What does “Actuarially Sound” Mean?
In a recent blog post, we explained what a Medicaid Compliant Annuity is. To summarize, in order for an annuity to be “Medicaid Compliant”, the annuity must contain the following language:
3. Actuarially Sound,
4. Provide Equal Payments, and
5. Name the State Medicaid Agency as Beneficiary only to the Extent Medicaid Benefits are provided.
The third requirement of the annuity needing to be “actuarially sound” can be confusing. The actuarially sound test means that the annuity owner must receive his or her original principal amount back within his or her Medicaid life expectancy according to your State life expectancy table or the life expectancy table published by the Social Security Administration. In other words, the term or period certain of the annuity must be structured so that it pays out based on the annuity owner’s Medicaid life expectancy or a shorter period of time.
Let’s Look at an Example of an Actuarially Sound Annuity:
Assuming the annuity owner is 75 years of age and has a remaining life expectancy of 13.10 years/157.20 months, the following annuity being structured for 100 months is actuarially sound because the policy owner is receiving the full $200,000 back within her life expectancy.
Alternatively, Let’s Look at an Example of an Annuity that is NOT Actuarially Sound:
Assuming the annuity owner is 75 years of age and has a remaining life expectancy of 13.10 years/157.20 months, the following annuity being structured for 200 months is NOT actuarially sound because the policy owner is not receiving the full $200,000 back within her life expectancy.
To complicate things just a little bit, there are three states (North Dakota, Oregon, & Washington) that have different definitions of actuarially sound. If you have questions about the actuarially sound requirement in these three states, please reach out to us!