How To Use Your Annuity to Pay for Long-Term Care Insurance

Shawn Plummer

CEO, The Annuity Expert

Planning for the future, particularly our golden years, becomes increasingly important as we all venture through life’s journey. However, one crucial aspect often overlooked is long-term care. This article will show how annuities can effectively fund long-term care, ensuring a secure and comfortable future for you or your loved ones.

Understanding Long-Term Care Annuities

A long-term care annuity is a financial product that combines the features of an annuity with long-term care insurance. Investing in a long-term care annuity can secure a guaranteed income stream for your future and cover the costs of long-term care services.

How Does a Long-Term Care Annuity Work?

When you purchase a long-term care annuity, you invest a lump sum or a series of payments into the annuity. The annuity then generates a regular income stream, covering long-term care expenses or any other purpose. If you need long-term care, the annuity with an LTC rider will help cover the costs, ensuring you receive the care you need without draining your financial resources.

Annuity To Pay For Long-Term Care Insurance

The Benefits of Annuities with Long-Term Care Riders

Annuities with long-term care riders offer several advantages over standalone long-term care insurance policies or traditional annuities.

Guaranteed Income and Long-Term Care Coverage

By combining a fixed annuity with long-term care benefits, you can enjoy the advantages of both financial products. You’ll receive a guaranteed income stream, which can provide financial stability during retirement, and have the added security of knowing your long-term care expenses will be covered.

Tax Advantages

Long-term care annuity payments used for qualified long-term care expenses are generally tax-free, allowing you to maximize the benefits of your investment.

Asset Protection

Long-term care annuities can help protect your assets by providing a dedicated funding source for long-term care expenses, preventing you from depleting your savings or relying on family members for support.

Choosing the Right Long-Term Care Annuity Provider

With various long-term care annuity providers and LTC annuity combo products available, choosing a provider that meets your specific needs and preferences is essential.

Assess Your Long-Term Care Needs

Consider factors such as your age, health, and family history to determine the level of long-term care coverage you may need.

Compare Long-Term Care Annuity Providers

Research and compare different long-term care annuity providers to identify the best annuity with long-term care rider options for your needs. Look for reputable companies with strong financial ratings, competitive pricing, and flexible policy options.

1035 exchange

Withdrawals from a nonqualified deferred annuity (after-taxed money) are considered to come first out of earnings, then out of the contract’s initial investment premium. This tax method is called Last In, First Out, or LIFO. The earnings portion of the withdrawal is considered taxable income to the annuitant.

However, IRC Section 1035 allows you to exchange one annuity for another without immediate tax consequences as long as specific requirements are met. As of January 1, 2010, the Pension Protection Act (PPA) allows both life insurance and annuities to be exchanged, tax-free, for qualified long-term care insurance policies such as a long-term care annuity.

How To 1035 Exchange An Annuity To A Long-Term Care Insurance Annuity

For the transfer of an annuity to a long-term care insurance policy to be classified as a tax-free exchange, specific criteria must be met:

  • First, the annuity must be nonqualified.
  • The exchange must happen directly between insurance companies. You will not get a tax break if you withdraw money from your annuity and then use it to pay for your long-term care insurance. The annuity application will include a 1035 Exchange Form.

Best Annuity for Long-Term Care: What to Look For

Finding the best long-term care annuities can be daunting, given the many options available. However, here are some key factors to consider:

  • Benefit Triggers: Ensure the annuity contract allows coverage when needed. Usually, you cannot perform at least two of six daily living activities, such as eating, bathing, or dressing.
  • Inflation Protection: Look for annuities that offer inflation protection to ensure your benefits keep up with the rising care costs.
  • Tax Implications: Some annuities provide tax-advantaged long-term care benefits, which could save you money in the long run.
  • Flexibility: The best long-term care annuities offer flexible options for receiving benefits, allowing you to tailor your care to your specific needs.

Annuity for Long-Term Care Pros and Cons

Like any financial product, an annuity for long-term care has advantages and disadvantages.


  • Financial Security: This kind of annuity provides a guaranteed income stream that can be used for long-term care.
  • Tax Benefits: Long-term care benefits received from annuities are often tax-free.
  • Inflation Protection: Many annuities have an inflation protection feature to guard against rising costs.


  • Cost: Due to fees and charges, annuities can be more expensive than other long-term care funding options.
  • Lack of Flexibility: Once you invest in an annuity, it might be difficult to withdraw the money without incurring penalties.

