Using Annuities for Long-Term Care: Medicaid-Compliant Strategies, SPIA Funding, and §1035 Exchanges

If you hold annuity assets and are evaluating long-term care planning options — or if a parent or spouse is already facing care costs — annuities can play a meaningful role in three distinct ways. This guide explains how each works, who benefits, and what the trade-offs are compared to LTC insurance, self-funding, and asset protection trusts.

Bottom line up front. Annuities and long-term care intersect in three fundamentally different contexts. First, a Medicaid-compliant annuity converts excess countable assets into a non-countable income stream under DRA 2006 rules — a crisis-care strategy when Medicaid qualification is imminent and a Medicaid Asset Protection Trust's 5-year window has closed. Second, a single premium immediate annuity (SPIA) generates guaranteed income that can fund ongoing care costs directly — a simple, predictable way to convert a lump sum into care cash flow without insurance. Third, an existing non-qualified annuity with embedded gains can be exchanged under IRC §1035 into a hybrid LTC product — converting untaxed deferred growth into long-term care coverage without recognizing income. These three strategies are distinct in purpose, timing, and audience. Most people asking "can I use my annuity for long-term care?" are actually asking about just one of them.

Strategy 1: Medicaid-compliant annuities — the crisis spend-down tool

A Medicaid-compliant annuity is used when a spouse or individual is already facing care costs — or will be within months — and needs to qualify for Medicaid quickly. The strategy converts a lump sum of countable assets into a non-countable income stream, which can change the Medicaid eligibility picture dramatically for married couples.

To understand why this matters, you need to understand Medicaid's asset rules for married couples. When one spouse requires nursing home care (the "institutionalized spouse," or IS), they may keep up to $2,000 in countable assets in most states. The "community spouse" (CS) — the healthy spouse still living at home — is allowed to keep a protected amount called the Community Spouse Resource Allowance (CSRA), which in 2026 ranges from $32,532 to $162,660 depending on the state.¹ Any marital assets above the IS's $2,000 limit and above the CS's CSRA must be "spent down" before Medicaid covers the institutionalized spouse's care.

Here is where the Medicaid-compliant annuity comes in. Rather than literally spending down those excess assets on care costs or permissible spend-down items, the community spouse can purchase a Medicaid-compliant annuity with the excess amount. The lump sum purchase price is paid to the insurance company. In return, the CS receives a guaranteed monthly income payment for a defined term. Because the annuity is in payout status and meets the DRA 2006 requirements (described below), the purchase is not treated as a transfer for less than fair market value — meaning there is no Medicaid penalty period for the purchase. The institutionalized spouse can then qualify for Medicaid based on their remaining countable assets.

A worked example

Harold, 78, requires nursing home care. His wife Ruth, 74, lives at home. They have $480,000 in combined countable assets: a brokerage account, CDs, and money market funds.

Ruth's CSRA: $162,660 (the 2026 federal maximum, which applies in states that use the highest protected amount)¹
Harold's allowed countable assets: $2,000
Combined floor: $162,660 + $2,000 = $164,660
Excess above floor: $480,000 − $164,660 = $315,340 that would otherwise need to be spent down before Harold qualifies for Medicaid

Without a Medicaid-compliant annuity, Ruth faces a dilemma: spend $315,340 on Harold's care before Medicaid kicks in (at $10,000–$12,000/month for a nursing home, that's roughly 26–32 months of uncovered costs), or rapidly transfer assets while managing the 5-year look-back consequences.

With a Medicaid-compliant annuity, Ruth uses $315,340 to purchase a single-premium immediate annuity in her name. She receives monthly income payments — say $2,600–$3,200/month, depending on her age, the current interest rate environment, and the payment term — for a defined period that does not exceed her actuarial life expectancy per SSA tables. Harold's countable assets drop to $2,000 (below the threshold), and Medicaid coverage for his nursing home care can begin immediately after the other eligibility criteria are met.

Ruth retains her CSRA intact and receives monthly income from the annuity to support her own living expenses. Harold qualifies for Medicaid within a much shorter time horizon than a direct spend-down would require.

