Annuities for Senior Care: How They Work

Annuities for senior care work by turning a chunk of savings into guaranteed monthly income you can spend on care. You hand an insurance company a lump sum, and it pays you back in steady checks, for life or for a set number of years. For a family staring down years of care costs, that predictable income can be the difference between a plan and a guess.

This guide covers how income annuities work, the immediate-versus-deferred and fixed-versus-variable choices, the tax treatment, the fees and lock-up to watch for, and how to avoid the sales traps seniors fall into.

Why Use an Annuity for Senior Care

Care is expensive, and the bills don't stop. In 2026, the national median cost of assisted living is about $6,200 a month, an in-home non-medical caregiver runs about $35 an hour (roughly $80,080 a year at 44 hours a week), and a semi-private nursing home room runs about $315 a day, or about $114,975 a year, according to the CareScout 2025 Cost of Care Survey.2 Those are national medians, and they vary widely by state and metro.

The hard part isn't the size of one bill. It's that the bills repeat, every month, for as long as care is needed. A pile of savings can cover that for a while. The fear is outliving it.

An income annuity addresses that specific fear. You convert part of your savings into a guaranteed income stream. As long as the contract runs, the checks keep coming, no matter how long you live or how the market behaves. That income can be pointed straight at a care bill.

It isn't free money, and it isn't right for everyone. You're trading a lump sum you control for income that's costly to get back out of early. Whether that trade makes sense depends on the type of annuity, the tax hit, and the fine print. Start with the types.

What an Income Annuity Is

An income annuity is a contract. You pay an insurance company a lump sum. In return, it promises you a stream of payments.1 That's the whole structure.

The most common version for care is a single-premium immediate annuity, or SPIA. You make a single payment, and income typically starts within a year of purchase.1 There's no accumulation phase. The money goes in, and the checks come out.

You also choose how long the payments last. A SPIA can pay for your life, for your and a spouse's joint lives, or for a set period of years.1 A lifetime payout protects you against outliving the money. A period-certain payout pays for a fixed term, say ten years, whether you live that long or not.

Read the death terms before you pick. Depending on the contract, if you die after only a few payments, the insurer may not have to keep paying a surviving spouse or refund the premium to your estate. You may be able to buy a rider that lets beneficiaries receive some money.1

Immediate vs deferred

The first big fork is timing.

An immediate annuity has no accumulation phase. Payments typically begin within a year of purchase.1 This is the one most families use when care is needed now, because it converts savings into income today.

A deferred annuity accumulates first and pays later.1 You fund it now, it grows, and income begins at a future date you pick. That suits planning ahead for care years out, not paying a bill that's already arriving.

Fixed vs variable

The second fork is how the money behaves while it's in the contract.

A fixed annuity guarantees at least a minimum interest rate.1 The payout is predictable. You know roughly what you'll get, which is what most families paying for care actually want.

A variable annuity lets you direct contributions into investment subaccounts, and it carries market risk.1 The upside is potential growth. The downside is that a bad market can shrink your value and your income. For money earmarked to pay a recurring care bill, that volatility cuts against the whole point.

In between sit fixed indexed annuities and registered index-linked annuities (RILAs). With a RILA you can lose money, though the insurer generally sets limits on both gains and losses.1

The Insurer Has to Stay Solvent

Here's the part people skip. An annuity payment is only guaranteed as long as the insurance company stays solvent.1 The promise is the insurer's promise. If the insurer runs into financial trouble, it may not be able to pay.

That's why the issuing company's financial strength and credit rating matter.1 You're not just buying a product. You're betting on a company to be around and paying for the next twenty or thirty years. Check an insurer's rating with an independent rating agency before you sign, ask your state insurance department about the company, and don't put all of it with one insurer if the sum is large.

FINRA flags insurer solvency, inflation, and surrender charges as the core risks of any annuity. Take all three seriously.

Which Annuity for Senior Care Fits Your Situation

The two forks, timing and risk, give you the practical choices below.

For most families paying for care now, the workhorse is a fixed immediate annuity: predictable income, starting soon after purchase.

How Annuities for Senior Care Are Taxed

Tax treatment is where annuities surprise people, so be clear on it before you buy. The rule depends on whether you funded the annuity with after-tax or pre-tax money.

Non-qualified annuity (after-tax money). If you bought the annuity with money you'd already paid tax on, each payment is taxed using an exclusion ratio. Part of every check is a tax-free return of your own investment in the contract; the rest is taxable gain.1 The split is based on the ratio of your investment in the contract to the total expected return. The IRS lays out this General Rule in Publication 939.

So a portion of each payment comes back to you tax-free, because it's your own money returning. Only the growth is taxed.