Long-Term Care Insurance Versus Annuity: Making the Right Choice

To make an informed decision between long-term care insurance and a long-term care annuity, consider the following factors:

Your Financial Situation

Evaluate your current financial resources and future income expectations to determine whether you can afford the premiums for long-term care insurance or if a long-term care annuity might be a more suitable option.

Your Risk Tolerance

Consider your risk tolerance and preferences for guaranteed income versus the potential for higher returns on other investments.

Your Health and Family History

Assess your health and family history to determine the likelihood of needing long-term care services in the future.

Tips for Maximizing Your Long-Term Care Annuity

To make the most of your long-term care annuity investment, consider the following tips:

Start Early

The earlier you invest in a long-term care annuity, the lower your premiums will be, and the more time you’ll have to accumulate funds for long-term care expenses.

Choose the Right Annuity with Long-Term Care Rider

Select an annuity with a long-term care rider that offers flexibility, comprehensive coverage, and competitive pricing to protect you adequately.

Review Your Plan Regularly

Regularly review your long-term care annuity and adjust your coverage as needed to account for changes in your circumstances or long-term care expenses.

Annuity/LTC Combination Product: A Two-in-One Solution

Another way to finance long-term care is through an annuity/long-term care (LTC) combination product. These products blend an annuity’s guaranteed income with the benefit of long-term care insurance. Essentially, it’s like having your cake and eating it too. You receive an income, and if you need long-term care, the policy will provide additional coverage.

Converting an Annuity to Long-Term Care Insurance

If you’re wondering, “Can I convert an annuity to long-term care insurance?” The answer is yes. Some annuities have a “1035 exchange” feature that allows you to exchange your annuity contract for a long-term care insurance policy without tax penalties.

Annuities To Pay For Long-Term Care Insurance

Is an Annuity a Good Investment for an Elderly Person?

Annuities can indeed be a good investment for elderly individuals, especially those who are worried about outliving their savings. Annuities can provide a steady, guaranteed income for life, ensuring you have funds available for any needs, including long-term care. Moreover, some annuities offer features tailored specifically for the needs of seniors, such as inflation protection and the option to convert to long-term care insurance.

For instance, consider the case of Mary, an 80-year-old woman. Mary has a nest egg that she worries might not last if she lives into her 90s or beyond or needs expensive long-term care. By investing in an annuity, Mary can secure a stable income for the rest of her life, no matter how long she lives, and ensure she has funds available for long-term care if needed.

However, as with all financial decisions, it’s crucial to weigh the pros and cons, consider your unique situation, and potentially seek advice from a financial advisor.

Next Steps

Investing in a long-term care annuity protects your financial future and ensures you receive the care you need as you age. By understanding the benefits of annuities with long-term care riders, evaluating long-term care annuity providers, and weighing the pros and cons, you can make an informed decision that best suits your unique needs. Remember to start early, choose the right annuity with a long-term care rider, and review your plan regularly to maximize the benefits of your long-term care annuity investment.

Annuity To Pay For Long-Term Care

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Frequently Asked Questions

Can you pay for long-term care with an annuity?

You can use the earnings from your annuity to pay for long-term care insurance without paying income tax on those earnings. This means you can use the annuity earnings that would have been taxed more tax-efficiently.

At what age should you not buy an annuity?

The age requirements for fixed index annuities are different. For example, you can buy a fixed index annuity until you are 90, but most companies have a limit of around 80. Additionally, some insurance companies only allow purchasers 50 or older to add an income rider.

Who should not have an annuity?

If you do not have enough savings to pay the premiums, buying an annuity might require you to spend at least $50,000. This could deplete your liquid savings and leave you vulnerable to having to borrow money if an unexpected expense arises. Therefore, purchasing an annuity in this situation may not be advisable.

What is an LTC annuity?

The LTC annuity works like a deferred fixed annuity and helps cover expenses related to nursing facilities, assisted living, home healthcare, chronic illness, and terminal illness. It’s designed to prevent people from using their retirement savings to pay these costs.

What happens when you run out of money for long-term care?

If your family member needs nursing home care but cannot afford it, you may face an Emergency Medicaid Crisis. To quickly apply for benefits and help make the most of your assets, you can consult a Medicaid Attorney. This can help you get the care you need promptly.

Can you pay long-term care premiums from IRA?

It is allowed to use IRA or retirement distributions to pay for long-term care insurance, but please note that you will need to pay income tax on all the distributions used to pay the long-term care insurance premiums.

Is there a tax-free annuity?

If you have held a Roth IRA account for at least five years, the annuities you receive will not be subject to taxation. This is because your contributions to a Roth IRA are taxed beforehand, meaning you won’t have to pay any more taxes when you withdraw the money during retirement.

Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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