Long-Term Care Annuity Products
A smart solution for future care needs – April 2025
Long-term care annuity products have unique features worth exploring. This special type of deferred annuity combines a fixed interest rate, possible indexing strategies, and built-in long-term care benefits, providing a practical way to safeguard your financial future without exhausting your nest egg. This article examines the pros and cons that make this a smart choice for many, alongside the limitations to help you decide if it’s the right fit for you.
✔ Over 30 years specializing in long-term care planning.
✔ Options from multiple highly rated insurance companies.
✔ Complimentary guidance from a professional long-term care advisor.
✔ Endorsed by the American Association for Long-Term Care Insurance.
Key benefits of long-term care annuities:
Leverage Retirement Savings – Use qualified dollars from an IRA, 401k, or other accounts to fund your LTC annuity and secure coverage without depleting your nest egg.
Valuable Tax Advantages – Benefit from tax-free 1035 exchanges for nonqualified annuities and tax-free withdrawals during claims to stretch your resources further.
Easier Health Qualification – Simplified health underwriting makes coverage more accessible, even if traditional long-term care insurance isn’t an option.
Peace of Mind – Guaranteed level premiums ensure predictable planning with no surprise increases.
How Does a Long-Term Care Annuity Work?
An annuity is a contract between you and an insurance company. A Long-Term Care Annuity is a deferred annuity with a long-term care rider.
This hybrid long term care insurance product, like a traditional deferred annuity, provides future payments based on an initial lump-sum investment. With a Long-Term Care Annuity, your long-term care benefits will typically be double or triple your investment.
For example, a $100,000 investment in an LTC annuity would provide $200,000 or $300,000 of long term care benefits. This can provide an annuitant with tremendous leverage of their premium dollars.
Long-term care annuity benefits are a pool of money with a monthly benefit cap. So an LTC Annuity with a $300,000 benefit could pay a monthly benefit for four to six years, depending on the monthly benefit selected. Some products can even pay benefits for an unlimited amount of time.
Access to benefits are triggered like long-term care insurance (when you have Cognitive Impairment or need help with Two out of the Six Activities of Daily Living).
Key Takeaway: A Long-Term Care Annuity is a financial product that combines a deferred annuity with long-term care coverage, offering significant leverage on your investment, typically doubling or tripling your premium into a pool of LTC benefits. Benefits are triggered by qualifying health conditions, and can sometimes extend for unlimited durations.
Funding Long-Term Care Annuities
A popular way to fund a long-term care (LTC) annuity is to reposition an existing annuity or other asset. You can use either qualified (IRA, 401k, etc.) or nonqualified funds, depending on your financial situation.
Qualified Money – There may be benefits to using retirement accounts like an IRA or 401k to fund a long-term care annuity. Because distributions are often funded through an income rider, they may help satisfy annual Required Minimum Distribution (RMD) requirements. However, it’s important to consider how using these funds may affect your long-term retirement income.
Nonqualified Money – Assets such as bank CDs, savings, annuities, or life insurance can also be repositioned. In some cases, this approach may improve your current return while providing tax-advantaged long-term care benefits.
Key Takeaway: Many people are able to perform a tax-free 1035 exchange from an existing annuity to an LTC Annuity. Still, it’s important to review the terms and any potential surrender charges.
How IRA Withdrawals Can Fund Your LTC Annuity
Long-Term Care Annuity Pros and Cons
LTC Annuity Pros
No Premium Increases
A hybrid LTC annuity is often funded with a one-time premium, eliminating the risk of future premium hikes. Unlike traditional LTC insurance, which may have variable premiums, this can offer added predictability and peace of mind.
1035 Exchanges
Existing annuity or life insurance contracts may be eligible for tax-free transfers into an LTC annuity through a 1035 exchange, though restrictions and product-specific rules may apply.
Tax-Free Withdrawals
Withdrawals for long-term care expenses are always tax-free. The overall tax free nature of your annuity will depend on the product and your personal situation. We can make a product recommendation and then refer you to your tax adviser for confirmation.
Return of Premiums
If long-term care benefits are not needed, the remaining annuity value may still be accessible or passed on to heirs, subject to contract terms.
Simplified Health Requirements
A hybrid LTC annuity may have more lenient health underwriting than traditional LTC policies. This can make a hybrid long-term care insurance annuity policy accessible to individuals with certain health conditions that may not qualify for traditional long-term care insurance. Health requirements vary by company.
LTC Annuity Cons
Up-front Premiums
Some LTC annuities require a significant initial investment. This may require reallocating funds or liquidating other assets, which can affect overal financial flexibility. Note that some long-term care annuities allow you to pay part of the premium over time.
Withdrawals
Long term care benefits received typically reduce the annuity value which could result in little or no death benefit for beneficiaries.
Tax Treatment
If you use qualified money to fund a non-qualified LTC annuity, you would likely incur negative tax consequences.
We always recommend that you use qualified money to fund a Qualified Asset Care long-term care annuity. In this case, the tax can be spread out over 10 years and count toward your required minimum distributions (RMD’s).
