Pros and cons of using annuities for long-term care

Advantages of long-term care annuities:

• While some level of medical underwriting is required, qualifying for an LTC rider on an annuity may be simpler than qualifying for traditional LTC insurance.
• By investing in an LTC rider on an annuity, you benefit from annuity payments regardless of whether or not you require care. This avoids the use-it-or-lose-it value of traditional LTC policies.
• An LTC rider on an annuity may be less expensive than premiums for a traditional LTC policy depending on your age, medical condition, state of residence and other factors. 
• If you choose to invest in a variable annuity, you can increase payouts with favorable market performance. This can help account for inflation on the cost of long-term care.

Disadvantages of long-term care annuities:

• Some LTC annuity riders require a significant cash outlay in the form of a one-time lump sum payment, which can place a strain on financial resources, depending on your situation. 
• Annuities are subject to fees and administrative costs and also impose benefit limits.
• Fixed payouts from a fixed annuity may be insufficient to cover the rising costs of care with inflation.
• The annuity payout may be less than benefits delivered by a traditional LTC insurance policy.

Who should consider a long-term care annuity?

• It’s important to do some research before deciding if a long-term care annuity is right for you. Here are some questions to help guide you before making a decision:
• Do you have a family health history that you believe may subject you to an illness that requires long-term care? (This could be a history of Alzheimer’s, auto-immune disease, multiple sclerosis, dementia or other chronic disease.) If so, you may want to prioritize LTC coverage.
• What is your current state of health? If you are young and healthy, you may be able to secure long-term care at a very reasonable price.
• What is your primary goal? Are you primarily concerned with ensuring you’re able to financially secure long-term care or are you primarily concerned with securing payout for you or your beneficiaries, but wish to insure against the financial burden in case you do find yourself requiring long-term care?
• What is the current state of your retirement accounts? Do you have cash accessible to make a lump-sum investment in an annuity or would that require diverting assets from your retirement savings?
• What are the tax implications if you receive annuity payments in the larger context of your finances?
• Does the option you select for long-term care coverage account for the cost of inflation?

Comparing different long-term care products

• Structure — Both individual and group LTC policies are designed exclusively to provide coverage for long-term care expenses. LTC riders on an annuity or life insurance policy are designed to provide from flexibility on an existing policy for the provision for LTC care expenses. Self-funding means setting aside money over time to prepare to pay for long-term care expenses. 
• Funding method — LTC insurance policies and life insurance policies with LTC riders are funded through premium payments over time. Adding an LTC rider to an annuity may require a large, initial lump-sum payment. 
• Qualification — A medical exam and information are most often required to secure an individual or group LTC policy or to add a rider to an annuity. However, it may be easier to qualify for group insurance or an annuity with LTC rider than an individual policy if you have health issues, are well into your 60s or have high-risk health challenges such as obesity or substance abuse. 
• Benefit trigger — Payout from a LTC policy or an annuity with LTC rider is triggered by a qualifying medical event that makes long-term care medically necessary. This could be an injury, diagnosis with a chronic or terminal illness or cognitive decline. A medical professional provides information to the insurance company who evaluates the claim and initiates payments for eligible events. Obviously, if you self-fund LTC, the decision of when to spend resources set aside depends entirely on the wishes of individual and/or their family.  
• Coverage amount and duration — Policies dedicated exclusively to LTC typically provide the most extensive coverage. Group policies typically have a lower payout, as do annuities. Coverage duration typically ranges from 3 – 5 years, but some policies offer lifetime coverage. 
• Unused funds — Whereas individual LTC policies are designed to provide coverage specifically and exclusively if long-term care is required, riders provide a safeguard to a financial vehicle that serves another purpose. For this reason, LTC riders on life insurance and annuities provide some level of coverage for LTC expenses but also offer payouts or a death benefit even if no long-term care is needed. With an individual or group LTC policy, if long-term care is not required, the premiums are forfeited. 

FAQs about annuities and long-term care

In summary, here are some frequently asked questions about using annuities to help fund long-term care. 

• What is a long-term care rider on an annuity? 
  
  A long-term care annuity combines a standard annuity with a long-term care rider to provide an enhanced stream of income if you become medically unable to perform certain daily tasks and require long-term care.

• Should I consider an annuity as a part of my retirement strategy?
  
  There are no simple answers when it comes to establishing your personal strategy for retirement. It’s important to evaluate your personal financial situation, goals, age, health condition and other factors. Protective’s Learning Center offers information on annuities as you plan for your retirement. It’s a good idea to meet with a qualified financial professional to determine the best strategy for you.  

• Can an annuity be used for long-term care?
  
  Annuities are designed to provide a guaranteed stream of income during retirement. Funds provided from an annuity can be used for any purpose, including long-term care. However, by adding an LTC rider to an annuity, it is possible to increase payments to you if a health event occurs that requires you to receive long-term care. 

• Do LTC riders cover home care and assisted living
  
  The payout from an annuity with LTC rider can be used for qualifying expenses, which include home care, assisted living an nursing home care. It’s important to understand that the rider may not cover all long-term care expenses, and the remainder would have to be paid out-of-pocket. 

• How do benefit multipliers work?
  
  A benefit multiplier on a long-term care annuity allows you to access a larger long-term care benefit than the initial amount you contributed to the annuity. For example, if you invest $100,000 in an annuity with a 2X benefit multiplier, you would have $200,000 in benefits available. This is a feature typically built into annuities at the time of purchase. 

• Are rider benefits taxable?
  
  Annuity benefits paid for long-term care are typically non-taxable, assuming they fall within certain limits as defined by the IRS.
  
  
• Can I add an LTC rider to an existing annuity?
  
  Typically, LTC riders must be purchased when the initial annuity is purchased. However, after investing in an annuity, if you decided you’d like to add a long-term rider, it is possible to use a tax-free 1035 exchange to transfer funds from an old annuity into a new annuity that includes a LTC rider. Consult with a qualified financial professional to ensure you make the change without triggering a taxable event. 

• What are the tax implications of a long-term care annuity?
  
  The funds distributed from a long-term care annuity are typically tax-free, as long as they fall within the thresholds established by the IRS. However, funds withdrawn for other purposes are subject to your regular income tax rate. Check tax provisions of your state with a qualified tax professional.

If you’re concerned about how you would access daily care if you were to need assistance in retirement, you may want to consider investment in a LTC annuity. Discuss long-term care options with your loved ones and/or a trusted financial professional. 

Sources:

1. SeniorLiving.org, “How Much Does Assisted Living Cost?” October 13, 2025.
2. HeartToHeart, “Understanding the Cost of Home Care Services,” March 19, 2025.

WEB.7006771.10.25