By: Lisa Hostetler Brown, Certified Elder Law Attorney*, LawyerLisa
Ask the Expert: Can Annuities Help with Long-Term Care Planning?
Expert Answer: As an elder law attorney, one of the questions I often receive from clients planning for retirement or long-term care is about annuities—what they are, how they work, and whether they’re a good fit for their estate or Medicaid planning strategy.
An annuity is a financial product typically offered by insurance companies. In simple terms, you invest a lump sum or series of payments in exchange for regular income payments, either for a set period of years or for the rest of your life. There are different types of annuities: fixed, variable, and indexed. Each of these has their own structure and risk level.
From an elder law standpoint, annuities can serve a couple purposes. Retirees can use them to create a predictable stream of income, especially when they’re concerned about outliving their savings. For Medicaid planning, a specific, Medicaid-compliant annuity can help a healthy spouse retain income while allowing the other spouse to qualify for Medicaid benefits for long-term care. However, a Medicaid-compliant annuity must be structured very carefully to comply with Medicaid requirements.
Like any financial tool, using an annuity as part of your financial plan has its pros and cons.
Pros:
- Guaranteed income: Annuities can provide financial stability for individuals who worry about market volatility or running out of money in retirement.
- Customizable: You can tailor an annuity’s payout terms, whether you want income for life or over a specific number of years.
- Useful in Medicaid planning: When properly structured, annuities can help protect assets while helping an individual qualify for long-term care assistance.
Cons:
- Complexity: Many annuities have fine print, fees, and surrender charges that can be confusing or costly if not fully understood.
- Lack of liquidity: Once you invest in an annuity, accessing those funds early may come with penalties.
- Tax implications: Income from annuities is often taxable, and the growth is tax-deferred—not tax-free.
One often-overlooked aspect of annuities is how they fit into your overall estate plan. Annuities can avoid probate and pass directly to heirs when they are properly titled and designated to your beneficiaries. However, if not carefully coordinated with your will or trust, they can cause unintended tax burdens or distribution issues. That’s why it’s essential to ensure your annuity strategy is aligned with the rest of your estate plan.
Before purchasing an annuity, it’s crucial to review the details with both your financial advisor and an elder law attorney. What works well for one individual may not suit another’s goals, health, or financial picture.
In the right circumstances, annuities can be a valuable part of a comprehensive elder law plan—but like all tools, they need to be used wisely and with proper guidance.
*Lisa is Certified by the National Elder Law Foundation