Limited Liquidity
Annuities may include surrender charges or restrict access to funds outside of long-term care needs, especially in the early years.
Long-Term Care Annuity Providers
We offer long-term care annuities from a range of highly rated insurance companies. The most suitable LTC Annuity provider for you will depend on several personal factors, including your age, health status and the amount you plan to invest. Our goal is to match you with a solution that fits your needs and financial goals.
Product Highlight: One option that has been popular with our clients is Indexed Annuity Care from OneAmerica 
. This product offers a unique approach to combining long-term care protection with indexed annuity growth, and it can be especially appealing to those considering self-funding their long-term care expenses. While it may be a strong fit for certain individuals, we’ll help you compare features across providers to find the most appropriate option for your situation. Learn More >
What is an Annuity?
An annuity is a contract between you and an insurance company. You make a lump-sum payment or a series of payments, and in return, the insurance company provides you with regular payments — either starting immediately or at a future date. These payments can last for a set number of years or for the rest of your life.
Annuities are often used to provide a steady stream of retirement income or to help manage long-term care costs. While they offer benefits like guaranteed income and potential tax deferral, they may also come with fees, limited liquidity, and varying levels of complexity. It’s important to understand the terms and compare products to determine whether an annuity fits your financial goals.
Types of Annuities
There are two main types of annuities – Immediate and Deferred.
Immediate Annuity
With an immediate annuity, you make a one-time lump-sum payment to an insurance company in exchange for regular income payments, which typically begin within a month. You can choose to receive payments for the rest of your life or for a fixed period, such as five or ten years, depending on the terms of the contract.
Immediate annuities are often used to create predictable retirement income. They’re also known as single-premium immediate annuities (SPIAs) or income annuities.
While they offer the security of guaranteed income, it’s important to consider potential trade-offs: your lump sum is generally no longer accessible after purchase, and payments may not keep up with inflation unless you choose an inflation-adjusted option.
Deferred Annuity
A deferred annuity is an insurance contract designed for long-term savings. It allows you to delay (or defer) income payments until a future date — often retirement. Unlike immediate annuities, which begin payments shortly after purchase, deferred annuities have a growth period, called the accumulation phase, during which your investment can grow tax-deferred. When you’re ready to begin receiving income, the contract enters the payout phase.
Deferred annuities come in various forms, fixed, indexed, and variable, each with different levels of risk, return potential, and fee structures. It’s important to understand how your specific annuity works, as returns may be guaranteed, tied to a market index, or subject to market fluctuations.
Early withdrawals during the first several years may trigger surrender charges and possible tax penalties, which is why deferred annuities are generally considered long-term investments. While they offer the advantage of tax-deferred growth, taxes are due upon withdrawal, especially for annuities funded with pre-tax dollars.
Compare Long-Term Care Annuity Quotes
Our specialists offer objective guidance on a wide range of long-term care insurance products and strategies including LTC Annuities. Expect personalized service on topics such as:
✓ Choosing from a variety of long-term care insurance products
✓ Suggestions for the carrier best suited to your situation and goals
✓ Assistance with health qualifying for coverage
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Long-Term Care Annuity FAQs
A long-term care annuity is a deferred annuity that combines a fixed interest rate, possible indexing strategies, and built-in long-term care benefits.
Long-term care annuity benefits will typically be double or triple your investment. For example, a $100,000 investment in an LTC annuity would provide $200,000 or $300,000 of long term care benefits. This can provide an annuitant with tremendous leverage of their premium dollars.
Section 1035 of the IRS tax code allows for the tax-free transfer of one type of insurance policy to another of “like kind.” This means that you may be allowed to convert an existing annuity into a long-term care annuity.
This can defer the gains associated with your existing annuity. And because of the tax-free nature of long-term care insurance, a 1035 exchange ensures the taxable gain disappears if it’s used to pay for long-term care expenses. Learn more >
Under Section 1035 of the IRS tax code, you may be able to make a tax-free exchange of an existing life insurance policy to a long-term care policy. This may be a prudent decision if your life insurance needs have changed and protecting yourself against potential long-term care needs is now a higher priority. Learn more >
Premiums invested in a long-term care annuity are not lost when you die. One of the following will typically happen when you pass away:
If you pass before using the long-term care benefits: In most cases, an LTC annuity will pay a death benefit to your beneficiaries. This could be the accumulated value of the annuity or a guaranteed minimum amount, depending on the specific policy.
If you die while receiving payouts: The outcome varies based on your annuity’s terms. Generally, if you have not exhausted the annuity by using long-term care benefits, the unused portion is paid to your beneficiaries.
To know exactly what will happen in your case, it’s essential to review your annuity contract for clarification.
An indexed long-term care annuity allows you to link your contract’s growth to a crediting strategy.
For example, Indexed Annuity Care from OneAmerica® ties your contract’s growth to several crediting strategies tied to the S&P 500. As the account value grows, so does the amount available for long-term care expenses. Learn more >
Article written by Craig Matesky, ACACIA Insurance President
Edited by Mike Berger, National Sales Manager