What about the annuity income Ruth receives? The monthly income from the community spouse's Medicaid-compliant annuity goes to Ruth, the community spouse. That income is not counted in Harold's Medicaid eligibility calculation — only Harold's own income (Social Security, pension, RMDs) counts against his income limit. In most states, all of Harold's income is applied toward his "patient pay amount" at the nursing home, with a small personal needs allowance ($30–$80/month) retained. Ruth's income — including annuity payments — is her own and is not applied to Harold's care costs, though she may be eligible to redirect some of Harold's income to herself under the Minimum Monthly Maintenance Needs Allowance (MMMNA), which in 2026 ranges from $2,643.75 to $4,066.50/month.¹

DRA 2006 requirements: what makes an annuity "Medicaid-compliant"

The Deficit Reduction Act of 2006 (DRA 2006) codified specific requirements for annuities purchased by or on behalf of Medicaid applicants or their spouses to be treated as non-countable assets exempt from transfer penalty.² An annuity that fails any of these requirements may be treated as a disqualifying transfer, creating a penalty period that delays Medicaid eligibility. The requirements are:

Irrevocable and non-assignable. Once purchased, the community spouse cannot surrender the annuity for a lump sum, change the beneficiary, or assign the contract. The annuity must be structured as a true income-only arrangement — the principal is gone. This is the most significant trade-off: the CS gives up access to the lump sum permanently in exchange for the income stream.
Equal, level payments — no deferral, no balloon. The annuity must pay the same amount each month for the entire term. There can be no deferred phase, no variable payment schedule, and no lump-sum balloon payment at the end. A deferred annuity (accumulation phase) that has not yet been annuitized generally does not qualify; it must be converted to an immediate payout annuity.
Actuarially sound. The payment term of the annuity must not exceed the actuarial life expectancy of the annuitant (the community spouse) based on Social Security Administration period life tables.³ If the CS's actuarial life expectancy is 14.2 years (an approximation for a 74-year-old woman using the SSA 2024 period life table), the annuity term may not exceed 14.2 years. A term longer than actuarial life expectancy transforms the annuity into a transfer for less than fair market value — the "extra" payments would effectively be a gift to heirs.
State named as remainder beneficiary. The Medicaid agency (or the state entity that processes Medicaid payments) must be named as the primary remainder beneficiary for single applicants, or the secondary remainder beneficiary if a community spouse survives, up to the total amount of Medicaid benefits paid on the institutionalized spouse's behalf. This is the DRA's mechanism for Medicaid estate recovery: if Ruth dies before the annuity term expires, the state recovers up to what it paid for Harold's care before the remaining payments go to other heirs. Ruth must be named first as beneficiary while she lives; the state becomes beneficiary upon her death.

States may impose additional requirements beyond the federal DRA floor. Some states require specific disclosure language in the annuity contract; others require prior state approval before purchase. California, New York, and several other states have specific Medicaid-compliant annuity regulations that differ from the federal minimum. The DRA created the federal framework; state Medicaid plans determine the administrative details. Always work with a Medicaid planning attorney or fee-only advisor experienced in your state's Medicaid program before structuring one of these transactions.

Who should (and should not) use a Medicaid-compliant annuity

Medicaid-compliant annuities are a crisis-care tool, not an advance-planning tool. They are appropriate in a narrow window:

Situation	Medicaid-compliant annuity: fit?
Spouse already in a nursing home or entering within 90 days	Strong candidate. No 5-year window available; annuity can accelerate Medicaid qualification without a transfer penalty.
Married couple with significant excess assets above CSRA	Strong candidate. The CS retains income; the IS qualifies faster; the CS doesn't have to watch the assets pay nursing home bills.
Single individual needing Medicaid (no community spouse)	Less useful. Single applicants can also purchase annuities, but all income typically goes to the nursing home as patient pay, and the state is the primary beneficiary. The economic benefit for a single applicant is much smaller.
5+ years before care is expected	Wrong tool. With 5 or more years of lead time, a Medicaid Asset Protection Trust is usually better — it protects the assets outright rather than converting them to income that disappears over the annuity term.
Household assets $2M+ and planning 10+ years ahead	Wrong tool. At this asset level, self-funding or hybrid LTC insurance is more appropriate; Medicaid planning at high net worth involves significant trade-offs in asset control.
Community spouse needs the principal accessible (health emergencies, etc.)	Caution. The annuity is irrevocable. If the CS faces their own unexpected large expense, the principal is gone. This is the primary risk — understand it fully before purchasing.

Medicaid-compliant annuity vs. Medicaid Asset Protection Trust

These are the two primary asset protection strategies in Medicaid planning, and they serve different timing windows. Understanding when each applies prevents the common mistake of using the wrong tool:

Factor	Medicaid-Compliant Annuity	Medicaid Asset Protection Trust (MAPT)
Lead time required	None — works even in crisis (care already needed)	5 years minimum before care is needed to clear the look-back period
What happens to assets	Converted to income stream — principal is spent over the annuity term	Assets are preserved (pass to heirs; CS retains no control but heirs inherit)
Best for	Married couples where one spouse is in imminent need of nursing home care and they have excess assets above the CSRA	Individuals and couples 5+ years before likely care need who want to pass assets to heirs rather than spend them on care
Income tax	Annuity payments are partially ordinary income (gain element) and partially return of basis — no special tax advantage	Grantor trust — taxed to grantor while alive; assets get stepped-up basis at death
State as remainder beneficiary	Required (DRA 2006)	Not required — full estate goes to heirs (subject to MERP rules in some states, but MAPT can block probate)
Legal complexity	Moderate — requires Medicaid-compliant insurance product and proper structuring	Higher — requires irrevocable trust document, deed transfer, trustee, ongoing trust tax return (Form 1041)

In some crisis situations, both strategies are deployed simultaneously: the MAPT's 5-year look-back has not yet run, so the assets inside the trust are fully protected, while the assets outside the trust are converted to Medicaid-compliant annuity income to accelerate the institutionalized spouse's eligibility. A Medicaid planning attorney can model the combined approach at your specific asset level and state rules.

