Long-Term Care and Income Annuities: How Each Fits a Retirement Income Plan

Long-term care and lifetime income are two separate risks that land on the same pool of savings. Medicare generally does not pay for custodial care, and the dollars that fund a long retirement are the same dollars that would fund a long care need. A plan decides in advance how each would be paid for, and every option has costs and limits.

That is the short version. This guide covers what Medicare does and does not pay for, the main ways households pay for care, what an income annuity is and where it can fit, and how the two decisions affect each other and your tax picture.

Does Medicare cover long-term care?

Generally not. Medicare.gov says Medicare does not pay for long-term care, which it describes as the help with everyday tasks such as bathing, dressing, and eating that people with a chronic illness or disability need. This is called custodial care, and it applies at home, in assisted living, or in a nursing home when it is the only care you need.

Medicare may cover limited, short-term skilled nursing or rehabilitation if you meet its requirements. The Administration for Community Living notes that Medicare covers a skilled nursing facility stay for a maximum of 100 days, and that the average covered stay is much shorter. That is a different thing from a long-term care plan.

How likely is it that you will need long-term care?

The Administration for Community Living estimates that someone turning 65 today has almost a 70% chance of needing some type of long-term care services and supports. The average is about three years of services. About one-third of people may never need care, and about 20% may need it for more than five years.

Those figures describe a range, not a forecast for you. The reason to plan is the spread: the outcomes differ widely, and the costly end of the range is the part that strains a retirement plan.

How do people pay for long-term care?

Households usually combine several approaches. Each has trade-offs.

• Savings and income. Paying from your own resources keeps control and flexibility. The risk is that a long or expensive need draws down money you counted on for other years.
• Medicaid. It pays for a large share of long-term care in the United States, but eligibility and covered services depend on your state’s rules and on your income and assets. Qualifying generally means spending down assets, and planning around it is a legal matter for an elder law attorney.
• Traditional long-term care insurance. A policy may pay for covered care subject to its benefit limits, waiting periods, and terms. Health underwriting can limit who qualifies, and premiums on some policies can rise over time.
• Hybrid policies. Some life insurance or annuity contracts include long-term care benefits. They trade away some flexibility, and the terms vary widely, so read the contract and compare it against paying for care directly.

No approach is right for everyone. The household’s assets, health, family situation, and tolerance for uncertainty decide which mix fits. Your estate planning attorney and CPA should be part of the decision.

What is an income annuity, and where does it fit?

An annuity is a contract with an insurance company. According to Investor.gov, you make a lump-sum payment or a series of payments, and in return the insurer agrees to make payments to you, either soon or at a later date. An immediate annuity starts income within about a year. A deferred annuity lets value build first, and income starts later.

In a retirement income plan, an income annuity is one way to build a floor: income that does not move with the market, set against essential spending such as housing, food, and healthcare. Social Security and a pension are the other common parts of a floor. Our guide to building a retirement income architecture explains why a floor can matter for behavior as well as for math.

An annuity is not the only way to build a floor, and it is not right for everyone. Understand these limits before you consider one:

• Liquidity. Money you hand to an insurer is generally not available as a lump sum. Deferred annuities often carry surrender charges if you withdraw early.
• Inflation. A fixed payment buys less over time unless the contract includes an adjustment, which usually lowers the starting payment.
• Insurer risk. The contract is only as strong as the company’s claims-paying ability. State guaranty associations may cover some obligations if an insurer fails, within limits that vary by state.
• Taxes. Payments are taxed differently depending on whether the contract was bought with pre-tax or after-tax money. Ask your CPA before you buy.
• Cost and complexity. Fees, riders, and payout options differ from contract to contract. Compare in writing, using the NAIC buyer’s guide as a checklist.

Can you use an IRA to buy a longevity annuity?

Yes, in one specific form. A qualifying longevity annuity contract (QLAC) is a deferred income annuity bought with IRA or qualified plan money. The IRS limit on QLAC premiums is $210,000 for 2026 (Notice 2025-67), as read on October 20, 2026. A QLAC’s value is excluded from the account balance used to calculate required minimum distributions, and income must start no later than age 85.

That exclusion matters because the RMD age is 73, or 75 if you were born in 1960 or later. A QLAC may lower required distributions in the years before its income begins. It also locks in money for a long time, so the trade-off is liquidity. The contract must meet IRS requirements to qualify, so confirm its status with your IRA custodian and your tax professional.

How do long-term care and annuity decisions affect each other?

They compete for the same resources, and they land in different tax years. Three connections come up most often.

1. Which dollars fund which need. An income floor can cover essential spending, which leaves the portfolio free to absorb a care cost. Without one, a care event may force withdrawals at a bad time. Our post on withdrawal sequencing explains how the order of withdrawals affects both taxes and risk.
2. Taxes. Qualified long-term care services may count as medical expenses, deductible to the extent they exceed a share of your income under IRS Topic 502. Large pre-tax withdrawals in the same year can still raise taxable income and, two years later, Medicare premiums through IRMAA.
3. Timing. The years between your last paycheck and your first required distribution are a planning window. Decisions about annuity purchases and policy purchases are easier to make while income is low and health is good than after a diagnosis.

What does this look like for a hypothetical couple?

Hypothetical example for illustration only. It is not a recommendation or a projection.

A couple in their early 60s has a large 401(k), a smaller taxable account, and Social Security they plan to delay. Their questions are the ones this guide raises:

• Floor. Would Social Security, plus any pension, cover housing, food, and healthcare? If not, is there a gap an income annuity might address, and what would they give up in flexibility?
• Care. Would a care event of several years be paid from savings, insurance, or both? Is either spouse’s health good enough to qualify for a policy now?
• Taxes. Which accounts would fund each need, and in what years, so large withdrawals do not stack in one tax year?

The answers depend on their balances, health, and tax picture, so the right path may differ from another couple’s. That is why a written, multi-year comparison is more useful than a general rule.

What are the limits and risks?

• Insurance and annuity terms vary widely. Two policies that look alike can differ in benefit triggers, exclusions, and fees.
• Longer lives and longer care needs cost more. Neither can be known in advance.
• Premiums, payments, and laws can change. Tax and benefit rules are updated, so confirm current details before you act.
• Complexity has a cost. Every added product adds fees, paperwork, and decisions for your heirs.

Educational only. Nothing here is a recommendation to buy or avoid any product, and results depend on your circumstances.

Sources and as-of date

These points reflect the following sources as read on October 20, 2026:

• Medicare.gov: Long-term care
• Administration for Community Living: How much care will you need? and Who pays for long-term care?
• Investor.gov: Annuities and Surrender charge
• NAIC buyer’s guide to fixed deferred annuities
• IRS Internal Revenue Bulletin 2025-49, Notice 2025-67, for the 2026 QLAC limit
• IRS Topic 502: Medical and dental expenses

Tax law and indexed limits change. Confirm the current rules with your IRA custodian, your attorney, and your tax professional before acting.

What should you do next?

Whether either decision fits depends on your assets, health, taxes, and the rest of your income plan. A good first step is the free Risk Analysis, which takes a few minutes and gives you something concrete to bring to a conversation. When you are ready to look at your own plan, schedule a consultation with Robert Boeck, and bring your CPA and your estate attorney into the discussion early.