase an immediate annuity to provide an income stream for life. In my experience the rate of return on investment is so low, that I would not recommend an immediate annuity, unless someone is faced with a situation where they need to do last minute Medicaid Planning,
An annuity involves the same risk that any investment does. You should make certain that the insurer is rated in the top two categories by one of the services that rates insurance companies, such as A.M. Best, Moody’s, Standard & Poor's, or Weiss. And don't put too much of your savings into any one type of investment, whether that be variable annuities, immediate annuities, stocks or bonds.
If you are contemplating purchasing an annuity and would like a second opinion, or if you have any questions, please contact our office for guidance at 617-489-5900.
The attorneys at Senior Solutions are caring elder law and estate planning attorneys with offices in Belmont and Hingham, Massachusetts. We serve the Greater Boston and South Shore of Massachusetts. Providing Medicaid Planning, Wills, Trusts, Powers of Attorney, Health Care Proxies, Special Needs Trust Planning, Guardianship & Conservatorship and Probate.
Kathy L. McNair, Esq.
Senior Solutions LLC