Can an Annuity Pay for Long-Term Care?

by Melinda Hill Mendoza

An annuity is an insurance policy that's designed to generate a guaranteed income. If you take out an immediate annuity, you pay a lump-sum premium, which is then paid out as income for the period of time you choose. You can fund a deferred annuity with a one-time premium or with ongoing premiums. The premiums earn interest based on an interest rate, stocks, bonds or mutual funds or an equity index. Whenever you choose, you can opt to take the annuity as a guaranteed income. Annuities can be used to pay for long-term care, subject to the provisions of the annuity.

Immediate Annuity

One of the most straightforward ways to use an annuity to pay for long-term care, such as nursing home care, is to purchase an immediate annuity. The immediate annuity will pay out a monthly benefit that's based on your age and health, and that payment can be applied to long-term care. You can purchase an immediate annuity even if you're already receiving long-term care.

Long-Term Care Policies

A long-term care policy pays for long-term care expenses such as nursing home care, in-home care and assisted living. You pay a monthly or annual premium, and when you need help with two or more of your daily activities (eating, bathing, dressing, toileting, transferring and continence) or are mentally incapacitated, you can utilize the benefits. The Pension Protection Act of 2006 includes a provision that allows you to use the interest your deferred annuity earns to pay for long-term care policy premiums. Ordinarily, when you withdraw interest the annuity has earned, you owe taxes, as annuities are tax-deferred. If you pay for long-term care premiums, you don't owe taxes on the money you use to pay for the long-term care premiums. This tax break only applies to nonqualified annuities.

Long-Term Care Annuities

Another option is to purchase an annuity specifically designed for long-term care. This is a deferred annuity and is usually funded by a one-time, lump-sum premium. When you start your annuity, you choose your long-term care benefit. Your benefit is a percentage of your premium, typically 200 or 300 percent. You can also choose whether you want your long-term care benefits to increase with inflation and how long you would like your long-term care benefits to last. If you need long-term care, the annuity will pay out benefits. If you don't, you can use the funds from the annuity as needed. There are surrender charges during the first several years of the annuity, and you will owe taxes if you withdraw any accumulated interest. Withdrawals also lower your long-term care benefit.

Periodic Withdrawals

Annuity policies typically allow periodic withdrawals. This means that you take money out of the policy without formally annuitizing, or taking a guaranteed income, from the policy. You may be able to set up periodic withdrawals on a monthly basis, subject to any surrender charges the policy has in place. The benefit to a periodic withdrawal is that you can change it. Once you annuitize your policy, you can't make any changes to it. You can take periodic withdrawals to pay for long-term care without permanently impacting your annuity. Keep in mind, if you withdraw any of the interest earned, it will be considered taxable income.

About the Author

Melinda Hill Mendoza has been writing professionally for over 10 years. She worked as an editorial assistant for Forward Movement Publications in Cincinnati, Ohio. She wrote for several years for and edited and wrote a chapter for a book with Wooster Press. She graduated from Miami University in Ohio with a Bachelor of Arts in English.

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