Death Claims and Medicaid Compliant Annuities

Medicaid Compliant Annuities (MCAs) are a well-established planning tool for helping clients achieve Medicaid eligibility while preserving assets in crisis long-term care situations. However, it’s important that advisors include one key component in discussions with their crisis planning clients: What happens when the client dies before the annuity term ends?

Understanding the death claim process, beneficiary hierarchy, and recovery rules is essential not only for proper advisement, but also for managing client and family expectations after death. Let’s take a look at how death claims work for MCAs and key planning considerations agents should keep in mind.

A Brief Refresher: What Is a Medicaid Compliant Annuity?

A Medicaid Compliant Annuity is an income-only, single-premium immediate annuity structured to meet federal and state Medicaid requirements. Its purpose is to convert excess countable resources into an income stream with zero cash value, allowing for immediate Medicaid eligibility. To be compliant, the annuity must:

• Be irrevocable – Terms cannot be changed once issued
• Be non-assignable – Cannot be sold or transferred
• Be actuarially sound – Term must be equal to or shorter than the owner’s Medicaid life expectancy
• Make equal payments – No deferrals or balloon payments
• Name the state as a beneficiary – The state Medicaid agency must typically be named as primary beneficiary, to the extent of benefits paid.

Key Parties to an MCA (And Why They Matter at Death)

Understanding who plays which role in the contract is essential for predicting outcomes when death occurs:

• Owner – Controls the contract and designates parties
• Annuitant – Life on which the annuity term is based (often the same as owner)
• Payee – Receives the monthly income
• Primary Beneficiary – First in line for residual benefits
• Contingent Beneficiary – Receives benefits after the primary beneficiary

For most MCAs, the state Medicaid agency is the primary beneficiary, but this is not universally true and varies by planning strategy.

What Triggers a Death Claim?

When an MCA client passes away, there are two possible outcomes: either death after or before the end of the annuity term. If death occurs after the annuity term ends, nothing happens. The contract terminates with the final payment, and no residual benefits exist.

However, if death occurs before the annuity term ends, a death claim is triggered. The primary beneficiary has the right to claim remaining benefits subject to Medicaid recovery rules.

Beneficiary Payout Options After Death

When a death claim is initiated, most carriers allow beneficiaries to choose between two payout options: either a lump sum payment or continuing payments. With a lump sum payment, the remaining annuity value is paid at once, and a commutation (discount) is applied. The longer the remaining term, the larger the discount.

With continuing payments, the beneficiary receives the remaining payments on the original schedule. In this case, a new contract number is issued, the beneficiary becomes the owner and payee, and new beneficiaries may be designated. Different beneficiaries may choose different payout options, depending on carrier rules.

Medicaid as Primary Beneficiary: How Recovery Works

When the state Medicaid agency is named as primary beneficiary, it may recover only up to the amount it actually paid on behalf of the Medicaid recipient. Any remaining funds after the Medicaid claim is satisfied pass to contingent beneficiaries (e.g., children or a trust). In some cases, the state Medicaid agency may keep the claim open if the Medicaid recipient is still alive at the time of the MCA owner’s passing.

Read More: Alleviating Client Concerns About the Beneficiary Requirement for MCAs

The Death Claim Process: What to Expect

The death claim process can typically take anywhere from 30 to 120 days, largely dependent on how quickly the state responds. The general steps include:

1. Contact our office to notify us of the death. We’ll inform you of any paperwork requirements at that time.
2. We’ll contact the insurance company and the state Medicaid agency, if they are the primary beneficiary, to begin the claim calculation.
3. The state Medicaid agency will state their claim amount to the insurance company.
4. Any residual funds will pass to the contingent beneficiary(ies).

For agents advising clients on Medicaid planning, proactively addressing death claim scenarios can prevent confusion, conflict, and unintended loss of benefits when families are most vulnerable.