Annuities and long-term care explained

Explore how certain annuity features may relate to long-term care needs, including key benefits and limitations.

Annuities and long-term care

If you lose physical or cognitive capabilities as you age, you may require long-term care (LTC) for a period of time--or even for the remainder of your lifetime. While there are many different types and levels of care available, most of them can be expensive. It's a good idea to consider how you might be able to help pay for long-term care should you need it in the future. Annuities can generate a guaranteed sum of future income you can choose to use for long-term care. Should the need for long-term care arise. Purchasing an annuity with a long-term care rider may earmark and optimize a portion of payouts specifically for long-term care and may include additional benefits. Learn more about how these vehicles work, their benefits and drawbacks of each, and how they might fit with your long-term care planning needs.

What are annuities?

An annuity is a financial product designed to provide a stream of income during retirement. Through a contract with an insurance company, you agree to contribute to an annuity through either regularly scheduled payments or a single, lump sum payment and the insurance company agrees to make regular payments to you at some point in the future. There are several types of annuities available, depending on your financial objectives and risk tolerance. Generally speaking, annuities are designed to provide a steady, dependable stream of income during your retirement. There are several benefits of annuities for retirement.

What is long-term care?

For most, the aging process is accompanied by a decline in physical and mental capabilities. For this reason, many seniors need assistance with daily living activities such as preparing meals, bathing, going up and down stairs and taking medication. The level of assistance required depends on the capabilities of the individual and ranges from a few hours per week of in-home assistance, transportation assistance, adult daycare, or a complete transition to assisted living or a memory care facility.

Long-term care can be expensive, with inflation pushing the costs up each year. According to SeniorLiving.org, the estimated median cost of assisted living in the U.S. is $6,129 per month, or $73,548 per year.¹ The cost of in-home care ranges from approximately $31 - $35 per hour, coming out to about $1,000 weekly for 8 hours of service per day.² Failure to plan for the expense of long-term care can erode your retirement savings and/or place a financial burden on loved ones.

Contrary to some common myths about Medicare, it does not provide coverage for long-term care. Nor does most private health insurance. It's important to be aware of long-term care expenses and how they could impact your budget in retirement.

How annuities can help cover long-term care costs

Although there are different types of long-term care insurance, which can help cover LTC expenses, annuities may also serve as viable options. First, it's important to understand a little bit about the different types of annuities. Immediate annuities start payouts soon after purchase, while deferred annuities begin payments farther in the future. Annuities can also be fixed or variable. Fixed annuities offer a guaranteed payout rate, which is secure but generally lower than variable annuities. Variable annuities come with higher risk, but may offer higher payout rates based on market performance. It may be possible to purchase a long-term care rider on any one of these types of annuities to provide income to cover long-term care expenses.

To receive long-term care payments from an annuity with a long-term care rider, you must qualify for long-term care--which generally means having a medical event or diagnosis that causes a need for long-term care assistance. This could be an injury, diagnosis a chronic or terminal illness, or loss of cognitive ability.

As an example, let's say at age 50 you invest $250,000 as a lump sum in a deferred annuity with a long-term care rider. In 15 years, at age 65, that annuity begins to pay you $1,500/month. At age 70, you're diagnosed with a chronic degenerative disease and become unable to perform basic tasks such as bathing and dressing. Your family decides that you will need in-home nursing care each day. Fortunately, because you purchased an LTC rider on your annuity, with a doctor's qualifying authorization, your monthly annuity payout doubles to $3,000/month to help cover the cost of in-home care. This allows you to get the assistance you need without placing a tremendous financial burden on your family or draining your retirement savings.

How does an annuity with a long-term care rider work?

Where offered, long-term care riders may be purchased upon initial purchase of an annuity contract. It may be possible to add an LTC rider to an existing annuity, depending on the provisions of the contract. The LTC rider allows you to receive extra funds from your annuity payout if a qualifying event occurs that makes long-term care medically necessary. Once the qualifying event has been verified, your annuity payments increase for a specified period of time to help you cover the cost of long-term care.

Pros and cons of using annuities for long-term care

As with all financial products, there are advantages and drawbacks associated with LTC annuities. There are several things to consider as you decide if an annuity with a long-term care rider is a good option for you.

Advantages of annuities with long-term care riders:

While some level of medical underwriting is required, qualifying for a 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 provisions 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 an annuity with an optional income benefit, you may be able to increase payouts due to market performance features. This can help account for inflation on the cost of long-term care.

Disadvantages of annuities with long-term care riders:

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 an annuity with a long-term care rider?

It's important to do some research while considering if an annuity with a long-term care rider 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?

As you consider these questions, it may also be a good idea to consult with a qualified financial professional.

Comparing different long-term care products

Options for securing long-term care include traditional long-term care insurance, life insurance or annuities with LTC riders, group LTC policies and even self-funding. Here's a quick comparison of how these financial instruments differ.

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 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 an 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 the 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.

Loading component...

FAQs about annuities and long-term care

What is a long-term care rider on an annuity?

Can an annuity be used for long-term care?

Do LTC riders cover home care and assisted living?

How do benefit multipliers work?

Can I add an LTC rider to an existing annuity?

What are the tax implications of an annuity with a long-term care rider?

Loading component...

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.7006771.03.26