Medicaid-Compliant Annuities

A Medicaid-compliant annuity turns a lump sum of savings into a stream of monthly payments. If it meets a strict set of federal rules, buying it is not treated as a gift, and the money used to buy it no longer counts as an asset. Instead, the monthly payments count as income. For married couples especially, a compliant annuity can protect a large amount of savings for the spouse at home, even when care is needed right away. This guide explains how these annuities work, the federal rules, and the trade-offs.

Figures change periodically. Double-check current amounts before relying on them.

The short version

An annuity is a contract, usually with an insurance company: you pay a lump sum, and it pays you back in installments.
For Long-Term Care Medicaid, an annuity bought on or after February 8, 2006 must meet the rules added by the Deficit Reduction Act of 2005 (42 U.S.C. 1396p(c)(1)(F) and (G)) or it is treated as a transfer of assets.
A compliant annuity must be irrevocable, non-assignable, actuarially sound, and pay in equal amounts with no deferral and no balloon payment.
The state must be named as a remainder beneficiary for what Medicaid paid, in first place, or second after a spouse or a minor or disabled child.
The money paid in stops counting as an asset; the payments count as income.
Compliant annuities are most useful for married couples, and in some cases for single people as part of a “half a loaf” plan.

How an annuity changes the numbers

Medicaid looks at assets and income differently. A $100,000 savings account is a countable asset, far above a $2,000 limit. A $100,000 annuity that pays $1,800 a month for five years is an income stream, and the $100,000 is no longer an asset. For a married couple, if the annuity belongs to and pays the spouse at home, the income is the spouse at home’s income, which generally is not counted toward the applicant after eligibility (the “name on the check” rule). That is how a compliant annuity can protect savings for a spouse in a crisis.

The federal requirements

Federal law, as interpreted in CMS guidance, requires the following for an annuity to avoid being treated as a transfer:

Disclosure. The applicant must disclose any annuity owned by the applicant or spouse, and by applying, the state becomes a remainder beneficiary.
State as remainder beneficiary. The state must be named as a remainder beneficiary in the first position for at least the total Medicaid paid on the annuitant’s behalf, or in the second position after a community spouse or a minor or disabled child (and in first position if that person or their representative transfers the remainder for less than fair value).
One of two safe harbors. The annuity must either:
be an annuity described in certain sections of the Internal Revenue Code, such as an individual retirement annuity, or purchased with the proceeds of an IRA, SEP, SIMPLE or Roth IRA; or
be irrevocable and non-assignable, actuarially sound (its term does not exceed the annuitant’s life expectancy under the Social Security Administration’s actuarial tables), and provide for payments in equal amounts during the term, with no deferral and no balloon payments.

An annuity that misses any requirement is generally treated as a transfer of assets, which can cause a penalty period, or as a countable asset.

What “actuarially sound” means

The total term of the annuity must not be longer than the annuitant’s life expectancy. For example, if an 80-year-old woman has a life expectancy of about 10 years under the federal tables, an annuity paying over five years would be actuarially sound, but one paying over 15 years would not. A shorter term is allowed and is often preferred in planning, because the payments end sooner.

Example 1: A married couple

Tom, 82, needs nursing home care. His wife Mary, 79, lives at home. They have $300,000 in countable assets. Their state uses the 50 percent method for the CSRA, so Mary keeps $150,000, and Tom must spend down the other $150,000, minus his $2,000 allowance.

Instead of spending $148,000 on care, the couple transfers it to Mary (transfers between spouses are allowed), and Mary buys a compliant single-premium immediate annuity that pays her about $2,600 a month for five years, within her life expectancy. The state is named as remainder beneficiary in second place, after their disabled son, or first place if there is none.

Tom qualifies for Medicaid right away. Mary keeps her $150,000 CSRA and receives $2,600 a month in additional income for five years. If Mary dies before the term ends, the remaining payments go to the state up to what Medicaid paid for Tom’s care, then to other beneficiaries.

This example is simplified. Some states limit spousal annuities, and the MMMNA calculation will change because Mary’s income is higher.

Example 2: A single person (“half a loaf”)

A single applicant has no spouse to receive payments, so an annuity alone mostly converts savings into income that goes to the nursing home. Annuities help single people mainly when combined with a gift. For example, a person gives half their savings to their children, which causes a penalty period, and uses the other half to buy a short compliant annuity whose payments, with their other income, pay for care during the penalty. See “Half a loaf” strategies.

State differences

The federal rules are a floor, and states differ in how they apply them:

Some states scrutinize spousal annuities more closely, or count the income stream as an asset if it could be sold.
Some require specific contract language.
Some limit how annuity payments for a spouse at home affect the allowance calculation.
State rules on the remainder beneficiary and the information that must be disclosed vary.

Because of these differences, a strategy that is routine in one state may not work in another.

Trade-offs and risks

Irrevocable. Once purchased, the annuity cannot be cashed in. The money is committed for the term.
Income goes up. For a single person, nearly all the payments may go to the nursing home as their patient liability.
The state may be repaid. If the annuitant dies during the term, the state is first or second in line for the remaining payments.
Taxes. Part of each payment may be taxable income, depending on the source of the money.
Cost and fees. Annuities for Medicaid planning are usually simple immediate annuities with low or no surrender charges, but buyers should understand any fees.
Sales pressure. Not every annuity is right for Medicaid, and long-term deferred annuities often sold to seniors generally do not meet the rules. See Medicaid planning scams and red flags.

Annuities already owned

An annuity bought years ago for retirement may or may not be compliant. Deferred annuities that have not started paying are generally counted at their cash value. Some can be converted (“annuitized”) into a compliant payout. Any annuity owned by the applicant or spouse must be disclosed on the application.

Getting help

Medicaid-compliant annuities are complex, and the details decide whether one works. The annuity contract comes from an insurance company, and the planning around it, including transfers between spouses, beneficiary designations and the application, should be coordinated. A Certified Medicaid Planner can work out whether an annuity makes sense and what term and amount fit the state’s rules, and an attorney prepares any related legal documents.

Frequently asked questions

Is a compliant annuity a loophole? No. The requirements are spelled out in federal law, which expressly contemplates annuities that meet them.

Can I buy a compliant annuity after entering a nursing home? Yes. It is mainly a crisis-planning tool.

Does the annuity have to be with an insurance company? Most are. Some private annuities between family members exist, but they face extra scrutiny.

What if the annuitant lives longer than the term? Payments simply end at the end of the term.

Does buying the annuity count as a gift? Not if it meets all the federal requirements.

Key terms

Single-premium immediate annuity (SPIA): an annuity bought with one payment that starts paying right away, the usual type in Medicaid planning.
Annuitant: the person whose life the payments are based on, and who receives them.
Actuarially sound: a payout term no longer than the annuitant’s life expectancy under federal tables.
Non-assignable: the payments cannot be sold or transferred to someone else.
Balloon payment: a large final payment, which is not allowed.
Remainder beneficiary: who receives payments left if the annuitant dies during the term.

Questions to ask before buying

Does the contract state that it is irrevocable and non-assignable?
Is the term within the annuitant’s life expectancy?
Are payments equal, monthly and starting right away?
Is the state named as remainder beneficiary in the correct position?
How will the payments change the patient liability or the spousal allowances?
What fees or commissions apply?

Last updated for 2026. General information only, not legal or financial advice. Medicaid Answers is a free educational resource published by Medicaid Answers Foundation.