Do You Find Annuities Confusing?
You’re not alone. If you’re not an insurance agent annuities can be confusing. I’m frequently asked questions regarding the difference of annuities, and how the difference kinds are treated for eligibility purposes. What purpose do they really serve? What kind is appropriate? How do you tell the difference between all the types?
Why Use an Annuity?
The primary reason for using an annuity is to convert excess assets into an income stream. Thus, the problem assets, whether they consist of cash, checking and savings accounts, stocks, bonds, mutual funds, cash value life insurance, or an IRA, can be converted into an annuity, without jeopardizing eligibility. Additionally, using certain types of annuities can provide a safe investment vehicle when preplanning for Medicaid or gifting assets.
An immediate annuity is a financial contract that delivers regular payments from an insurance company to the payee that begins soon after the signing of the contract – there is no accumulation period. For Medicaid purposes, if the immediate annuity meets certain restrictions outlined in the Deficit Reduction Act of 2005, it is considered income only. For Veterans Benefits purposes, an immediate annuity is considered income only regardless of its provisions.
A tax-deferred annuity is an investment with an insurance company which continues to grow until the owner makes a complete withdrawal or annuitizes the contract. Established under § 403(b) of the Internal Revenue Code, tax-deferred annuity owners have the opportunity to accumulate funds on a tax-deferred basis. Contributions and the investment returns can grow quickly in that taxes are deferred until the owner receives the funds. For Medicaid and Veterans Benefits purposes, a tax-deferred annuity is a countable asset, which becomes part of the applicant or spouse’s net worth. Tax-deferred annuities are primarily used as investment vehicles in preplanning for Medicaid, or in gifting assets.
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