Several years ago, the old Presidential Life Insurance Company, Nyack New York (Presidential), issued a SPIA with very unique variability which, I helped design. Of course, this was prior to the Athene Life and Annuity Company (Athene) purchase in 2013. Up until the Athene purchase, tens of millions of dollars of premium were accepted by Presidential for the “Income & Legacy”, the marketing name for the SPIA. As fate would have it and after 2013, several issued contracts were challenged by New York State, specifically Broome County, to fall into the Medicaid Estate of residing Broome County Annuitants. However, as it turned out (the unintended consequences) and after an informal appeal, the county’s’ initial ruling, to pull the contacts into the Medicaid Estate, was not up held.
How did this occur? I’m often found of say; very old annuity designs such as SPIAs, generally don’t fit in with modern times because so much revolves around account cash values designs and beneficiary rights. When it came to State Medicaid purposes, the Deficient Reduction Act of 2005 was very clear in the treatment of annuities. So, the regulators thought they had all the annuity bases covered. Not so; in steps the Income & Legacy, a take-off of an ancient annuity income design that clashed with modern day savings account designs.
First some annuity background: The Income Legacy was a hybrid Joint and Survivor contract designed to directly compete with single life contracts with period certain or other refund features. From a consumer point of view, it was thought to be more appealing than period certain or other refund single life contracts in situations with older annuitant parents and their adult children beneficiaries. At the time, typically, joint and survivor contracts were normally purchased by spouses but this was not the market for the Income & Legacy. For example; instead of issuing a standard single life SPIA with an instalment refund and life as the estate benefit, the Income & Legacy was designed to offer the estate benefit, in this refund example, staring at the point of Parent Annuitant death and not the contract issue date as with the case with single life annuities. This is always the Achilles heal of SPIAs with period certain or premium refund estate benefits; that sometime after the issue date, if the Father/Mother Annuitant lives long enough, he/she will outlive or nearly outlive the estate benefit guarantee period and there will be no annuity value to the kids when the Annuitant parent dies.
With the old income & Legacy contract, it was not possible for the Parent Annuitant to outlive the estate benefit for the adult kids because, as in this example, the refund period didn’t begin until the Parent Annuitant actually died. So, if the Parent Annuitant purchased at age 65, they could live to be 100 years, receive the annual income and the kid would still get a premium fund. However, there was one catch; the Adult child had to remain living to receive the entire refund or other estate benefit. If the adult child died before the entire refund was paid the contract terminated. Of course, if the adult child predeceased the Parent Annuitant, the Parent Annuitant still received the life-only annuity payment.
Such was the case; the normal adult child usually listed as a beneficiary on a SPIA for the estate benefit now, became another Annuitant (insured) on the contract. The difference from other joint annuity contracts was, at the Parent Annuitant’s death, the child did not receive a life-time income as is the case with other joint & survivor SPIA contracts usually reserved for spouses. At the contract purchase date, the adult child’s estate value was expressed in a number fixed payment years, 5, 10, 15, premium refund, etc. and once these payments were completed or the Adult Child died, the Adult Child’s annuity income terminated. In the SPIA world, this of course created an interesting competitive position for the contract. The Income & Legacy was in actuality, a combination of a life-only annuity starting at the purchase date for the Parent Annuitant and a “temporary life” annuity for the adult Child Annuitant starting when the Parent Annuitant died. The adult child, normally and merely just a beneficiary for the estate benefit on a single life contract now became an annuitant and participated in the company’s “mortality pool” albeit to a limited extent and the overall annuity pricing reflected this arrangement. (As an aside: IMHO one of the most innovative and truly elegant mortality pooled income designs to ever grace the annuity stage.)
The wealth preservation stage is set for a premium refund Income & legacy design. Dad/Annuitant (the only surviving parent) needs LTC and a Medicaid claim is eventually submitted. New York State, seeking to be named first primary beneficiary to the extent of their Medicaid lien on this refund design, is turned away by the carrier. By design, the contract does not permit “beneficiaries”. It only permits joint Annuitants who, need to be live individuals and also named on the initial application. The contract is a “mortality pooled” design so, there no payment commutation features as part of the contract.
However, there is still the 5-year look back purchase rule to consider. This particular transaction stemmed from a deferred annuity contract owner purchase several decades earlier. Presidential offered broad settlement privileges in all of their deferred annuity contracts, any current SPIA contact could be substituted for the normal guaranteed settlement choices in the existing deferred annuity contracts. Because the Income & Legacy was a current SPIA contract, the deferred annuity owner (Dad) had a contractual right to purchase it. So, when this actually occurred a few months prior to the State Medicaid claim, New York State accepted the fact; the settlement option was a right guaranteed in the existing deferred annuity contract and was completed on an equal value transaction/consideration basis. Even though the utility changed; the cash/refund value, of the original deferred annuity to New York State wasn’t the same as it was to Dad’s estate, of a mortality pooled value, of the new Income & Legacy, New York State did not contest the utility difference.
Consequently, for asset purposes, the annuity purchase cost was not included in Dad’s Medicaid Estate. However, the annuity income was used to support Dad and paid to the LTC provider. At Dads’ death, and in this particular case, the adult Joint Annuitant son enjoys all the premium cost installment refunded to him without New York State interference. However, if son dies prior to receiving the full premium refund then, son’s estate forfeits any remaining unpaid installment amounts under the son’s temporary life annuity agreement, his right in the contract. That risk of estate loss is the difference between being an annuitant (insured) and merely a beneficiary.
I often say, there are many benefits of owning mortality pooled annuity contracts that are just not too apparent. Morality pooled SPIAs were designed to preserve wealth and provide a lifetime income. SPIAs, more than any other financial product are more successful at doing both simultaneously. Unfortunately, in the SPIA purchase decision, consumers typically underweight the wealth preservation aspects of SPIAs. Multigenerational families who mortality pool together typically, in the long run, are more successful at accomplishing both wealth preservation and lifetime income.