Senior Care Financial Decisions, Part 3: Using Annuities to Pay for Long-Term Care Costs

We've recently covered long-term care insurance and reverse mortgages as options for covering the significant cost of long-term care should the need arise. Today, we're wrapping up this three-part series with a third, potential option popular with many financial advisors and estate planners: annuities. Let's take a closer look at what you need to know to decide whether this arrangement is right for you.

Related: Senior Care Financial Decisions Part 2: Reverse Mortgages and Senior Care Financial Decisions Part 1: Long Term Care Insurance

Is an annuity your best protection should the need for long-term care arise?

The ABCs of Annuities

Financial advisors often recommend annuities as a smart way to generate retirement income. In simplest terms, annuities are contracts through which users make a payment or series of payments to an insurance company in exchange for regular disbursements in the future. These tax-deferrable funds are only withdrawable after the age of 59.5, making them a useful stream of income during the retirement years.

There are several different types of annuities, each with its own set of risks and return potential. Deciding when to annuitize your contributions — ie., start receiving payments — and the duration of disbursements are also variable depending on your needs and individual circumstances.

Related: Senior Care: Pre-Planning is Key

Annuities for Long-Term Care

While the high cost of long-term care insurance policies which may or may not eventually pay off can be difficult to swallow, a new breed of “hybrid” annuity has been picking up in popularity in recent years. These products allow buyers to select an annuity which also includes a long-term care rider — many of which carry up to three times the annuity value in long-term care benefits following the depletion of the annuity account (if you already have an annuity, meanwhile, your carrier may let you add a LTC rider). Should long-term care never be needed, the annuity value is paid out in a lump sum to account holder's beneficiary.

Pros and Cons of Hybrid Annuities

For many people, annuities offer an appealing alternative to the uncertainty of long-term care insurance. Because there's less underwriting involved than with conventional long-term care policies, users may be more insurable despite less-than-ideal health. Additionally, it is easier to buy policies at an older age.

Annuities also offer enhanced flexibility in terms of how the money can be used — from expenses as straightforward as nursing home care to less common arrangements, such as paying a family member for assistance.

And of course, there's the peace of mind that comes with knowing that once your annuity plan is funded and in place, you won't risk losing it by neglecting to make payments.

However, there are some other considerations when it comes to these types of policies. For starters, most require a minimum payment of $50,000 which can be hard for those on a fixed income or budget to give up — particularly considering that these funds will be inaccessible until maturation and have a steep surrender fee even after the policy has matured.

Additionally, returns on annuities are typically less than other types of investments which may make them less desirable from an estate planning perspective.

Lastly, while some other long-term care financial plans qualify for “partnership plans” which don't require policyholders to exhaust their assets in order to be eligible for Medicaid, annuities typically do not qualify.

A financial planner can help you reach your retirement and long-term care goals.

While it's true that annuities can be an invaluable longevity planning tool, they are also complex in nature which can lead to their misuse and/or mismanagement. A financial planner can help you make the most informed decisions for your unique needs by offering the latest legal and financial help for seniors.


  1. Can you provide information as to: 1. What are the annual special fees typically for the LTC rider on an annuity with this option? (.50%, 1%, etc.) 2. Do these fees continue during both accumulation and distribution (withdrawal and/or annuitization) period? 2. In a general way is there a difference in interest credited between annuities with this rider and without. (i.e.lower on those with rider?) 3. In a general way are surrender charges and periods higher and longer for those annuities with a rider option? 4. Do payments made for qualified LTC expenses under annuity with rider reduce the annuity in value dollar-for-dollar or pro-rata? 5. If the annuity is depleted to $-0- as in #4… are there guaranteed payments for a longer period of time? 6. If the annuity is depleted to $-0- as in #4 is there typically any residual final distributible amount to owner or beneficiary? Thx
  2. Thank you for the information on hybrid annuities. I didn’t know much about these policies, so your explanation that they provide both the benefits of long term care and also have the advantage of annuity was very helpful. I will certainly be looking into hybrid LTC to care for my family.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.