By Lauren Adams, CLTC

As if baby boomers didn't have enough to worry about, they are now faced with the possibility of caring for their parents as they themselves gear up for retirement. More and more people are becoming aware of the lack of resources available from the government for financing long-term care, defined as needing assistance with daily activities or supervision caused by a cognitive impairment.

Just as aware are unscrupulous marketers who offer quick fixes to complicated issues. Near or at the top of the list of easy solutions are so-called "Medicaid friendly" annuities.

What is Medicaid planning?

Medicaid is a health insurance supported by the state and federal government. It is figuratively the safety net for millions of Americans who cannot afford health care. It is also used for payment of nursing home costs. Because it is a program based on financial need, applicants must either have limited assets and income or transfer those resources to qualify. Medicaid planning, practiced by elder law attorneys, is the name given to efforts to accomplish this goal.

For years, elder law attorneys have used immediate annuities in Medicaid planning to protect the assets of families so they can qualify for long-term care Medicaid benefits. Federal law allows the assets of an individual which otherwise would have to be spent on care in a nursing home, to be converted into income through the use of an immediate annuity.

Here is how an annuity works. You give a sum of money to an insurance company and in exchange, they promise to pay you a monthly amount for a certain period of time, either for a fixed period or for your lifetime.  The logic behind the use of an annuity in Medicaid planning is this: you give income to the facility and have Medicaid pay for the balance of the care cost rather than pay the much higher private (non-Medicaid) rate.

For example Fred needs skilled nursing home care, which in his state, costs $5,000 per month. He has $100,000 in assets, which the Medicaid program requires he spend on his care. Instead of paying privately, he purchases an immediate annuity, thus converting cash into income. Although the income goes to the facility, he instantly qualifies for Medicaid. Fred's family has an opportunity to receive the balance of payments if he dies before the annuity is paid out.

The Pitfalls of Buying Annuities for Medicaid Planning

Many insurance agents have picked up on the concept and have begun promoting the use of these so-called "Medicaid friendly" annuities when someone needs nursing home care.  Whether they push them in a seminar setting, in a phone call or letter or in a one-on-one meeting with you, here's what you need to be aware of before you consider purchasing an annuity.

What if the owner outlives the annuity? The family gets nothing. The only way the family wins is if their loved dies sooner rather than later.

Know When You're Being Sold a Medicaid Friendly Annuity

If the insurance agent is looking to sell "Medicaid friendly" annuities as a quick fix, here are some headlines commonly used in ads or direct mail efforts that will tip you off..

Explore An Alternative: Long-Term Care Insurance 

Before you consider an annuity purchase to qualify for Medicaid, speak with your insurance professional about how it compares with long-term care insurance which is specifically crafted to pay for care where it is most wanted and needed, at home and in the community.

Lauren Adams has earned the designation "Certified in Long-Term Care" or CLTC, after completing a rigorous multidisciplinary course focused on the profession of long-term care.  She can be reached by e-mail at ladams@ltcamerica.com.