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Deferred Annuities

by Ira M. Leff, Esq.

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March 3, 2010

In the past, I have written about the use of immediate annuities in Medicaid asset protection planning. What about deferred annuities? Deferred annuities are investments with life insurance companies. Funds are deposited with the company for future distribution. Typically, these contracts guaranty a higher rate of return than banks offer, but in exchange impose a hefty penalty for early withdrawal. From a Medicaid perspective, these contracts are countable assets since they can be converted to cash at any time, albeit with a penalty.

This week I have helped two families with large investments in deferred annuities. The first is a 73 year old widow who, in April 2009, invested just about all of her liquid assets in an annuity contract. Eight months later she had her knee replaced and was admitted to a nursing home, and then an assisted living facility where she currently resides. She needs to access the corpus of the annuity contract to pay for her care. Her contract contains a nursing home waiver, which allows withdrawals without a surrender charge, after the first contract year, if the owner is confined to a nursing home for at least 90 days. Unfortunately, the waiver does not apply to the assisted living level of care. The insurance company proposed to assess a 9 percent surrender charge and a market value adjustment. I was able to persuade the company to waive these charges by asserting that it was a breach of fiduciary duty to advise this 73 year old woman to invest nearly all of her liquid assets in these long-term contracts.

The other case involves a married couple. The husband and wife each bought a deferred annuity in 2004, when they were 84 years old. These annuities call for a 25 percent penalty for the first six contract years and a market value adjustment! The husband has been in a nursing home since December 2009, and needs to access the money in his contract to pay for his care. Unlike the case above, these contracts do not contain nursing home waivers. In reviewing the contracts, I discovered that they permit the owner to borrow up to 60 percent of the accumulation account without any penalty. So, in this case the husband and wife will borrow out the funds that they need without a penalty.

The lesson to be learned from these two cases is that buyers need to beware when they enter into long-term contracts with significant penalties for early withdrawals.

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