What Is a Non-Qualified Long-Term Care Annuity?

A non-qualified annuity is funded with after-tax dollars (not a 401(k) or IRA). Historically, the main advantage was tax-deferred growth. The challenge is that when you take withdrawals later, gains are generally taxed as ordinary income.

A non-qualified LTC annuity strategy aims to solve that problem by pairing an annuity structure with long-term care benefits in a way that can convert what would have been taxable annuity gain into tax-free long-term care benefits—when benefits are used for qualifying care. The result is often more efficient than paying for care using taxable withdrawals from other sources.

How Non-Qualified LTC Annuities Work in Real Life

Unlike a traditional long-term care policy that requires new ongoing premiums, a non-qualified LTC annuity approach often starts with money you already have—especially an existing deferred annuity that’s “sitting there” with embedded gain.

Depending on the design, you may:

1) Use a repositioning strategy to place an older annuity into a newer structure built for long-term care benefits, 2) trigger benefits if you meet the policy’s long-term care eligibility definition, and 3) receive benefits that can be used for qualified care services.

What matters most is how the contract defines eligibility, how benefits are paid, and how the plan fits alongside the rest of your retirement income. For many families, this is less about “buying a policy” and more about turning a dormant asset into a purposeful plan.

Pension Protection Act (PPA): Why the Tax Treatment Can Change

Under the Pension Protection Act, certain annuity structures can provide a major advantage: annuity dollars used for qualified long-term care benefits may be treated as tax-free under the rules governing long-term care benefits.

In plain English: instead of pulling taxable gains out of an annuity and paying ordinary income taxes, the strategy is designed so that long-term care benefit payments are treated as qualified benefits when used appropriately. This can be especially valuable for people who have meaningful gain inside an older annuity and are worried about a future care event creating a tax problem on top of a financial problem.

Because tax rules can be design-specific, the key planning step is to evaluate how the contract pays benefits and how it aligns with qualified long-term care definitions and benefit triggers.

Who Should Consider a Non-Qualified LTC Annuity Strategy?

This strategy is commonly a fit for retirees and pre-retirees who want long-term care leverage but also want control, simplicity, and the comfort of using a repositioned asset rather than committing to new lifetime premiums.

It can be a strong option for:

• People with an existing non-qualified annuity that no longer has a clear role in the plan (especially if it has embedded gains).
• Retirees seeking tax-efficient care funding rather than relying on taxable withdrawals later.
• Households that want “value either way,” meaning a care benefit if needed and a remaining value pathway if care is never used.
• Clients with underwriting concerns who may find traditional LTC approval challenging.
• Couples planning together who want an asset-based approach to reduce the risk of one spouse’s care draining the other spouse’s retirement lifestyle.

Using a 1035 Exchange to Reposition an Existing Annuity

If you already own a deferred annuity, a common path is a Section 1035 exchange. This is an IRS-recognized, tax-deferred transfer from one annuity to another that is intended to preserve tax treatment while you reposition into a better-fitting structure.

The practical goal is to avoid creating a taxable event just to change the plan. Instead of surrendering an annuity and potentially triggering tax on gain, the exchange route is commonly used to reposition to a structure that may be more efficient for long-term care planning.

Most importantly, the exchange decision should be evaluated alongside any surrender schedule, current contract features, and whether the existing annuity still serves your objectives.

Example: Turning an “Idle” Annuity into Long-Term Care Leverage

Imagine a retiree who owns a non-qualified annuity that was purchased years ago and is no longer needed for income. The annuity has grown meaningfully, and the owner is concerned that using the money later could create taxes at the exact time the family is dealing with long-term care decisions.

By repositioning into a long-term care annuity design intended to produce qualified long-term care benefits, the family may be able to shift the future “taxable withdrawal” problem into a “tax-efficient benefit” approach—so a care event doesn’t also create a tax event.

For many households, this is the difference between hoping the portfolio can absorb care costs and having a defined plan that reduces the impact on retirement income.

Traditional LTC Policy vs. Non-Qualified LTC Annuity

Both approaches can be valid—what’s “best” depends on your health profile, cash-flow preferences, and whether you want to reposition an existing asset rather than start a new premium commitment.

Coordinating Long-Term Care Planning with Retirement Income

Long-term care planning works best when it is coordinated with the rest of your retirement strategy. The objective is not just “having coverage,” but reducing the odds that a care event forces disruptive choices—selling assets at the wrong time, increasing taxes unexpectedly, or reducing a spouse’s standard of living.

Some families pair a long-term care annuity approach with predictable accumulation strategies like a fixed annuity ladder. Others view the plan alongside broader tax and distribution strategies, including charitable planning tools that may help reduce future tax friction while meeting legacy goals.

The best structure is the one that behaves well under stress: when care is needed, when markets are volatile, or when the household is trying to protect both income and dignity at the same time.