The Annuity You Already Own: Deferred vs. Immediate, Surrender Charges, and Florida Medicaid

Bernard's Annuity: A Common Starting Point

Bernard is a composite I use to illustrate a situation I see often in my practice, not an actual client. He is 83, lives in Naples, and in 2016 he bought a deferred annuity for $220,000. A decade later, the annuity is still inside its surrender period, meaning the insurance company would charge a penalty if he cashed it out early. Bernard's family is now facing the possibility of nursing home care for him, and his daughter has asked a sensible question: is that annuity protected, is it countable, or can it be turned into something Medicaid will not count against him?

That question does not have a one-word answer. It depends on what kind of annuity Bernard owns, what stage of its life the annuity is in, and whether it can legally be restructured under federal rules before his Medicaid application is filed. Let's sort through the categories.

Deferred Annuities: Usually Counted at Surrender Value

A deferred annuity is one still building value, whether through a fixed rate, an indexed return, or a fixed-index structure. The owner has not yet "annuitized" it into a stream of payments. As long as it sits in this accumulation phase, Florida Medicaid generally treats it as a countable asset, and it counts the annuity at its current surrender value, not its full accumulated value.

That distinction matters. If Bernard's $220,000 annuity carries a surrender charge, Medicaid counts what he could actually access after that charge, not the full contract value. The annuity is still very much on the table as a countable resource, though, which means it sits alongside his other countable assets when measured against Florida's asset limit for long-term care Medicaid (a limit this series covers in the general eligibility guide). An annuity like this cannot simply be set aside or ignored on an application. It has to be disclosed and addressed.

Immediate Annuities: A Narrow Path to Income Treatment

An immediate annuity works differently. Instead of accumulating value, it is annuitized right away into a fixed stream of payments, principal and interest together, paid out on a schedule. When an annuity is properly annuitized and meets federal compliance standards, Medicaid may treat the payments as income rather than counting the underlying contract as an asset.

This is the foundation of what elder law attorneys call a Medicaid-compliant annuity strategy, and it is why some families convert a deferred annuity into an immediate one before a Medicaid application is filed. But the word "properly" is doing a lot of work in that sentence. Federal law under 42 U.S.C. § 1396p lays out specific requirements, and Florida's Medicaid program follows them. Generally speaking, a compliant annuity must be:

• Irrevocable and non-assignable, meaning the owner cannot change their mind or sell the contract later
• Actuarially sound, meaning the payment term cannot exceed the annuitant's life expectancy under government mortality tables
• Structured to pay back principal and interest in equal installments, with no deferred or balloon payments at the end
• Set up so payments begin promptly after purchase rather than years down the road
• Written to name the State of Florida as a remainder beneficiary, discussed more below

Miss any one of these elements and the conversion does not accomplish what the family hoped. Instead of producing an exempt income stream, it can be treated as a disqualifying transfer, which creates the very penalty period the family was trying to avoid.

The State as Remainder Beneficiary, and Why That Matters

One requirement deserves its own explanation because families are often surprised by it. A Medicaid-compliant annuity must name the State of Florida, through the Agency for Health Care Administration, as a remainder beneficiary. This means that if the annuitant dies before all the payments are made, the state has a claim on remaining payments up to the amount Medicaid spent on that person's care.

Where there is a spouse, or a minor child, or an adult disabled child, state law allows the state to be named as a secondary beneficiary, after that family member, rather than first in line. This is one of the more technical pieces of annuity planning and it works alongside protections for the community spouse that this series covers separately. The remainder beneficiary designation is not optional paperwork. It is a federal condition for the annuity to be treated as income rather than a countable asset.

Qualified Annuities: A Different Set of Rules

Not all annuities are evaluated the same way. A qualified annuity, meaning one funded with pre-tax retirement dollars similar to an IRA, is generally treated under different rules than a non-qualified annuity purchased with after-tax savings. Because qualified annuities are tied to retirement accounts regulated by the Internal Revenue Code, they are often approached differently in the transfer-of-asset analysis than a standard non-qualified contract.

This distinction matters for someone like Bernard if any portion of his annuity traces back to retirement account dollars. Whether a specific annuity is qualified or non-qualified, and how Florida Medicaid treats it, depends on the contract's origin and structure. This is a detail worth confirming directly with the annuity provider and reviewing with an attorney rather than assuming either way.

The Surrender Charge Question: When Cashing Out Beats a Penalty

Here is where Bernard's situation becomes a real decision point. His annuity still carries a surrender charge from its 2016 purchase. Families often ask whether it makes sense to just cash the annuity out, eat the surrender charge, and spend the proceeds down on care.

Sometimes it does. If converting the annuity to a compliant immediate payout is not realistic, perhaps because the insurance company will not restructure it correctly, or because the numbers do not work for Bernard's age and health, then surrendering the contract and paying the charge may be the more affordable path compared to risking a Medicaid transfer penalty. A transfer penalty is calculated using a current penalty divisor and can block Medicaid payment for care for a period of months, which is often far more costly than a one-time surrender fee. This series covers that penalty math in detail elsewhere; the point here is narrower: the surrender charge is a known, fixed cost, while a miscalculated or non-compliant annuity transfer can create an open-ended one.

This article is for general informational purposes only and does not constitute legal advice, nor does reading it create an attorney-client relationship. Florida estate, elder, probate, and real estate law are fact-specific and change over time. Consult a licensed Florida attorney about your individual circumstances. Arthur Simpson, Esq. is licensed to practice law in the State of Florida. Attorney advertising.