Strategy 2: SPIA as a long-term care income source

The second, simpler role for annuities in LTC planning has nothing to do with Medicaid. A single premium immediate annuity (SPIA) converts a lump sum into a guaranteed monthly income stream — which can then pay for care costs directly.

The appeal is straightforward: if you hold $400,000 in a taxable brokerage account and enter a memory care facility at $8,000–$10,000/month, you're drawing down that portfolio over 40–50 months while managing market risk. A SPIA converts the same $400,000 into a monthly payment of roughly $2,500–$3,500/month (depending on age, gender, and the interest rate environment at purchase), guaranteed for life or for a defined term. You give up control of the principal in exchange for certainty of income.

For LTC planning specifically, the relevant SPIA structures are:

Life annuity (no refund): The highest monthly payment, because the insurance company keeps whatever principal remains if you die early. Maximizes care income but leaves nothing for heirs and creates the "what if I die in year 2?" concern.
Life with period certain (e.g., 10-year certain): Payments continue to beneficiaries for at least 10 years even if you die early, at the cost of a slightly lower monthly payment. Addresses the early-death concern while preserving meaningful income for the care scenario.
Term certain (not life-contingent): Payments for a fixed number of years regardless of longevity — appropriate if you're trying to cover a specific care window (e.g., bridge 3 years of memory care) rather than lifetime longevity risk.

SPIA rates vary substantially with interest rates and are not fixed by regulation — shop multiple carriers, compare equivalent structures, and understand that a $400,000 SPIA purchased in a high-rate environment will pay more than the same purchase in a low-rate environment. The key variable to compare across quotes is the annual payout rate (annual payment ÷ premium paid), which allows apples-to-apples comparison regardless of annuity type labeling.

The SPIA approach lacks the Medicaid-planning benefit of the DRA-compliant annuity — a standard SPIA does not necessarily meet DRA 2006 requirements and, if purchased within the 5-year look-back period, may trigger a Medicaid transfer penalty unless it meets those requirements. If there is any possibility of Medicaid need, structure the annuity to comply with DRA requirements from the beginning.

Strategy 3: §1035 exchange — converting existing annuity gains to hybrid LTC coverage

If you hold a non-qualified deferred annuity with significant embedded gains — meaning the current value exceeds your basis — surrendering it to fund a hybrid LTC policy would trigger ordinary income tax on the gain. An IRC §1035 exchange lets you transfer that gain directly into a qualified long-term care insurance contract without recognizing income.

The Pension Protection Act of 2006 (PPA 2006, §844) extended §1035 exchange treatment specifically to permit direct exchanges from annuities to §7702B-qualified LTC insurance contracts and to hybrid life+LTC products.⁴ Before PPA 2006, the exchange from an annuity to an LTC contract was not clearly permitted; the PPA created the explicit authority.

How it works in practice:

You hold a non-qualified deferred annuity with a current value of $200,000 and a cost basis of $120,000 — meaning $80,000 in embedded gain that would be taxable as ordinary income if you surrendered the contract.
Rather than surrendering, you direct the insurance company to transfer the $200,000 directly into a hybrid LTC product (such as Lincoln MoneyGuard, Nationwide CareMatters II, or OneAmerica Asset-Care).
The $80,000 gain is not recognized at the time of exchange. The gain is "absorbed" into the LTC policy's basis structure. Premiums paid for a §7702B-qualified LTC contract using the exchanged funds may qualify for the HIPAA per diem exclusion ($430/day in 2026⁵) when benefits are later paid.
The hybrid LTC policy provides a death benefit (returned to heirs if care is never needed) and LTC benefits funded by the now-converted annuity assets.

This is a meaningful tax efficiency for people who hold old, appreciated annuities and want LTC coverage but don't want to trigger a large tax bill to fund the premium. The §1035 exchange is covered in detail — including partial exchange mechanics, the direct transfer requirement, and which annuity types qualify — in our dedicated §1035 exchange for LTC insurance guide.