A simplified, hypothetical example shows the mechanic. Say you put $100,000 of after-tax savings into an immediate annuity, and over its expected payout the contract is projected to return $125,000 in total. Your investment in the contract ($100,000) divided by the total expected return ($125,000) is an exclusion ratio of 80 percent. So 80 cents of every dollar you receive is a tax-free return of principal, and only the remaining 20 cents is taxable gain.1 The exact ratio depends on your contract's numbers, but this is the shape of it: most of each early payment is your own money coming back, not new taxable income.

The exclusion also runs out. For a contract with an annuity starting date after 1986, the total you may exclude over the years cannot exceed your net cost in the contract, so once you have recovered your investment, every payment after that is fully taxable.1 Budget for the later, higher-tax years, not just the first ones.

Qualified annuity (pre-tax money). If you bought the annuity inside a retirement account with pre-tax dollars, there's no exclusion. Every payment is fully taxable as ordinary income.1 The money was never taxed going in, so it's all taxed coming out.

This matters for care budgeting. Two annuities paying the identical monthly amount can leave very different cash in hand after tax. Run the after-tax number, not the gross, when you plan around a care bill. A tax professional can compute your exclusion ratio.

What to Watch Out For

Annuities carry real drawbacks. Know these before you sign anything.

Surrender charges and early-withdrawal costs. Once your money is in, getting it back early is costly. Many deferred annuities do let you withdraw money, but many annuities set holding periods and surrender charges for early withdrawals, and even if you avoid the surrender charge, a withdrawal before age 59½ may carry a 10% IRS tax penalty on top of any tax owed.1 If a sudden expense hits, that lump sum isn't sitting there to grab. Don't annuitize money you may need in a hurry.

Fees. Fees reduce an annuity's value however they're paid. A variable annuity charges base contract fees plus the fees of its underlying funds, and optional benefits such as an enhanced death benefit typically cost extra; fixed, fixed indexed and RILA contracts build their fees into the interest they credit instead.1 Because so much of the cost is built in rather than billed, ask exactly what you're paying and to whom.

Inflation erodes fixed payments. A fixed payment that looks fine today buys less every year, because fixed annuity payments typically lack a cost-of-living adjustment to keep pace with inflation.1 Care costs keep climbing even when growth slows, as it did in 2025.2 A check that covers the bill now may fall short in a decade.

Use the free-look period. A newly delivered annuity contract carries a free-look period, usually at least 10 days for a variable annuity, during which you can cancel without a surrender charge and typically get your purchase payments refunded. How long that window runs varies with the state where you signed the application, so ask for your own contract's number in writing rather than assuming a month.1 Use it. Read the contract during that window, and walk away if anything doesn't match what you were told. The NAIC consumer guide explains the free-look rules and what to check.

Watch for sales pressure. Be wary of anyone pushing a complex or expensive product, rushing you to sign, or steering you out of a perfectly good existing plan. A legitimate annuity holds up to a slow read and a second opinion. A high-pressure pitch is a warning sign on its own.

Medicaid-Compliant Annuities Are a Different Tool

One point of confusion worth clearing up. A Medicaid-compliant annuity is not the same thing as the income annuities in this guide.

A Medicaid-compliant annuity (MCA) is a specialized planning device used to qualify for Medicaid without triggering a transfer penalty.1 Federal law tests it two separate ways, and it has to clear both. First, buying the annuity counts as disposing of an asset for less than fair market value, which triggers a penalty, unless the state is named as remainder beneficiary for at least the total amount of Medicaid paid on the applicant's behalf, either in the first position or in the second position behind a community spouse or a minor or disabled child (and it flips to the first position if that spouse, or a representative of that child, disposes of any of the remainder for less than fair market value). Second, the annuity counts as an asset for transfer purposes unless it is a retirement annuity under the tax code, or unless it is all of the following at once: irrevocable and nonassignable, actuarially sound as determined under the actuarial publications of the Social Security Administration's Office of the Chief Actuary, and paid in equal amounts across its term with no deferral and no balloon payments.3 Failing to name the state as remainder beneficiary results in a transfer-of-asset penalty, and states add requirements of their own on top of the federal list, so treat the federal conditions as a floor rather than the whole test. A penalty isn't automatically the end of the road, either: the same federal section excuses transfers to or for the sole benefit of a spouse and lets the state set the penalty aside where denying eligibility would cause undue hardship, so ask about those routes before assuming the worst.3 That's a Medicaid-planning move, handled in the Medicaid pillar, not a general income annuity you'd buy to fund care directly.

If protecting assets while qualifying for Medicaid is your goal, that's a separate path. See our guide to Medicaid planning strategies.

Learn More

Find personalized help deciding whether an annuity fits your family's care plan at brevy.com.

The information on Brevy.com is for educational purposes only and is not a substitute for professional legal, financial, or medical advice. Rules vary by state and program and change frequently. Always verify with the relevant agency or a qualified professional. Brevy is not a law firm, financial advisor, or healthcare provider.