An Annuity Is an Investment
Before I get into my opinion let’s first establish an understanding. When I refer to Veterans benefits, I am referring to the special improved pension that most folks know by “VA Aid and Attendance.”
Let’s also understand that annuities are investments and as such have a place in one’s investment strategy. Even without consideration of veterans benefits, the annuity may simply not be a good idea as a matter of financial planning. Let’s say for example we have a gentleman 80 years old. He is not a veteran. He purchases an annuity because the interest rate is better than he is getting for his bank CDs. A year later he has a stroke and now must spend money to make his home wheelchair accessible. When he cashes out the annuity he may lose 10% or more in “surrender charges.” A simple explanation is that annuities are sold on commission and the surrender charge covers that cost. The moral: don’t put money into an annuity if you may need it within the next few years, and that includes the nursing home.
Why I Don’t like Them for VA Benefits
As a rule I don’t like them because there are better options. And of course, every rule has exceptions. First the rule: There are a number of reasons why I don’t like them. Here are a few.
1. They are not necessary. One common strategy is for the veteran to transfer money to a child who then purchases the annuity. The annuity is superfluous because the veteran was eligible as soon as he made the gift.
2. Transferring to another person might not be too smart, though. What if s/he has a financial emergency, divorces, gets sued, goes bankrupt? The money is lost.
3. What if the Vet goes to a nursing home within five years and needs Medicaid? The transfer is caught in the five year look back. Unless every dollar is returned Medicaid will impose a “penalty period” which means they will not pay the nursing home.
For example, the transfer and purchase of a $50,000 annuity will result in a half year penalty period of Medicaid not paying. The nursing home may sue to get paid. How can you avoid this result? By putting $50,000, and not a penny less, back in the Vet’s bank account. Too bad about that annuity surrender charge. Too bad if some of the annuity was used by the child to pay some of the Vet’s bills. The penalty period stands.
4. “Immediate annuities” have problems too. An immediate annuity pays a monthly income to the Vet or spouse. It has no surrender charge since it is irrevocable. So, if the Vet is the payee, Medicaid requires the payments go to the nursing home since it is his income. If there is no spouse when he dies the state will take the payments in “Medicaid estate recovery” to pay itself back for the Medicaid benefits.
If the annuity pays to the spouse, then more of the Vet’s income will go to the nursing home as part of his Patient Pay Amount (co-pay). Less will go to his spouse since she will be receiving the income from the annuity. This is money needlessly lost.
Exceptions to the rule:
1. Transfers/gifts to children are highly risky if we cannot trust the child to return the funds for the veterans benefit.
2. Sometimes the family plan is to avoid the nursing home at all costs. And, some conditions do not typically require a nursing home, consider some dementia patients only need a safe environment with very little medical support. In those cases an immediate annuity can supplement the Vet’s income plus VA benefit to meet the monthly cost of an assisted living facility.
Conclusion
An annuity is an investment vehicle that is part of an investment strategy. They may be used to apply for Veterans benefits and there are other strategies that work as well. It is up to the adviser to recommend the best strategy given the client’s particular circumstances.