How to decide which annuity strategy applies to your situation

Your situation	Relevant strategy
Spouse entering nursing home, need Medicaid quickly, married, significant assets	Medicaid-compliant annuity (Strategy 1). Converts excess assets above CSRA into income; accelerates IS eligibility without penalty. Work with a Medicaid planning attorney in your state.
Already in care or funding care now; want guaranteed income to cover monthly costs	SPIA for care income (Strategy 2). Convert a lump sum to monthly income; choose term-certain or life structure based on care scenario and longevity concern. If Medicaid is possible in the future, ensure the SPIA meets DRA requirements.
Hold an old non-qualified annuity with large gains; want LTC coverage; don't want to trigger income tax	§1035 exchange to hybrid LTC (Strategy 3). Move the annuity to a §7702B-qualified hybrid product tax-free. Review our §1035 exchange guide for the mechanics.
5+ years before care is likely; want to protect assets from Medicaid spend-down	Medicaid Asset Protection Trust — not an annuity strategy. See our MAPT guide.
Evaluating whether to buy LTC insurance at all; not in crisis	LTC insurance or self-fund decision — the self-fund vs. insure calculator models the comparison at your asset level.

The role of a fee-only advisor in annuity-based LTC strategies

Medicaid-compliant annuities are sold by insurance companies — the same companies that sell the traditional and hybrid LTC insurance products covered elsewhere on this site. The difference is that annuity salespeople earn commissions on the product they sell, which can create a bias toward recommending the annuity transaction even when a different strategy (MAPT, self-fund, or Partnership LTC insurance) would better serve the family's interests.

A fee-only advisor does not earn a commission from the annuity purchase. They evaluate whether the Medicaid-compliant annuity is the right tool for your timing and asset level, model how much of the community spouse's income the annuity will generate, compare the annuity approach against the MAPT approach if there is time, and coordinate the strategy with estate planning (beneficiary designations, MERP exposure, POA documents that authorize the transaction if the institutionalized spouse can no longer sign).

For the §1035 exchange to hybrid LTC, a fee-only advisor compares the after-tax cost of the exchange against the after-tax cost of simply surrendering the annuity, paying the tax, and buying the hybrid LTC product outright with the net proceeds. At low gain levels, the difference is small. At high gain levels (large old annuities with minimal basis), the tax savings from the §1035 exchange can be the decisive factor in whether the hybrid LTC product is affordable.

Community Spouse Resource Allowance and Minimum Monthly Maintenance Needs Allowance (2026): Centers for Medicare and Medicaid Services (CMS) annually adjusts the CSRA floor ($32,532) and ceiling ($162,660) and the MMMNA floor ($2,643.75/month) and ceiling ($4,066.50/month) under 42 U.S.C. §1396r-5. CMS published the 2026 figures in the annual SSI/Medicaid update. Individual states may set CSRA amounts within these federal bounds; verify your state's specific amount with a Medicaid planning attorney. cms.gov
Deficit Reduction Act of 2006 — Medicaid annuity requirements: DRA 2006, §6012, codified at 42 U.S.C. §1396p(c)(1)(F). Establishes that an annuity purchased by or on behalf of a Medicaid applicant or their community spouse is subject to look-back and transfer-of-assets rules unless it meets specific requirements: irrevocable and non-assignable, level payments without deferral or balloon, actuarially sound term, and state as remainder beneficiary. congress.gov
Social Security Administration period life tables — actuarial soundness standard: The SSA publishes period life tables (Life Table for the Social Security Area Population) used to determine actuarially sound annuity term limits for Medicaid-compliant annuities. The 2024 table is the most recently published. ssa.gov
Pension Protection Act of 2006, §844 — §1035 exchange to LTC contracts: PPA 2006, §844, amended IRC §1035 to explicitly permit tax-free exchanges from non-qualified annuities to §7702B-qualified LTC insurance contracts and from life insurance to §7702B contracts. Also permitted the exclusion of annuity distributions used to pay premiums on a §7702B contract when funded via a §1035 exchange. irs.gov
HIPAA per diem exclusion (2026): IRS Rev. Proc. 2025-28 set the 2026 per diem exclusion for qualified long-term care benefits (IRC §7702B) at $430/day ($156,950/year). Benefits received from a §7702B-qualified LTC contract are excludable from income up to this limit plus actual unreimbursed long-term care costs. irs.gov
IRC §1035 — tax-free exchange of insurance contracts: Internal Revenue Code §1035 permits tax-free exchanges of life insurance policies, annuities, and qualified long-term care insurance contracts meeting the requirements of the statute. Post-PPA 2006, this includes exchanges from annuities to §7702B contracts. law.cornell.edu

Medicaid eligibility limits (CSRA and MMMNA) and IRS per diem figures verified as of June 2026. Medicaid rules are state-specific and change annually; verify current state-level figures with a Medicaid planning attorney before making any decisions.