Long-Term Care Annuity: How LTC Annuities Work in 2026

A long-term care annuity is a single-premium fixed annuity with a qualifying long-term care rider attached. It turns one deposit into two to three times that amount of tax-free money for care, and thanks to the Pension Protection Act, an old non-qualified annuity can be exchanged into one without ever paying tax on the built-up gain.

What Is a Long-Term Care Annuity?

A long-term care annuity is a deferred fixed annuity that carries a long-term care rider qualifying under IRC Section 7702B. You fund it once with a lump sum. If you later need care, the contract pays out a multiple of what you put in.

The leverage is the point. A $100,000 deposit typically creates $200,000 to $300,000 of long-term care benefit, depending on your age and health at issue. If you never need care, the account value stays yours and passes to your beneficiaries.

That last part is what separates it from traditional long-term care insurance. There is no use-it-or-lose-it premium and no annual rate increase letter, because you are leveraging an asset you already own rather than renting coverage year by year.

How Long-Term Care Annuities Work

Every LTC annuity has the same four moving parts. Understanding them is most of the battle.

1. A single premium buys a pool of benefit

You deposit a lump sum, commonly between $50,000 and $500,000. The insurer applies a multiplier and creates a long-term care benefit pool worth two to three times the deposit. Younger and healthier applicants get the higher multiples.

2. Your own money pays first

When you claim, the contract spends your account value first, usually over a 24-month or 36-month period. Once the account value is exhausted, a continuation-of-benefits rider takes over and keeps paying the same monthly amount for the remainder of the benefit period. That continuation piece is where the leverage actually lives.

3. Benefits are triggered by ADLs or cognitive impairment

Like any tax-qualified long-term care contract, benefits begin when a licensed health care practitioner certifies that you cannot perform at least two of the six activities of daily living, or that you have a severe cognitive impairment. The six ADLs are bathing, dressing, eating, toileting, transferring, and continence. Most contracts also apply an elimination period, commonly 90 days of covered care.

4. Benefits are paid by reimbursement or cash indemnity

Most LTC annuities are reimbursement contracts. You pay the qualified provider, submit the invoices, and the insurer reimburses up to your monthly maximum. Benefits generally cover home health care, adult day care, assisted living, and nursing home care, not just a facility.

A smaller number are cash indemnity contracts. Once a claim is approved, the insurer pays the monthly benefit directly to you with no receipts to submit and no restrictions on how the money is spent, which means it can pay an unlicensed caregiver such as a family member. This distinction matters more than most buyers expect, so check which model a contract uses before you commit.

What It Looks Like in Practice

Here is the structure using round numbers. This is a simplified illustration, not a quote, and your actual multiplier depends on age, health, and the contract you choose.

The arithmetic most carriers use is simple. Divide the account value by the number of months in the base benefit period to get the monthly maximum, then the continuation rider pays that same amount for the extended period.

Put that against what care actually costs. The 2025 CareScout Cost of Care Survey, published March 2026, puts the national median for a private nursing home room at $355 per day, or $129,575 a year, and assisted living at $6,200 a month, or $74,400 a year.

A $250,000 benefit pool covers roughly two years of private nursing home care at today’s median, or more than three years of assisted living. That is the realistic frame for sizing a contract.

The Pension Protection Act Advantage: Tax-Deferred Becomes Tax-Free

This is the part that gets overlooked, and it is the strongest reason most people end up buying one.

If you own an old non-qualified annuity sitting on a large gain, you have a tax problem waiting for you. Withdraw the money and the gain comes out first as ordinary income under last-in, first-out treatment. Many people hold these contracts for years specifically to avoid triggering that bill.

The Pension Protection Act of 2006, Public Law 109-280, changed this. Section 844 amended IRC Section 1035 so that, effective January 1, 2010, a non-qualified annuity can be exchanged tax-free into an annuity with a qualifying long-term care rider. It also amended Section 7702B so that benefits paid for qualified long-term care expenses are received income-tax-free.

Stack those two provisions and something unusual happens. The 1035 exchange moves the gain across without tax, and the long-term care payout removes it permanently. As Michael Kitces has put it, the tax-free nature of the benefits means the taxable gain disappears entirely rather than being deferred to a later date.

Formally, withdrawals used to pay qualified long-term care costs are treated as a reduction of cost basis rather than taxable income. In plain terms, a tax-deferred asset becomes a tax-free one, provided the money is used for care.

How the 1035 exchange works in practice

• The contract you are exchanging must be non-qualified, meaning it was funded with after-tax dollars. IRA and other qualified money does not work this way.
• The receiving contract must be a tax-qualified long-term care contract under Section 7702B. Most LTC annuities are built specifically for this.
• The money must move directly between insurers. If the check comes to you first, the exchange is disqualified and the gain becomes taxable.
• Partial exchanges are permitted under Revenue Procedure 2008-24, with cost basis allocated pro rata.
• Watch the surrender schedule on the contract you are leaving. A surrender charge can eat more than the tax you are avoiding.

See our full guide to the 1035 exchange for the mechanics that apply to any annuity transfer.

