WAG 07-02-17: Annuities and Pensions

PM 07-02-17

NH, SLF, and cases with DoA HCBS waiver services

Refer long term care cases with annuities to HFS Long Term Care - Asset Discovery Investigation (LTC-ADI) using the HFS 3654A Long Term Care - Asset Discovery Investigation (LTC-ADI) Referral Form. 

For community cases with annuities, refer to the Bureau of Collections using the Report of Real & Personal Property (IL444-0008; "DPA 8"). 

1. Determine if the annuity pays benefits in approximately equal periodic payments over the term of the annuity. If it does, take the following steps to determine if fair market value is received:
   1. Determine the lump sum premium amount.
   2. Determine the expected return on the annuity.

      Refer to the Life Expectancy Table (see WAG 25-03-12). The table provides the average number of years of expected life remaining, based on the person's current age and gender. For example, a female age 75 has a life expectancy of 12.55 years.

      For annuities that pay for life, multiply the approximately equal periodic payments to obtain a yearly amount. Then, multiply the yearly amount by the life expectancy of the person. The result is the expected return on the annuity.

      For annuities that pay for a fixed number of years, multiply the approximately equal periodic payments to obtain a yearly amount. Then multiply the yearly amount by the fixed number of years. However, if the customer's life expectancy is less than the fixed number of years, use the number of years of expected remaining life. The result is the expected return on the annuity. 

   3. Determine if fair market value is received.

      Compare the lump sum premium amount to the expected return on the annuity. If the expected return is equal to the lump sum premium amount, the customer has received fair market value. If the expected return is less than the lump sum premium amount, fair market value is not received and the purchase is subject to the resource transfer policy. Any uncompensated amount is equal to the difference between the premium amount and the expected return on the annuity.

      Example 1: Mr. C, age 70, is an LTC resident and purchases an annuity for $40,000. The annuity will pay him $200 monthly for life.

      To determine the expected return on the annuity, multiply the monthly amount to obtain a yearly amount ($200 X 12 = $2,400). Then multiply the yearly amount by the life expectancy of the customer. Based on the Life Expectancy Table, a male age 70, has a life expectancy of 13.73 years ($2,400 X 13.73 = $32,952). The expected return on the annuity is $32,952.

      Since the expected return on the annuity ($32,952) is less than the premium amount ($40,000), fair market value has not been received. The purchase is subject to transfer policy. Any penalty determined is based on the uncompensated amount of the transfer. The uncompensated amount is the difference between the premium amount and the expected return on the annuity ($40,000 - $32,952 = $7,048).

      Example 2: Ms. D, age 65, receives DoA HCBS waiver services and purchases an annuity for $10,000. She receives monthly payments of $100 to be paid for 10 years.

      To determine the expected return on the annuity, multiply the monthly amount to obtain a yearly amount ($100 X 12 = $1,200). Compare the customer's life expectancy to the fixed term under the annuity. Since the customer's life expectancy (19.89 years) is greater than the fixed term (10 years), use the fixed term. Multiply the yearly amount by the fixed number of years ($1,200 X 10 = $12,000). The expected return on the annuity is $12,000.

      Since the expected return on the annuity ($12,000) is greater than the premium amount ($10,000), fair market value is received. The purchase of the annuity is an allowable transfer. 

2. If an annuity does not pay benefits in approximately equal periodic payments over the term of the annuity, fair market value is not received. Follow the steps in 1a. and 1b. to determine any uncompensated amount.