The Tax-Free Annuity

Many annuities are used at least partially to pay for long-term care. When you own the right annuity, distributions to pay for long-term care are tax-free thanks to a 2006 law.

To qualify for tax-free treatment, the annuity owner must need assistance with at least two of the activities of daily living (eating, dressing, bathing, walking, etc.), and that must be certified by a doctor.

Language mandated by the 2006 law is required to have a long-term care annuity. So if your annuity predates the law, distributions probably won’t be tax free, and even many issued after then don’t qualify.  Check with your insurer or insurance agent. When your annuity doesn’t qualify, you can use a section 1035 tax-free exchange to trade the old annuity for a new one. There might be a surrender penalty on the old annuity and a commission for the new annuity. Check all the costs and consequences before deciding if this move is worth while.

The annuity is not a complete plan for paying for long-term care. Few people can save enough through annuities to pay for potential LTC. But it can be part of a package of strategies.