A worked comparison

Suppose you hold a $150,000 non-qualified annuity with a $50,000 cost basis, so $100,000 of embedded gain. If you surrender it to pay for care, that $100,000 comes out as ordinary income. At a 22% effective rate, roughly $22,000 goes to taxes before a dollar reaches a caregiver.

Exchange the same contract into a PPA-qualified LTC annuity instead, and the gain transfers untaxed. Use the benefits for qualified care and that $22,000 is never paid. The contract has also leveraged the $150,000 into a substantially larger benefit pool.

Underwriting: Simplified, Not Guaranteed

Long-term care annuities use simplified underwriting. There is no medical exam and usually no attending physician statement, because with no death benefit involved the insurer is underwriting morbidity risk rather than mortality risk.

What you do face is a set of knock-out questions, typically 10 to 12 depending on the carrier. Answer yes to any of them and the application stops. Common disqualifiers include:

• Currently hospitalized, bed-confined, or living in an assisted living or nursing facility
• Already needing help with activities of daily living, or using a walker, wheelchair, oxygen, or a hospital bed
• A diagnosis of Alzheimer’s disease, dementia, mild cognitive impairment, Parkinson’s disease, ALS, or multiple sclerosis
• Recent stroke, congestive heart failure, organ transplant, or dialysis
• A long-term care policy declined or postponed in the past 12 months

This is why an LTC annuity is often accessible to people who cannot qualify for traditional long-term care insurance or a hybrid life policy. It is more forgiving, but it is not guaranteed issue.

Which Companies Offer Long-Term Care Annuities

This is a small market. Far fewer carriers write annuity-based long-term care than write standard fixed annuities, and the shortlist has been stable for years.

Availability, benefit multiples, and rider charges vary by state and by issue age, and carriers open and close these products more often than they do standard annuities. Confirm what is actually available to you before planning around a specific product.

A note on Mutual of Omaha

Mutual of Omaha’s Living Care Annuity is frequently listed as an option in older articles, and it is worth being clear that we cannot currently verify it as available to new applicants. In April 2026 the company announced a new Health and Annuity Solutions division expanding its investment in both the annuity and long-term care markets, but that announcement did not name a linked-benefit annuity product. We will update this page if the product returns. In the meantime, see our Mutual of Omaha annuity review for what the company does currently offer.

Pros and Cons of Long-Term Care Annuities

Where they win

• Leverage. Two to three times your deposit available for care, from an asset you already own.
• The tax break. Under the Pension Protection Act, gains in an old non-qualified annuity come out tax-free when used for qualified care. There are few tax planning moves of this size still available.
• Easier to qualify for. Simplified underwriting with no medical exam opens the door to applicants who would be declined for traditional LTC insurance.
• Nothing is wasted. No use-it-or-lose-it premium. Unused account value passes to your beneficiaries.
• Premiums cannot be raised. One deposit, no renewal notices, no rate increase letters.
• Broad care settings. Home health care and adult day care usually qualify, not just nursing homes.

Where they fall short

• Weak accumulation. Much of the interest credited is consumed by the rider charge, so growth trails a plain MYGA. If your goal is accumulation, compare against current fixed annuity rates first.
• Capital intensive. A meaningful benefit pool requires a large lump sum, which is money you are choosing not to deploy elsewhere.
• Usually reimbursement, not cash. Most contracts require you to pay providers and submit invoices. Cash indemnity contracts exist and are more flexible, but they are the exception.
• Health questions still apply. Simplified is not the same as guaranteed. Knock-out questions disqualify some applicants.
• Limited competition. A handful of carriers means less pricing pressure than the fixed annuity market.
• Qualified money does not get the tax break. The PPA advantage only applies to non-qualified contracts.

LTC Annuity vs Traditional LTC Insurance vs Hybrid Life

The honest summary is that traditional long-term care insurance buys the most coverage per dollar, hybrid life offers the largest legacy if you stay healthy, and the LTC annuity is the one that solves a specific problem: an idle non-qualified annuity, an owner who may not pass full underwriting, and a desire to keep the money if care is never needed.

Who a Long-Term Care Annuity Is Best For

• You own a non-qualified annuity you are not spending, especially one with a large embedded gain you have been reluctant to trigger.
• You have been declined or rated for traditional long-term care insurance, or you expect to be.
• You want care coverage but refuse to pay premiums that could be raised or forfeited.
• You have liquid assets you can commit for the long term without needing them for income.
• You are typically between about 55 and 80, the range where multipliers are still meaningful and underwriting is still passable.

It is a poor fit if the deposit represents money you may need for income, if your funds are all in IRAs or other qualified accounts, or if maximizing growth is your actual objective.

Frequently Asked Questions

Sources

• CareScout 2025 Cost of Care Survey results, Genworth Financial, published March 2, 2026.
• Insurance or annuity 1035 exchanges to buy LTC insurance, Kitces.com, on the Pension Protection Act and Section 1035.
• ForeCare fixed annuity, Global Atlantic Financial Group.
• Annuity Care and Annuity Care II, OneAmerica.
• CareMatters Annuity, Nationwide.
• Mutual of Omaha expands investment in annuities and long-term care markets, April 2, 2026.
• Pension Protection Act of 2006, Public Law 109-280, Section 844.